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Validity of Put Options: Timeline under the Securities Contract Regulation Act of 1956
Validity of Put Options: Timeline under the Securities Contract Regulation Act of 1956: -
It is imperative to understand that the legislative scheme envisaged under the Securities Contracts Regulation Act of 1956 (hereinafter referred to as SCRA), expressly connotes prohibiting instruments in derivatives unless permitted under the Act. This scheme is ex facie evident right from the enforcement of the Act on 20th February 1957, where under Section 20, the Act prescribed for an express prohibition on options in securities in line with its sentiment under the Preamble aimed at preventing undesirable transactions in the securities market.
On 27th June 1969, the Government of India through Ministry of Finance issued a notification under Section 16 of the SCRA (vide: Notification No. SO 2561), thereby prohibiting the issuance of Forward Contracts inter alia providing only for Spot Delivery Contracts for the issuance and sale of securities in the Indian Capital Markets. Subsequently, by the Securities Laws (Amendment) Act of 1995, Section 20, as aforementioned, stood to be deleted, not affecting the prohibition on Forward Contracts under Section 16.
The genesis towards recognizing the derivatives as Legal instruments for trade in the Capital Markets had breathed into existence by the pragmatic amendment made to the Securities Laws in the year 1999, which had come into force from 22nd February 2000. The Securities Laws (Amendment) Act of 1999, under the newly enacted Section 18A, had recognized derivatives as legal capital market instruments provided that they are listed and traded through a recognized. In the same year, the definition of Derivative under Section 2 (aa) and the subsequent amendment of the definition of Securities to include derivatives under S 2(h) came into existence, thereby formally opening the spectrum for trading in derivatives.
On 1st March 2000, SEBI issued a Notification (vide: Notification No. SO 184 (E) ) under Section 16 of the SCRA, which operated as an extension to the erstwhile notification issued in 1995, wherein it prohibited the sale or purchase of securities in other than, spot delivery contracts or contracts for cash or hand delivery or contracts in Derivatives as permitted under Section 18A of the Act. Although the notification issued in 1995 and 2000 under Section 16 of the SCRA seems to address the same subject matter adequately, the point of distinction lies with the 2000 notification for the emphasis it renders regarding the contracts of derivatives permitted under the SCRA under Section 18A.
Thereafter, the SEBI in the year 2013 had issued a breakthrough notification debunking the various conundrums that existed with regards to the containment of Optionality Clauses in the shareholders' agreements or articles of association of the Company. The SEBI, through the notification (vide Notification No. LAD-NRO/GN/2013-14/26/6667), had unprecedentedly permitted shareholder agreements or articles of association to incorporate Optionality clauses with varied terms and conditions as may be necessary for the sale and purchase of such securities.
