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Issues: Whether clauses in a share purchase agreement granting the investor a right to require the seller to repurchase shares on occurrence of a contingency were illegal or unenforceable as a forward contract or as a derivative transaction under the Securities Contracts (Regulation) Act, 1956 and the SEBI circular issued thereunder.
Analysis: The contractual right under the share purchase agreement did not create a present obligation for sale or purchase of shares on the date of execution. A binding contract for repurchase would arise only if the stipulated contingency occurred and the investor exercised the option. Such an arrangement was not a forward contract because there was no time-lag between delivery and payment in the sense prohibited by the regulatory framework, nor did it amount to a contract for trading in derivatives. Section 18A of the Securities Contracts (Regulation) Act, 1956 protects lawful derivative contracts meeting specified conditions, but it does not invalidate a mere option embedded in a shareholders' agreement. The SEBI notification of 1 March 2000 was held inapplicable to this kind of contractual put option.
Conclusion: The option clauses were not illegal or unenforceable, and the arbitral finding to the contrary was rightly reversed. The challenge to the award therefore failed.
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