LEGALITY OF PUT AND CALL OPTIONS: ENDURING MURKINESS AND ISSUES FOR NON-RESIDENT INVESTORS
One of the most widely-accepted principles of modern economic theory is that influxes of investment are required for the economy to grow at a reasonable pace. This is especially true in light of the so called ‘multiplier principle’.1 Simplistically, it means that an investment of a certain amount of money leads to an increase in national income that may be several times the value of the original investment.2 The investment acts as a catalyst, leading to augmentation in consumption and production.3
As a result, it would stand to reason that the prudent course of action for a government interested in ensuring sustained growth would be to encourage investment to the greatest extent reasonably possible. It is essential that there be freedom of investment to prevent recessions and economic slow-downs.4
In India, one of the major concerns regarding investment, especially investment from abroad, are the questions of legality arising with respect to Call and Put Options. Exit options such as this are absolutely essential, because investors would be reluctant to make investments when there is a chance that such investment may end up transforming into a sinkhole from which the investor cannot escape.Regulatory authorities seem to be taking more objective and realistic approaches to the legality of such instruments. However, up until very recently, there were some lacunae in the law regarding the legality of the exit options. Even after such issues were addressed, there are some persisting issues, especially regarding exit valuations of non-resident investors.Over the course of this paper, various issues that have been raised regarding the valuation of Call and Put Options have been analysed, and an attempt has been made to offer solutions to them.