Sebi view key to faster put,call options benefits: Expert

Sebi’s reversing its view on put-and-call options by issuing a circular is the fastest mechanism to implement the amendment, says Vivek Gupta of BMR Advisors.

Speaking to CNBC-TV18, Vivek Gupta adds that the largest beneficiaries will be sectors where there is meaningful private equity investment and strategic, long term joint venture partnerships. Also Read: Law min clears amendment to investment via put-call options Below is the edited transcript of the analysis on CNBC-TV18 Q: What is your view on law ministry's go-ahead for greater flexibility on put-and-call options?
A: This will be a big positive for foreign investors. Previously, Sebi interpreted the Securities Contracts Regulation Act (SCRA) to mean that put-and-call options were legally untenable as in the Cairn-Vedanta case. The regulator viewed put and call options as neither derivatives since they are not traded on the stock exchange nor are they spot contracts.
So, there are three layers of problems- the Sebi interpretation, the RBI view of any instrument with put-and-call options as a external commercial borrowing (ECB) as opposed to equity because it believes that if there is a fixed return through a put-and-call option that portion adopts the nature of debt and not equity.
The third problem is the section in the Companies Act which says that shares of a public company are freely transferable and therefore a put-and-call option or any sort of share transfer restriction is a problem in the context of the current Companies Act.
While this move will be positive it will be interesting to see as to how the government really implements it.
So far as the Companies Act is concerned, the Companies Bill will need to be passed. The current Bill already contains a provision which allows for such restrictions in shares.
So far as the SCRA is concerned, while there is a Sebi restriction from an interpretation basis, potentially either a amendment to the SCRA or at least a clear exposition by Sebi of its qualification either as a derivative or as a spot delivery will have to be made. Q: Will the government use the circular route to implement this and is that mechanism sufficient to address some of the problems?
A: Legal opinion in the past has indicated that even within the ambit of the existing law,  put-and-call options should be permitted because all these restrictions were primarily restrictions meant to apply to speculative trades. When foreign investors entered into put-and-call options and their agreements with Indian counterparties are non-speculative long-term restrictions on transferability of shares or mechanisms for transferability of shares. So, if Sebi were to be able to reverse its past interpretations through a circular that will be the fastest route to implementation.
Legally, it will be interesting question to study whether that can happen or it will require some amendment to the Securities Contracts Regulation Act (SCRA). I would hope that it can be done on interpretation basis because if we are talking of about a legal amendment to an Act then we are talking about going to Parliament and which then is anyone’s guess as to how long it will take. Q: Who is likely to benefit if Sebi takes the circular route?
A: All sectors where there is meaningful private equity investment will cheer the move because private equity investments typically come with riders such as put-and-call options which address a variety of commercial situations including situations where valuation gaps are bridged and risks can be more effectively shared. So, it will be a huge boost to all alternative investment funding.
Strategic joint venture partnerships which are for the long term will also benefit as it will aid in dispute resolution, allocating of returns or simple restrictions on transferability of shares binding on each other for at least a certain minimum time period.
So, this move will be a big positive for both the institutional foreign investors as well as strategic joint ventures because there must be restrictions on transferability of shares and effective arrangements between two contracting parties who are owners of a company is a commercial reality today.