Call/Put Options: Illegal?

Bharat Vasani, Chief Legal-Group General Counsel of Tata Group and Berjis Desai, Managing Partners of J Sagar Associates, in an exclusive interview with CNBC-TV18's Menaka Doshi, talk about the BALCO Arbitration Award, which once again throws up the vexed issue of Call and Put options.

Last month a three member arbitration panel held in the BALCO case of Sterlite versus the Government of India that any restriction on the free transferability of shares of a public company is violative of Section 111A of the Companies Act. Now these restrictions included a Call Option that Sterlite had to purchase the remaining 49% in BALCO from the government but they also included several other restrictions within the shareholders agreement that barred either one of the shareholders i.e. Sterlite or the Government from selling shares within a certain period of time. Now this is an arbitral award so it does not carry the same weight as a court judgment. Nonetheless it has once again raised questions regarding the legality of shares sale in Purchase Options imposed by two shareholders on each other. This is the same cloud of confusion that hangs over ROFRs (Right of First Refusal) despite a recent judgment that went in favor. So what will help resolve this situation and what are companies deciding to do - to go with Call/Put options or not? Q: This arbitral award, which I have shared and I know its not in public domain but I have a copy and I have shared portions of it with you, is not just about ROFRs or Call and Put Options because the two judges in the award say that any restriction whatsoever of any kind is violative of Section  111. What do you make now of the case law that we have on this situation and how do you decide whether in your joint venture agreements you want to put Call/Put options or not? Vasani: I haven