Bombay High Court Decides on Enforceability of a Put Option in a Share Purchase / Shareholders’ Agreement

The Bombay High Court in its decision dated March 27, 2019 in Edelweiss Financial Services Limited v. Percept Finserve Private Limited[1] has set aside an arbitral award which had held that a put option provided to Edelweiss Financial Services Limited was void and unenforceable. The arbitral award held that such put option was a forward contract and in any event a derivative contract under the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and therefore illegal under the notifications issued under Section 16 and also contrary to Section 18A of the SCRA. The Bombay High Court set aside the arbitral award on the ground of ‘patent illegality’ and held that such a put option is enforceable as the contract of sale comes into existence only after the exercise of such option. Therefore, such an option is neither a forward contract nor a derivative contract under Section 2(ac) of the SCRA. The Court further held that even assuming the option is a derivative, its illegality must not be borne from Section 18A of the SCRA – which only positively provides for legality and validity of contracts in derivative. The Court has also ruled that cross objections filed by a respondent in a petition under Section 34 of the A&C Act are not maintainable since the provisions of Civil Procedure Code, 1908 are not applicable to proceedings under Section 34 as the A&C Act is a code in itself and Section 34 does not make any provision for filing of cross objections.

[1] Edelweiss Financial Services Limited v. Percept Finserve Private Limited, Arbitration Petition No. 220 of 2014.

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]
Date: March 31, 2019