Private equity investment in India has matured significantly over the past two decades, with India now consistently ranking among the top five global destinations for PE capital. Yet the legal architecture of a PE investment-the instruments used, the documents executed, and the protections built in for investors-remains poorly understood by many founders and management teams receiving it. Understanding the structure of private equity in India, from the investment vehicle through to the exit, is essential for any business seeking institutional capital. This article covers the full legal framework, from offshore holding structures to put option enforceability under Indian law.
Direct Equity and CCPS: A PE fund may invest directly into the Indian operating company by subscribing to equity shares or Compulsorily Convertible Preference Shares (CCPS). CCPS are the most commonly used instrument for foreign PE investment under the FDI automatic route, as they qualify as equity instruments under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (FEMA 20(R)). The investment creates an immediate shareholding relationship with full governance rights through the SHA.
Offshore Holding Company Structure: Many foreign PE funds invest through an offshore special purpose vehicle (SPV), typically incorporated in Mauritius, Singapore, or the Cayman Islands, which in turn holds equity in the Indian operating company. Common reasons: (a) Mauritius-India Double Tax Avoidance Agreement (DTAA) has historically provided capital gains tax benefits; (b) Singapore-India DTAA also provides treaty relief; (c) ease of fund structuring and portfolio management at an offshore level; (d) exit flexibility-selling the offshore SPV rather than the Indian shares avoids stamp duty on share transfer and simplifies fund accounting.
Importantly, General Anti-Avoidance Rules (GAAR) under the Income Tax Act, 1961 (applicable from 2017) and Principal Purpose Test under the OECD’s BEPS framework have reduced the certainty of treaty benefits for structures that lack commercial substance. PE funds now invest significant effort in ensuring their offshore SPVs have genuine commercial substance in the jurisdiction of incorporation.
Combination Structures: Larger PE investments may combine equity (or CCPS) at the Indian company level with CCDs (Compulsorily Convertible Debentures) issued by the offshore holding entity, optimising returns across debt and equity treatment in the fund’s home jurisdiction.
Key Transaction Documents
1. Term Sheet
The term sheet sets out the key commercial terms of the PE investment. While most provisions are non-binding (valuation, structure, governance terms, exit rights), several are typically binding: (a) confidentiality, (b) exclusivity (the company and promoters agree not to negotiate with other investors for a fixed period), and (c) governing law and jurisdiction. The term sheet is the commercial starting point and the basis for negotiating definitive agreements.
2. Share Subscription and Purchase Agreement (SSPA)
The SSPA governs the actual subscription of new shares (or transfer of existing shares from the promoter). Key provisions:
- Representations and warranties by the company and promoters covering corporate status, financial statements, IP ownership, regulatory compliance, absence of litigation, and accuracy of disclosed information
- Conditions precedent to closing: completion of investor’s due diligence satisfactorily, board and shareholder approval of the investment, any required regulatory clearances (CCI if thresholds are crossed), amendments to the AoA to incorporate investor rights
- Use of proceeds: PE investors typically specify permitted uses for the subscription proceeds, with restrictions on using PE funds to repay promoter loans or fund non-operational activities
3. Shareholders Agreement (SHA)
The SHA is the primary governance document in private equity in India. Its core provisions:
- Reserved matters / affirmative vote rights: All decisions that require investor prior consent, regardless of board majority
- Board composition: Investor’s director nomination rights (one or more seats based on shareholding), quorum requirements (which ensure investor’s director must be present for board meetings to proceed)
- Anti-dilution: Broad-based weighted average formula, with carve-outs for ESOP issuances and rights issues
- Tag-along and drag-along rights
- ROFR and ROFO on share transfers
- Liquidation preference: Typically 1x non-participating for VC investors; larger PE investors may negotiate participating preferred
- Investor covenants: Non-compete and non-solicitation obligations on the founders during their association with the company
- Promoter lock-in: Restriction on promoters selling their equity for a specified period post-investment (typically 2-3 years, subject to carve-outs)
4. Restated Articles of Association
The AoA of the company must be amended to incorporate the key rights agreed in the SHA-particularly reserved matters, board composition rights, and transfer restrictions. SHA provisions that are not reflected in the AoA are contractual between the parties but may not bind third parties (including future investors) or be enforceable against the company itself. SEBI has emphasised the importance of AoA alignment for companies approaching an IPO.
