पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 24 · Scale

Selling the company: the legal mechanics of an Indian M&A

A sale is a term sheet, a diligence, a share purchase agreement, a list of conditions and a closing day. Know what each stage asks of the founders and how much of the price arrives on the day.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

A canal lock gate with its black and white balance beam under a clear summer sky. — Photograph: Jan Wright · Pexels

The announcement says ₹120 crore. On closing day the founders receive ₹75 crore. Nine crore went to the venture debt lender and the bankers, eighteen sits in an escrow account for a year and a half, and another eighteen depends on revenue targets for the next eighteen months. The founders had read the term sheet. They had not done the arithmetic on it, and nobody had told them the foreign buyer could not have held back more than a quarter of the price even if it had wanted to.

Most founders sell once. The buyer’s team has done it dozens of times. This lesson walks through the legal mechanics of selling a private Indian company by share sale: the stages, what the share purchase agreement actually allocates, the conditions that must be met before money moves, the regulatory approvals that apply in India, and how much of the headline price reaches the sellers on the day. It assumes a share sale; asset sales and court-approved schemes of arrangement follow different paths and are worth asking about when the buyer proposes one.

The stages of a sale

A sale has six stages. A term sheet or letter of intent sets the price, the structure and an exclusivity period, usually the only binding parts. Diligence follows: the buyer’s lawyers, accountants and engineers read everything, which is where the [data room](/library/due-diligence-data-room-that-closes-round) and the [secretarial record](/library/board-resolutions-minutes-secretarial-record) earn their keep. The share purchase agreement is negotiated alongside, with a disclosure letter in which the sellers list every exception to the warranties. Signing binds both sides. A period of conditions precedent follows, while approvals are obtained. Closing is the day shares and money change hands.

Two practical points. Keep the exclusivity short, forty-five to sixty days, with a right to extend only by agreement, because exclusivity is the moment the seller’s leverage begins to fall. And run the company as if the deal will fail. Buyers retrade price when performance slips during diligence, and the agreement will contain covenants restricting what the company may do between signing and closing anyway.

What the share purchase agreement allocates

Price. Either a fixed price on a historical balance sheet with a promise that no value has leaked since, often called a locked box, or a price adjusted after closing for actual cash, debt and working capital. The first is simpler for founders; the second is fairer when the business moves fast. Warranties. Statements of fact about the company: title to shares, accounts, tax, contracts, IP, employees, litigation, compliance. Each warranty is a promise the buyer can sue on, which is why the disclosure letter matters: a matter fairly disclosed against a warranty is not a breach of it.

Indemnities. Promises to pay for specific losses, regardless of disclosure: a known tax dispute, a pending claim, a gap found in diligence. Negotiate the limits as hard as the price: an overall cap as a share of the price, a lower cap for general warranties than for title and tax, a basket below which no claim is made, and a time limit after which claims end. Restrictive covenants bind the selling founders not to compete or solicit staff for a period; the [contracts lesson](/library/contracts-ten-clauses-that-decide-disputes) explains why a restraint that comes with the sale of goodwill is the one kind of non-compete Indian law treats differently, so expect the buyer to insist on it. Employment. Founders who stay usually sign new employment agreements, and part of their consideration may depend on staying; read those with the same care as the price.

Conditions precedent and the approvals

Closing waits on a list of conditions. Corporate approvals: board and shareholder resolutions, and waivers of the pre-emption, first refusal and tag-along rights in the [shareholders’ agreement](/library/shareholders-agreement-what-you-are-signing) and the articles. Third-party consents: customer, lender and landlord contracts with change-of-control clauses. Regulatory approvals, which depend on size, sector and the buyer’s residence.

