SEBI permits preferential clauses in M&A agreements

04 Oct 2013

Market regulator Securities and Exchange Board of India (SEBI) has allowed parties entering into merger and acquisition (M&A) deals to include preferential clauses like ''right of first refusal'', ''tag-along'' and ''drag-along'' in their share purchase agreements or articles of association, so as to provide flexibility in such deals.

Right of first refusal gives one of the parties in an M&A deal the first right to buy out its partner in the event of the other party wishes to exit at any time.

Tag-along and drag-along clauses allow one of the partners to join the other partner in further acquisitions or sell-offs.

Such rights of parties entering into M&A deals are normally covered under 'put and call' options, which allow one party to sell or buy the securities or assets involved in a transaction.

SEBI has permitted contracts containing an option for purchase or sale of securities provided the title and ownership of the underlying securities are held continuously by the selling party to such a contract for a minimum period of one year from the date of entering into the contract.

The price or consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained therein, should be in compliance with all the laws for the time being in force, as applicable.

Also, the contract so arrived at has to be settled by way of actual delivery of the underlying securities.

SEBI said it would allow use of such clauses in share purchase agreements by bringing changes to the Securities Contracts (Regulation) Act (SCRA).

These changes are likely to help boost the interest of foreign investors, who tend to prefer such clauses in their deals. However, the amendments would be effective with prospectively and not to the deals already having taken place.

Some of the high profile merger and acquisition deals such as the Diageo-United Spirits deal and Cairn-Vedanta deal had to face regulatory hurdles for want of clarity on regulatory clauses.

The government had recently cleared a proposal to amend the SCRA regulations for allowing put and call options as well as some other provisions to allow investors more flexibility in finalising transactions.

Incorporation of such clauses in shareholder agreements help in removing ambiguity and give the investor an option to either sell the shares (put option), or to buy additional shares (call option) at a future date.

The SEBI notification said the changes would not affect any contract that has been entered into prior to the date of the notification.