Investment Agreements in India : Is There an 'Option'?

Put and call options are ubiquitous in modern investment agreements, such as those involving joint ventures as well as private equity and venture capital investments. The enforceability of put and call options in Indian companies has been the subject matter of debate due to the existence of stringent securities legislation that has been supported by strict judicial interpretation. Moreover, recent pronouncements by India's securities regulator, the Securities and Exchange Board of India, have expressly disallowed options in securities of Indian companies (except private companies).This article embarks on the modest task of mapping out the legal landscape that presently shapes the enforceability of put and call options in Indian companies. It seeks to review applicable legislation and analyze key judicial pronouncements that hold sway over the field. It finds that the current legal regime governing put and call options in investment agreements is fragmented and hazy and unnecessarily restricts the ability of investors in Indian companies to enter into such arrangements to protect their own interests. It calls for a reconsideration of the legal regime so that physically settled options that are customary in investment agreements may be treated as valid and legally enforceable.POST SCRIPT: The issues raised and proposals made in this article have been addressed substantially in a notification issued by the Securities and Exchange Board of India on October 3, 2013