Cos can now use options in M&As: All you need to know

Law Minister Kapil Sibal has given approval to a proposal from the Securities and exchange Board of India to allow using options as part of mergers and acquisitions.

Here are a few details you wanted to know about the move:

* What it means: This means that in a merger and acquisition agreement, listed companies can include a right to buy more or sell shares of target companies at a later date, but at a predetermined price. A put option gives the holder a right to sell shares while a call option gives a right to buy further shares. For the holder, an option gives a right. The counter party, however, is obligated to buy or sell shares when the option holder exercises the right.

[caption id=“attachment_787509” align=“alignleft” width=“380”] A put option gives the holder a right to sell shares while a call option gives a right to buy further shares. For the holder, an option gives a right. Reuters[/caption]

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* What is it aimed at: According to the minister, quoted in a Mint report, the move is aimed at encouraging foreign investments and bringing about clarity to the Securities Contracts (Regulations) Act, or SCRA.

* What experts say: Experts have hailed the move. Somasekhar Sundaresan, a partner at law firm J Sagar Associates, told Mint that the move was long overdue. “Two private shareholders entering an agreement resulting in delivery of shares cannot be taken as a speculative contract is leaving no stone unturned in its effort to woo foreign funds,” he has been quoted as saying.

According to Dara Kalyaniwala, head of investment banking at Prabhudas Lilladher, quoted in a Business Standard report, the move will bring about transparency in M&As. Most of the deals already include such options and are kept confidential and secret. The public never come to know of these.

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* Why were options not allowed: Sebi disallowed such options because it thought they encourage speculation. Moreover, it also considered put option was illegal in a share purchase agreement. According to BS report, the RBI was also not comfortable with such agreements, as it also had doubts about the legality of the put and call options. Vedanta Resources-Cairn India and Diageo-United Spirits had such arrangement built in and were questioned by Sebi.

* How was it resolved: The department of industrial policy and promotion clarified that “any instrument with an inbuilt option would be considered debt and treated as external commercial borrowing”, which cleared the air, the BS report said quoting sources.