The cable-stayed Bandra-Worli Sea Link crossing the bay towards the Mumbai skyline. — Closing is a crossing that waits on every condition. Each approval is a span that has to be in place first. Photograph: Simranpreet Singh · Pexels

Competition. The Competition (Amendment) Bill 2022, passed by Parliament in April 2023, added a deal value threshold: as PRS Legislative Research summarises it, transactions worth more than ₹2,000 crore must be notified to the Competition Commission for approval, and the time limit for approval was cut from 210 to 150 days. Below that value, the asset and turnover thresholds in the Act still apply; most startup acquisitions fall below both, but check rather than assume.

Foreign exchange. When a non-resident buys shares from residents, the Reserve Bank’s Master Direction on Foreign Investment sets the price floor: not less than the price worked out by an arm’s length valuation for an unlisted company. A non-resident selling to a resident faces the mirror rule, a ceiling. The transfer is reported in Form FC-TRS within sixty days, and under the reporting regulations, amended to 13 June 2026, the onus of reporting is on the resident transferor or transferee. The [FEMA lesson](/library/fema-for-founders-when-a-foreigner-invests) explains the rest of the regime. Sector regulators add their own conditions: a company holding a licence from the Reserve Bank, SEBI or IRDAI may need the regulator’s approval before control changes hands, a question to settle at the term sheet, which the [sector licences lesson](/library/sector-licences-rbi-sebi-irdai-fssai) maps. And tax: the buyer will withhold tax on payments to sellers where the law requires it, and will want the sellers’ capital gains computed before closing.

Who receives which rupee

The price the buyer pays is not divided among shareholders in proportion to their holdings until the shareholders’ agreement says so. Investors holding preference shares usually carry a liquidation preference that applies on a sale: the right to take back their investment, or a multiple of it, before ordinary shareholders share the rest, or to convert and share pro rata if that is worth more. At a modest price the preference can absorb most of the proceeds; at a high one it falls away. Read the waterfall in the [term sheet lesson](/library/term-sheet-clause-by-clause) and run the numbers before negotiating price, because the price at which the founders’ own outcome changes is the number that matters to them.

Three other claims come off the top. Lenders are repaid at closing, since loan agreements usually make a change of control an event of default. Vested employee options are settled in cash or rolled into the buyer’s plan, and unvested ones are treated as the plan and the agreement provide. And the transaction costs, bankers, lawyers and accountants, are paid by the company or the sellers as the agreement allocates. Build a single spreadsheet that runs from the headline price to the cash each shareholder receives, and share it with the board before the term sheet is signed.

Escrows, holdbacks and earn-outs

Few buyers pay the whole price on the day. Part sits in an escrow account with a bank as security for warranty and indemnity claims; part is deferred, paid on fixed dates or tied to performance as an earn-out. Each protects the buyer and each is money the founders may never see. Earn-outs in particular move control of the outcome to the buyer, who will run the business after closing.

India sets a hard limit when the transaction crosses the border. Paragraph 7.9.1 of the Master Direction allows no more than 25 per cent of the total consideration to be paid on a deferred basis, settled through an escrow arrangement, or indemnified by the seller, and each only for eighteen months. A foreign buyer’s standard template with a twenty per cent escrow and a twenty per cent earn-out does not work for an Indian target without restructuring. Run your own terms through the figure.

The headline price is a ceiling. Negotiate the escrow, the earn-out and the indemnity cap as if they were the price, because they are.

The sale calendar

Twelve months before you expect to sell, clean the secretarial record, reconcile the register of members with the cap table, re-paper related-party contracts and list every change-of-control clause in customer contracts. At the term sheet, run the closing waterfall with real numbers, agree the price mechanism, the escrow and deferral within the 25 per cent rule if the buyer is non-resident, and the indemnity caps before exclusivity starts. During diligence, prepare the disclosure letter as the questions arrive, not at the end. Between signing and closing, keep a weekly list of conditions with an owner and a date for each, including the FC-TRS deadline if a non-resident is buying. After closing, diarise the end of every escrow, deferral and warranty period, and the date each claim right expires. A founder who does this sells the company once and is paid for it once, rather than negotiating the price a second time in the year after.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.