The Telegraph
Since 1st March, 1999
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Scan on put-call option in selloff

New Delhi, July 2: The government will review all strategic sales made till now which carry a built-in call or put option.

The core group on disinvestment, which met here recently, decided that they needed to be reviewed as attorney-general Milon Banerjee had pointed out that the country’s company law did not allow for any call or put options to be incorporated in sale or shareholders’ agreements.

Officials said many of the 11 state-run firms and 19 hotels, which were sold to private entrepreneurs through strategic sales, had call and put options which ensured that the government would sell the remaining stakes in them when the acquirer wanted them to.

An option to buy is known as a call option while an option to sell is called a put option.

The government is alarmed as this little bit of legalese could well lead to a large number of cases with buyers of state shareholding through agreements with call or put options. Call options allow buyers of stocks or bonds or commodities the right to buy a specified number of shares on or before a pre-specified expiry date.

There are two types of options: European and American. In a European option, the buyer can only exercise the right to take up the option or let it lapse on the expiry date. However, in an American option, this right can be exercised at any time up to the expiry date.

The PSU selloffs adopt the principles of the European option.

These strategic sales usually see the government selling a limited shareholding in PSUs with clauses that give them the first right of refusal in buying the remaining holdings in those state-run firms.

The only company where call options have been exercised till date is Hindustan Zinc Ltd where Anil Agarwal-owned Sterlite bought out the remaining 26 per cent for Rs 446 crore. Otherwise, till now, the government has not sold any stock through call or put options.

The attorney-general’s advice, which was given when Sterlite attempted to exercise the call option in Balco, says in view of sections within the Companies Act 1956 and Indian Contract Act 1872, the “provision of valuation date and call option do not survive and consequently ... cannot .... bind the government to accept the same.”

The government had sold a 51 per cent stake in CMC Ltd and 74 per cent in Hindustan Teleprinters Ltd as well as in PPL.

It has more recently sold off a 72 per cent stake in Jessop to the Ruias and 25 per cent in IPCL to Reliance.

Officials said many of the shareholders’ agreements that flowed from such sales incorporated similar call and put options. They said the disinvestment department had told the core group meeting that it felt the attorney-general’s advice opened up the possibility of new cases as many shareholders’ agreements had similar call or put options.

This is not the first time that the government has been plagued by the way strategic sales were handled when they were contracted. Last year, a political uproar as well as adverse comments by auditors forced the government to change the valuation guidelines for stake sales.

The earlier preference for valuing firms using a discounted cash flow method was dropped in favour of a market valuation of assets.

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