Put Options explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
An investor may bargain for the right to sell. It may not bargain for the price it will receive — and the difference has occupied the courts for years.
The three conditions on put options
Exercise of a put option under an optionality clause is subject to a minimum one-year lock-in, a fair-value-based exit price and the prohibition on any guaranteed return.
| Condition | What it prevents |
|---|---|
| Minimum one-year lock-in | An instrument that can be put back immediately, which would be debt in substance |
| Fair-value-based exit price | An exit at a price unrelated to the value of the investment |
| No guaranteed return | An equity investment that carries none of the risk of equity |
The three conditions together enforce a single boundary: an instrument that is called equity must behave like equity.
This is the same distinction the FEMA foundation principles draw at the instrument level, where fully and compulsorily convertible instruments are treated as equity and everything else, including optionally convertible or redeemable instruments, is treated as debt.
A put option at a guaranteed price achieves by contract what an optionally convertible instrument achieves by its terms — the investor takes the upside if the business succeeds and recovers a fixed amount if it does not. Economically that is a loan with an equity kicker, and FEMA regulates debt differently from equity.
Hence the fair value requirement. An investor may have the right to exit; what it receives on exit must reflect what the business is then worth.
The DoCoMo litigation over fixed-price put options
The tension between a fixed, guaranteed exit price and FEMA's pricing discipline was illustrated by the protracted Tata–NTT DoCoMo dispute, in which a fixed-price put option accompanied by a damages clause became the subject of extended litigation and acquired a wider public and political dimension.
The holding: the courts ultimately held that a pricing arrangement inconsistent with FEMA does not render the underlying contract void ab initio.
That is significant for contract drafting. A FEMA-inconsistent pricing term does not destroy the agreement it sits in; the contract survives, and the question becomes what can be done about the term.
What the litigation did not answer
The practical difficulty this leaves unresolved, namely how a party is to seek a retrospective RBI approval once the transaction is already complete and what recourse remains if RBI declines that approval, was not itself addressed by the litigation.
This is a real gap. A contract that survives but whose pricing term cannot be performed without approval leaves the parties with an enforceable agreement and no lawful way to perform it. And given that an application requiring RBI approval ordinarily takes between four and ten months, with instances of more than two years, seeking approval after the event is not a quick remedy even where it succeeds.
The question now before the Supreme Court
A closely related question, whether a damages clause of this kind, unaccompanied by any transfer of securities, constitutes a current or a capital account transaction, has more recently been the subject of a Supreme Court direction requiring RBI to take a position.
The characterisation determines the default. Recall the third foundation principle: capital account transactions are prohibited unless specifically permitted, while current account transactions are permitted unless specifically prohibited.
- If the damages payment is a capital account transaction, it needs affirmative enablement — and a payment measured by reference to a share price may not find it.
- If it is a current account transaction, it is permitted unless something prohibits it — and a damages payment under a contract is an ordinary commercial payment.
The argument for the current account view is that no securities move: the investor is not being paid for shares, it is being compensated for a breach. The argument against is that the compensation is measured by the shortfall against a share price, which makes it a capital transaction in substance.
Drafting put options in an optionality clause
- Provide the right to exit, not the price.
- Tie the exit price to fair value determined at the time of exercise.
- Observe the one-year lock-in.
- Avoid any formulation — floor price, minimum IRR, damages measured against a fixed figure — that produces a guaranteed return in substance.
Common mistakes
- Achieving a guaranteed return through a damages clause rather than the option price.
- Assuming a FEMA-inconsistent pricing term voids the whole contract.
- Planning to regularise a completed transaction by retrospective approval.
- Drafting an exit price as a floor rather than as fair value.