Forum Views - May 2024
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FORUM VIEWS - MAY 2024
purchase of securities, other than spot delivery contracts,
contracts for cash/hand delivery/ special delivery, and
derivatives contracts.
On 3rd October, 2013 by Notification No. G.S.R 219(E), issued
under section 16 of SCRA, SEBI inter alia rescinded the 1969
Notification and for the first time inter alia permitted contracts
in shareholders agreements or provisions in the articles of
association, providing for purchase or sale of securities
pursuant to the exercise of an option contained therein to buy
or sell the securities, on the terms and conditions set out
therein (i.e. put/ call options). The above Notification also
provided that nothing contained in the said notification shall
affect or validate any contract which has been entered prior to
the date of the said notification. The explanation to the said
Notification clarified that the above contracts will be valid
notwithstanding anything contained in section 18A.
The above legislative history finally culminated into the
landmark judgement dated 2nd February, 2023 passed by the
Division Bench of the Bombay High Court, in Percept
Finserve Private Limited v. Edelweiss Financial Services
Limited (2023 SCC OnLine Bom 319) which finally put to rest
the controversy surrounding enforceability of put options.
Edelweiss Financial Services Limited (“Edelweiss”) entered
into a share purchase agreement (”SPA”) with Percept
Finserve Private Limited (“Percept Finserve”) for purchase of
certain shares of Percept Limited in 2007 i.e. much before the
2013 Notification. The SPA contained certain conditions
subsequent that had to be fulfilled by Percept Limited and
Percept Finserve. The SPA contained a Put Option whereby an
option was given to Edelweiss to re-sell the shares of Percept
Ltd. to Percept Finserve for a purchase consideration of INR 20
crores along with 10% of internal return of rate, if there was a
breach of certain conditions subsequent as per the SPA.
As the conditions subsequent were not fulfilled, Edelweiss
exercised its Put Option, and issued a letter calling upon
Percept Finserve to give effect to the Put Option. As Percept
Finserve did not honour the exercise of the Put Option,
Edelweiss commenced arbitration proceedings. The sole
arbitrator in his award concluded that Percept Finserve and
Limited had in fact breached their obligations under the SPA,
but rejected Edelweiss's Put Option claim on the ground that
the same was illegal. The arbitrator held that the Put Option
was illegal as a) it constituted a forward contract, which is
prohibited under Section 16 of SCRA read with SEBI’s March
2000 circular; and Put Option being a contract in derivatives
and not being traded on recognised stock exchange in
accordance with Section 18-A of the SCRA was illegal.
The Award was challenged by Edelweiss under Section 34 of
the Arbitration and Conciliation Act, 1996 (“Act”) and was set
aside by the Bombay High Court on 27th March 2019. An
Appeal was thereafter filed before the Division Bench by
3. What was the landmark judgement passed by the
Bombay High Court in the matter of Percept Finserve
Private Limited v. Edelweiss Financial Services Limited?
Percept Finserve under Section 37 of the Act against the order
of the single bench. The division bench expressed complete
agreement with the views of the single judge in holding that
the Put Option was legal and enforceable. The Court placed
reliance on a previous discussion in MCX Stock Exchange
Limited v. SEBI (2012 SCC OnLine Bom 397), which held that
an ‘option’ is in the nature of a privilege, the exercise of which
is dependent on the discretion of the person who has been
granted the option. In case of an option, a concluded contract
arises only upon exercise of the option. It was thus held that
contract for repurchase of shares by Percept Finserve will
arise only on the exercise of the Put Option by Edelweiss upon
non - fulfilment of the conditions subsequent.
A further question that came up before the Bombay High Court
was whether the options contained in the SPA were contrary
to section 18 A of the SCRA. The Court held that Section 18 A
never prohibited entering into a call or put option but only
regulated trading or dealing in such option as a security. It was
also reiterated by the Court that put option clauses like the Put
Option in this case will be enforceable under the scheme of the
SCRA, irrespective of whether the underlying agreement is
executed prior to, or post the Notification issued by SEBI in
2013.
By the aforesaid judgement a crucial aspect of securities and
commercial law which plagued parties and the regulator in
equal proportion for decades was finally answered. This
judgement ensures that put and call options are considered
valid and enforceable irrespective of the change in law and
passing of several notifications.
Zerick Dastur is Proprietor of the Law Firm, practicing in the field of Court
litigation, Dispute Resolution, Arbitration, Securities law and Competition Law.
He is a triple Gold Medalist from Mumbai University having topped the Mumbai
University in Law. His practice covers diverse areas of Corporate, Commercial,
Securities law and Regulatory disputes. He is representing a number of clients in
the Port Sector, Infrastructure and Mining Sectors. He has represented clients in
domestic and international, commercial arbitration matters. He handles a
number of cases relating to securities law litigation and SEBI. He was a former
Partner at the Law Firm, J. Sagar Associates.
He has litigation experience before the Hon’ble Supreme Court, various State
High Courts Statutory Tribunals and Regulators. He has been involved in a
number of matters involving issues of Constitution Law. He has been involved in
landmark matters involving defence of Auditors and Corporate clients before
various Regulators/Civil/Criminal Courts and Tribunals in connection with
Corporate frauds. He has also advised various clients in matters involving
shareholder disputes and minority actions before the NCLT and CLB.
He also practices Securities Law and appears before the Securities Appellate
Tribunal and the SEBI. He has advised clients in connection with Competition
Law issues in everyday business operations including issues relating to anti-
competitive agreements and abuse of dominance by enterprises.
He writes for various newspapers and publications on issues relating to
Corporate law, Arbitration, Commercial and Competition Law. He regularly
writes on securities law for the publication run by the Bombay Stock Exchange
Brokers Forum. He is a regular speaker at events organised by Economic Times,
VC Circle, Indian Merchant Chambers, Consumer Resources, Corporate
Knowledge Foundation and the World Zoroastrian Chamber of Commerce.
He is a Member of the Law Committee of Indian Merchant Chambers and was
involved in the drafting of the Rules for the IMC International Arbitration Centre.
Views of the author are personal and do not constitute legal advice.
(Advocate Zerick Dastur and Advocate Smriti Singh)
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