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Subsequent Option for purchase of Shares or Assets and Exercise Price of Sale Undertaking

Subsequent Option for purchase of Shares or Assets and Exercise Price of Sale Undertaking

This paper addresses following two issues in a brief manner:


1.        Meaning of Subsequent Option and its distinction from real option with a few examples of recent applications in giving a subsequent option, comparison of subsequent option with other similar tools, trading in subsequent option before and after its value date and permissibility of taking an amount in consideration of granting the subsequent option.


2.        Receiving price against giving a promise to sell or purchase.


Meaning of Subsequent Option

Subsequent option is a financial right which a Promissor grants with his own will to Promissee or Beneficiary. By way of such promise, the Beneficiary has the right to oblige the Promissor to purchase or sell shares or any other assets which are known, identified or described at a known price on a fixed date or during a known period whereas the Promissee is obliged to compensate the beneficiary in case of his breach of the promise.


Following interpretations may be done from the above definition.


1.        The subsequent option is a financial right one gives to other with his own will. The option given by way of a contract of exchange is a real contract and is not our subject of discussion. The option is a financial right because it relates to purchase or sale of some thing which has financial value. This is because one who has this right is entitled to compensation in case of breach by the promissor.

2.        This right entitles the beneficiary to oblige the promissor to purchase or sell identified or described goods at a known price on a fixed date.

3.        It is necessary that the subject matter of the promise is determined in addition to price, date or period of purchase or sale.

4.        If the right of option is arising from a contract then it will be the only subject matter of such contract and will be known as real option. If it is arising from a promise then it will be subject matter of such promise except that such promise may be subsequent to one or more contracts establishing a certain relationship between same parties which are the parties of promise like a promise from lessee to purchase the leased asset from the lessor. This order / relation may be in mind and not in conditions.

5.        The subject matter of subsequent option may be shares or any other assets of monetary value fulfilling the Sharia prerequisites for the same.

6.        Option may be of two kinds; call option and put option.

7.        One who gives a call option may be the owner of assets or may not be the owner but acquires the assets based on a promise from the beneficiary.


Distinction between Sale of an Independent Option and Sale of an Option Subsequent to a Contract of Exchange.



Sale of an Independent Option

This means a contract to sell an option itself against a known price whereas there is no contractual relationship previous or present between the seller and the buyer. The contracts of purchase or sale of call or put options are prohibited as resolved by the International Islamic Fiqh Academy in its previous meeting No. 63/7/1.


Sale of Subsequent Option

The sale of a subsequent option does not differ from the sale of an independent option from Sharia perspective because it is a bilateral promise from two parties to enter into a contract of exchange providing for the ownership on a given date except that the bilateral promise is binding only one party which is the seller. However, since in the application the rules of a promise binding only on one party are not applicable in practice in these contracts, therefore these contracts are also prohibited.


Financial Application of Subsequent Option

In these applications, the subsequent option means an option which arises from a promise given on one party and binding on it alone but within an umbrella of exchange contracts in a way that option right is subsequent to these contracts and not independent nor an exchange contract itself entered into between the parties of real option.




1.        A company’s grant to its employees of option to purchase its shares

The option arises from a binding promise by a company to sell a given numbers of its shares to its employees who fulfill certain criteria against a fixed price on a given date or during a given period. It is obvious that this option is subsequent to the work contract between the company and the employee. This provision may be covered in the work contract itself or its annexes or by way of giving an option to the employee after entering into contract and during the work period through a promise attached to the work contract.


The promise is granted without any financial consideration although such a consideration may be taken care of while fixing the salaries and the other terms of an employee and binding on the company alone whereas the employee has discretion to use the option to purchase shares at the given price or to leave his right.


In my opinion company’s grant of this right will be considered in the category of obligation to donate as per the Malikiyyah and the company will be obliged to fulfill its promise irrespective of whether it has granted it within the work contract or by way of a separate document.


In case of default by the company of its promise, it will be obliged to compensate the employee for actual losses he suffered due to breach of the company. This compensation may be due to a damage suffered by the employee in case he executed a transaction resulting into incurring costs and there were no promise, he would not have entered into such transaction. If he has purchased any goods, he will sell them and the difference between the sale price of such goods and their cost will be compensation for the employee.


If the employee purchases the shares of the company in same number as promised by the company from the market, can he ask the company to pay the difference if any?


Although the very nature of promise denies this right being such difference not a loss incurred but an opportunity lost but in my opinion the company should compensate the employee by paying the difference between the promised price and the market price.


However, if the employee neither purchases goods from the market nor purchases shares thereform, he may not claim compensation as there is no actual loss financial incurred to him.


2.        Share Option to financiers

A company seeking financing gives a promise to sell its shares at a known price, on a given date or during a given period to its financiers who extended financing through a Sharia compliant mode of financing. Mostly, it happens in Sukuk based on Ijara, Mudaraba or Musharaka by way of granting the Sukuk holders a right to convert their Sukuks with shares of the Company.


In my opinion it falls in the category of exchange contracts and not the donation contracts.


Such a promise and the underlying option becomes part of the conditions of financing and sometimes issued by way of separate document although signed in one sitting with other documents.


In my opinion, the preferred way is to give such promise in a separate document observing the Sharia requirement of prohibition of combining contracts. However, it may be made part of one of the financing documents since a promise is not a contract or its part and hence it does not invalidate the financing contracts.


As discussed above in share option to an employee, incase of default, the financiers will be entitled to compensation only if they would have purchase certain goods based on promise or they prefer to purchase shares of the company from the market after the default.


If they do not enter into any such purchase, they are not entitled to compensation in my opinion to close the door of gambling.


However, if the company amicably agrees with beneficiaries without requiring them to purchase company’s shares from market at market price on a compensation which is difference between the market price and the promised price, it would be permissible since it is in the category of agreement on valuation of compensation.


It is also permissible that the company appoints the promissee as its agent to purchase the company’s shares from the market, deliver to the company and then to purchase for itself receiving the difference between the market price and the promised price from the company provided that offer and acceptance for the sale between the company and the promissee is recorded by way of valid legal means so as to distinguish between the two guarantees.


3.        Share Option by share holders of a company to a new share holder

It is permissible that existing share holders give a promise to sell some of the shares of the company at a known price, on a given date or during a given period to those who are willing to join the company and this is by way of a promise binding on the existing shareholders alone


Is it a condition that the existing shareholders should have a financial benefit in issuing the promise whereby the beneficiaries have usually an optioin to purchase shares at lower than market price or is it an act of charity?


It is obvious that if people having intellect enter into those transactions in which only charity is not the objective, they do so for certain financial benefits. Such benefits may some times be indirect and non-monetary consideration for giving the option.


Same is applicable in an option given by companies to its employees and an option given by a company to its financiers. The companies have obvious financial benefits in this although not identified else it will come into category of charities which is not permissible for companies by the prevailing laws except within certain limitation and scope.


As to the repercussions of breach of promise by existing shareholders and compensation to the beneficiary, same rules will apply which were mentioned above.


Comparison between Subsequent Option and Similar Tools


1.        Difference between Subsequent Option & Sale with Option

Subsequent option arises from a binding promise with willingness and obligation of promissor alone. When beneficiary requires the promissor to fulfill his promise, it is obligatory to execute a sale contract between both parties by way of new offer and acceptance. Promise is not a contract or part of a contract. It will not be considered as offer by promissor resulting into conclusion of sale if promissee accepts like the enforceable offer near Malikiyyah.


A sale with provisional option is a complete sale concluded with offer and acceptance and binding on both parties immediately after its conclusion having its own repercussions. However, an option is provided to one party to cancel the contract. If he does not use the right, the contract will apply with all repercussions without a need to sign a new contract and if he opts to cancel the contract, the contract will not be applied.


2.        Difference between Subsequent Option & Prize (Ja’ala)

Declaring reward or prize (Ja’ala) is an offer from one party to a group in which prize giver offers a financial benefit with his own will to some one who achieves the task or discovers some thing required whereas there stands no contractual relationship between the parties and one who achieves the task will be entitled to prize without any need to sign a contract with the prize giver.


Common between subsequent option and Ja’ala is the willingness of one party alone resulting into creating an obligation on promissor. However, the subject matter of both is different. The subject matter of option is purchase of permissible goods and subject matter of Ja’ala is entitlement of financial benefit or reward.


3.        Subsequent Option & First Purchase Right of Partners

First Purchase Right to the existing partners in a company is established through the provisions of prevailing law providing that in case of increase in capital of the company, existing share holders will have first purchase right to subscribe for the increased shares proportionately. If some shares are left unsubscribed then other may subscribe for these shares. This right is similar to subsequent option in a manner that beneficiaries in both options are entitled to tight of purchase. However, a first purchase right holder does not require consent of other partners or to enter into a contract with a partner.


Exercise of Subsequent Option

A subsequent option whether it is a call option or a put option may be traded before its maturity or exercise date with certain Sharia restrictions. This is because it is a financial right and it gives entitlement of compensation to the beneficiary.


Trading in a Put Option before Maturity

In a put option given by lessee to the lessor, the lessor may withdraw from his right before completion of lease period with or without financial consideration because it is in the category of settlement in rights. As to Lessor’s assignment of his right to a third party, it is a matter which requires further studies and Ijtihad.  


Trading in a Call Option before Maturity

In a call option given by the lessor to the lessee, it is permissible that both parties agree on withdrawal with or without a financial consideration because as mentioned above, it is a settlement in rights with mutual agreement. Moreover it does not aim at aggression on any party, does not legitimize a prohibition and does not prohibit a permission. As to assignment by lessee to a third party, it is also a matter which requires further studies and Ijtihad. In my opinion, if the assignee is a sub-lessee for the same leased asset, it may be permissible and if assignee is not a sub-lessee then it is not permissible.


Substitution / Compensation in Subsequent Options after Maturity

In my opinion it is permissible to agree on compensation with company which gave the option for withdrawing from the right under the subsequent options after the maturity because it falls in category of withdrawal from rights with mutual agreement. However, it is not permissible to agree in advance for entitlement of promissee for compensation in case of withdrawal. As to the withdrawal in favour of a third party, it will be as discussed above.


Receiving Price against Giving a Promise

If an option is under a contract of exchange like Ijara, Mudaraba, Musharaka, Investment Wakala etc., the promise may be either through a separate document or within the contract giving right to purchase or sell leased assets, Mudaraba assets, Musharaka Assets, Wakala assets.


In case of promise on leased assets the price may be based on the face value of the leased assets. However, if the promissor is a Mudarib, partner or Wakeel then the exercise price should be market value, fair value, net asset value or the agreed value of the assets on exercise date.


As to taking a price against issuing a promise in subsequent options, it is not permissible and the customary practice in Islamic finance industry is also the same because these subsequent options are under certain contracts through which the promissor achieves his financial benefit. In case of real options also, it is not permissible to take a price against giving an option as there is no exchange contract existing.



Use of promises in Islamic finance which started from promise to purchase in Murabaha has spread at a wide level being adopted in many transactions and modes and no standards or regulations are available to address the practical problems and challenges in implementation of these promises. In my opinion, Islamic scholars need to carry out thorough studies and researches and to hold seminars and conferences to lay down the principles and regulations in this regard which may be related to the following:


1.        Sharia basis for binding of a promise and its source (a contract or individual will);

2.        Scope of binding promise;

3.        Conditions of requirement to execute the promise;

4.        Method of exercise of promise, material exercise and exercise against a consideration;

5.         Compensation for breach of Promise, its types, Conditions and Method of Determination;

6.        Issuing a Promise and its source against a consideration or price;

7.        Condition to include promise in exchange contracts or to keep the promise separate from the contracts.