Investor Protections
Representations, Warranties, and Indemnity:
Unlike a transaction governed only by conditions precedent, PE investments include comprehensive reps and warranties by promoters and the company, backed by an indemnification obligation. Promoters provide financial indemnities for breach of reps, covering the investor’s losses up to a cap (often 100% of the investment amount for fundamental reps). This creates personal financial exposure for promoters, not merely the company.
Information Rights:
PE investors typically negotiate: monthly management accounts (within 15 days of month end), quarterly financial statements (within 30 days of quarter end), annual audited accounts (within 60 days of year end), annual budget and business plan, and immediate notification of material adverse developments (litigation, regulatory actions, loss of key customers). Larger investors may also require attendance rights at board meetings and committee meetings.
DRHP/IPO Rights:
Prior to an IPO, investors negotiate rights to include their shares in the offering (so they can exit via the IPO), demand registration rights (requiring the company to register their shares for public sale), and anti-dilution protection on the IPO pricing.
Exit Mechanisms
IPO Exit: The most preferred exit route in private equity in India. The investor receives registered shares for listing; the SHA includes an obligation on the promoters to use best efforts to complete a qualified IPO by a specified date. If the IPO does not occur, alternative exit mechanisms activate.
Strategic Sale: If the company is sold to a strategic buyer, the investor’s tag-along rights ensure it can exit alongside the promoters at the same per-share price.
Secondary Sale: The investor sells its stake to another PE fund or investor, subject to ROFR provisions in the SHA. Secondary transactions in Indian PE are increasingly common, providing earlier liquidity for fund investors.
Put Option: The investor has a contractual right to require the promoters to purchase the investor’s shares at a specified price (typically cost of investment plus a minimum return, or a formula-based price). The enforceability of put options in Indian private companies has evolved significantly:
The Supreme Court in Bharat Nidhi Ltd. vs Takhatmal Shridhar addressed the enforceability of options in the context of securities regulation. More directly relevant is Section 10 of the Securities Contracts (Regulation) Act, 1956 (SCRA), which, prior to its amendment in 2013, was used by courts and regulators to argue that put/call options in unlisted securities were not enforceable. Following the 2013 amendment and SEBI circulars permitting put/call options on unlisted shares subject to conditions, put options are now generally considered enforceable in Indian private companies. However, for foreign investors, the exercise of a put option (requiring the promoter to purchase shares from the investor) must comply with FEMA 20(R) pricing regulations-the price must not exceed the fair value as determined by a registered merchant banker using the DCF method.
Regulatory Framework
FEMA 20(R): Governs the entry of foreign PE investment (pricing, instrument type, sector caps, reporting obligations including FC-GPR within 30 days of share issuance).
Companies Act, 2013: Governs the corporate formalities of the investment (board and shareholder resolutions, AoA amendments, share issuance procedures under Section 62).
SEBI (ICDR) Regulations, 2018: Become relevant when the company files a DRHP for an IPO, at which point pre-IPO shareholding, ESOP plans, and outstanding SHA provisions must comply with SEBI requirements.
Key Takeaways
- CCPS and restated Articles of Association together form the legal backbone of private equity investment in India under FEMA 20(R).
- Put options on unlisted shares are generally enforceable post-2013 SCRA amendments, subject to FEMA pricing guidelines for foreign investor exits.
- SHA provisions on reserved matters, anti-dilution, and information rights must be reflected in the AoA to bind the company and third parties.
This article is for informational purposes only and does not constitute legal advice. Readers should seek appropriate professional counsel for their specific circumstances.
META TITLE: Private Equity India: Structure, Docs & Investor Protections