The Securities and Exchange Board of India (Sebi) has provided companies the flexibility of buying and selling of shares to private equity investors and strategic partners by changing rules on forward contracts.

Sebi on Thursday removed restrictions that were more than a decade old and has allowed companies to include put and call options in shareholders' agreements.

"This would certainly help the parties to freely negotiate the terms of exit with tag and drag, right of first refusal, the enforceability of which has constantly been under cloud for several years now. This will make deal terms in M&As and private equity deals flexible with more shareholder autonomy," said Tejesh Chitlangi, partner, IC Legal.

Put and call options, pre-emption rights and other such arrangements are matters that are commonplace in today's contracting environment, as these clauses are inserted in negotiated agreements to protect the interests of the both the buyer and the seller. However, in the past, these clauses suffered from three limitations-first, under the company law, which held that shares of a company are freely transferable and hence, these rights were not enforceable as against the company.

Second, RBI regulations, which viewed some put and call arrangements as "guaranteed" returns, and hence, as external commercial borrowings and not equity. And third, Sebi norms, which viewed such arrangements neither as derivatives nor as spot contracts, and hence, restricted them.

"With the recent changes in law, two of the three problems have been sorted out by the government. The new Companies Act recognises such arrangements explicitly. Likewise, Sebi has now come out with this circular, which expressly permits these arrangements. It is interesting to see, however, that the relaxation is only prospective, which opens up interesting enforceability issues vis-a-vis contracts executed previously," said Vivek Gupta, partner, BMR Advisors.

"What remains to be done, however, is some explicit guidance from RBI, which will then remove issues around these commercially required arrangements completely," Gupta said.

In the recent past, some of the high-profile deals including Diageo-United Spirits and Vedanta-Cairn had to be reworked after Sebi directed the concerned companies to drop the put and call options or any other pre-emption right clauses in their deal agreement.

In a put option, the investor has the right to sell his shares back to the company or to the promoter at a pre-determined price. In a call option, he has the right to buy shares held by the company or promoter.

Tag along rights means instead of purchasing the shares offered by the selling shareholder, the non-selling shareholder has a right to sell its shares along with the shares of the selling shareholder and on the same terms as those of the selling shareholder. While drag along rights means in the event the selling shareholder is divesting a controlling stake in the investee company, it has the right to compel the non-selling shareholder to sell its shares on the same terms as its own shares.

Sebi has, however, imposed some restrictions on these clauses. "Foreign investors will have to comply with the pricing and exit norms under exchange control laws, which should be fine. The norm, whereby call/put options can only be exercised where the selling party has held the shares for a minimum of one year, would not be a deal breaker either, as parties should be able to comply with this requirement with ease," Tejesh said.

"The extension of Securities Contracts (Regulations) Act provisions to unlisted public companies recently under Supreme Court's Bhagwati judgement should bless these pre-emptive clauses in both listed and unlisted public companies," he added.(Economic Times)