Share Purchase Agreements in India: A Complete Legal Guide for Buyers and Sellers

A Share Purchase Agreement (SPA) is the cornerstone of any share acquisition in India. It is the binding contract between buyer and seller that governs the transfer of ownership, allocates risk, and sets the terms of payment. Understanding SPAs is essential for anyone involved in buying or selling a company's equity or shares in an Indian corporate entity.

Structure and Essential Components of an SPA

An SPA typically opens with representations and warranties from the seller about the target company. These are statements of fact regarding corporate status, ownership of shares, financial statements, litigation history, regulatory compliance, and tax positions. Warranties are the seller's assurance to the buyer. A breach of warranty by the seller triggers indemnity obligations, meaning the seller must compensate the buyer for losses arising from misstatements. Warranty periods vary, usually 12 to 24 months from closing. Indemnity provisions are critical: they define which party bears the risk of unknown liabilities discovered after the transaction closes.

Conditions Precedent and Closing Mechanics

Conditions Precedent (CPs) are events that must occur before closing. Common CPs include regulatory approvals from government agencies, third-party consents from banks or landlords, board resolutions authorizing the sale, and clearance from anti-corruption or anti-money laundering checks. If any CP is not satisfied by the long-stop date (the outside closing date), either party can typically walk away. The Material Adverse Change (MAC) clause protects the buyer by allowing termination if the target's business deteriorates significantly between signing and closing. Closing conditions specify what must happen on the closing date itself: share transfer, payment of purchase price, delivery of share certificates, and regulatory filings.

Non-Compete, Earn-Out, and Tax Indemnity

Non-compete and non-solicit covenants prevent the seller and related parties from competing with the target business or soliciting its customers and employees after closing. These are enforceable if reasonable in scope, duration, and geography. Earn-out provisions tie a portion of the purchase price to post-closing performance metrics such as revenue targets, profit margins, or customer retention. Earn-outs are useful when buyer and seller disagree on valuation. Tax indemnity is an essential component in Indian SPAs: the seller indemnifies the buyer for any tax liabilities of the target company that arise from periods before closing, including unknown tax assessments, interest, and penalties. This is typically provided through a tax indemnity escrow or insurance policy.

Regulatory Framework: SEBI Takeover Code, Stamp Duty, and FEMA

If the target company is listed on NSE or BSE, the SEBI Takeover Code 2011 governs the acquisition. Key provisions include mandatory open offer if the acquirer crosses 25 percent ownership, pricing norms, and disclosure timelines. