Term Sheet to Closing: How an Equity Round Closes in India

A signed term sheet feels like the finish line. It is closer to the halfway mark. Between the term sheet and money in the bank sit confirmatory due diligence, two long agreements, a set of conditions, board and shareholder approvals, and a string of company law and FEMA filings. At this stage deals more often slow down over findings, drafting and paperwork than over valuation.

This note walks through that stretch for an Indian private limited company raising equity: what the term sheet binds, how diligence findings turn into conditions, what goes into the two agreements, where founders give away too much in warranties and indemnities, and the closing mechanics. Company law and FEMA time limits below can change.

What the term sheet binds, and what it does not

The commercial terms in an Indian term sheet, such as valuation, board seats and investor rights, are usually non-binding. A few clauses are drafted to bind from signature: exclusivity, confidentiality, costs and governing law. Exclusivity is the one to watch, because it stops you from talking to other investors for a fixed period while this investor finishes its work.

That makes the period after signing the real risk window. You have paused your other conversations, and the investor has not yet committed. Keep exclusivity as short as the investor will accept, make any extension need your consent, and have your data room and filings in order before you sign, so diligence has less to find.

Confirmatory due diligence and the findings list

The investor's lawyers and accountants now test what you told them. Legal diligence covers corporate records, contracts, IP, employment and litigation. Financial and tax diligence covers the accounts, tax positions, GST and payroll. If money is coming from abroad, FEMA diligence checks earlier foreign investment and its reporting.

The output is a findings report. Fixing issues before diligence starts is cheaper than negotiating each one later, because every finding ends up in one of four places.

• A condition precedent that must be fixed before the money comes in
• A condition subsequent that must be fixed within a set period after closing
• A specific indemnity, where the company or founders cover a known risk
• A change in price or structure, when the finding is serious

The two documents: SSA and SHA

The share subscription agreement (SSA) governs the investment itself: how many shares, at what price, the conditions to closing, the representations and warranties, and the indemnity. The shareholders agreement (SHA) governs life after closing: board composition, reserved matters, information rights, pre-emption, transfer restrictions, tag-along and drag-along, liquidation preference and anti-dilution. Our note on term sheet clauses explains what each of these means in practice.

One Indian rule matters more than any clause. Following the Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan, restrictions on share transfer that are not in the Articles of Association do not bind the company. So the SHA rights must be written into the Articles, by special resolution, at closing. An SHA signed without amending the Articles is an avoidable gap.

Warranties, disclosure letter and indemnity

In the SSA the company, and often the founders, give warranties: statements about the company that the investor relies on. If a warranty proves untrue, the indemnity clause decides who pays and how much. This is where founders give away the most without noticing.

The disclosure letter is the founders' main protection. It lists known exceptions to the warranties, such as a pending tax notice or a late filing, and a matter fairly disclosed there generally cannot be the basis of a later claim. Then negotiate limits into the indemnity itself.

• An overall cap, often linked to the amount invested, with a lower cap for founders personally
• A de minimis amount below which individual claims are ignored
• A basket, so claims can be made only once they add up to a threshold
• Time limits, with general warranties expiring sooner than title and capitalisation warranties
• No unlimited personal liability for founders, except for fraud

Closing mechanics under Indian company law and FEMA

Closing is a sequence, and the order matters. Foreign investment adds entry checks before any of it: the sector cap and route, and prior government approval where the investor is from a country that shares a land border with India.

Our note on private placement versus preferential allotment covers the company law side in more detail. For a typical private placement of shares, the steps run roughly in the order below.

• Valuation report from a registered valuer and, for foreign money, a FEMA fair value certificate
• Board approval of the issue, the offer letter and the amended Articles
• Special resolution of shareholders, with Form MGT-14 filed within 30 days
• Private placement offer letter in Form PAS-4 to the named investor
• Money received from the investor's own bank account into a separate bank account
• Allotment within 60 days of receiving the money, failing which it must be refunded
• Return of allotment in Form PAS-3 within 15 days, and the money used only after that filing
• Shares issued in demat form where Rule 9B applies, and stamp duty on the issue paid
• For foreign investors, Form FC-GPR within 30 days of allotment
• Investor nominee director appointed, with Form DIR-12 within 30 days

If the investor wants a US parent

Some investors, especially US funds, prefer to invest in a Delaware parent with the Indian company as its subsidiary. If that is the plan, decide it before the term sheet, not during closing. A flip means setting up the US company, moving founders' Indian shares into it through a share swap that must fit FEMA rules on both overseas and foreign investment, and dealing with the tax on that swap, which can be significant.

For founders building for US customers, a US entity often makes sense anyway, but the structure should follow the business, not the closing timetable. Our notes on the India to US flip and on USA company registration explain the options.

Frequently asked questions

Is a term sheet legally binding in India?

Mostly not. Exclusivity, confidentiality, costs and governing law are usually drafted as binding. The commercial terms bind only when the SSA and SHA are signed.

How long does it take to close after signing a term sheet?

Commonly several weeks to a few months. The biggest variable is how clean your records are, followed by the investor's internal process and, for foreign money, FEMA steps. A ready data room is the best way to shorten it.

Do founders have to give personal warranties?

Investors often ask. Negotiate founder warranties down to matters founders control, such as title to their own shares, with knowledge qualifiers, a cap and a time limit, and avoid unlimited personal indemnity.

What happens if a condition precedent is not met?

The SSA sets a long-stop date. By then the investor can waive the condition, agree an extension, convert it into a condition subsequent, or walk away. Clear CPs early so the long-stop date never matters.

Related guides

• Founders agreement: vesting, IP and leaver terms
• Term sheet clauses that matter
• Private placement vs preferential allotment
• India to US flip structure
• USA company registration for Indian founders