Recently, SEBI in an informal guidance to Vulcan Engineers Limited vide Informal Guidance Letter No. CFD/DCR/16403/11, DATED 23-5-2011, opined that a pre agreed purchase of shares of a listed company through call / put option is not valid under the Securities Contract (Regulation) Act, 1956 (SCRA).
Background –Vulcan Engineers Limited (VEL), a listed company, sought informal guidance in relation to ‘person acting in concert’ under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 – (Takeover Regulations). Terruzzi Fercalx SpA (TERRUZZI), a foreign company incorporated in Italy, was holding 66.9 1percent shares of VEL. It was proposed to make preferential allotment of 13.79 percent of VEL’s shares to SIMEST SpA (SIMEST), an Italian Financial Institution controlled by Italian Ministry of Economic Development. The investment method of SIMEST requires compulsorily exit within a maximum duration of seven years from any equity investment made in a non-European Union company and further requires that within such a period a pre-agreed buyback of SIMEST shares should be established with the partner firms. TERRUZI and SIMEST, proposed to enter into an agreement in Italy whereby SIMEST can exercise its option to sell all the VEL shares owned by SIMEST to TERRUZZI over agreed period of time and TERRUZZI will be obliged to purchase the shares offered by SIMEST after complying with all applicable laws in India. The purchase of shares pursuant to put option is to be carried out at a pre-agreed price to be determined in accordance with the agreement. On the basis of above facts, an informal guidance was sought on whether SIMEST and TERRUZZI could be considered as persons acting in concert under Takeover Regulations.
Informal Guidance by SEBI
Based on the above facts and in response to the request for the interpretative letter on the above issue, SEBI opined that:
1. As the option in exercisable on a future date, the transaction would not qualify as spot delivery contract as defined under section 2(i) of SCRA.
2. Further, the aforesaid put/call option would not qualify as a legal and valid derivative-contract in terms of section 1 8A of SCRA as it is exclusively entered between two parties and is not a contract traded on stock exchanges and settled on the clearing house of the recognized stock exchange.
3. SEBI Notification No. S.O 184(E) dated 1 March 2000 under SCRA, reads as under:
“ that no person in the territory to which the said Act extends, shall, save with the permission of the board, enter into any contract for sale or purchase of securities other than such spot delivery contract or contract for cash or hand delivery or special delivery or contract in derivatives as is permissible under the said Act.”
4. In view of the above provisions, the pre-agreed buyback of VEL shares from SIMEST through put/call option is not valid under SCRA. Given the above position, SEBI did not provide any guidance on the issue of person acting in concert raised by the Company.
Our Comments – This informal guidance re-iterates the position taken by SEBI in Cairn-Vedanta deal as regards legal validity of put / calls options. Going forward, the companies entering into put / call option for listed shares may need to take cognizance of this stance.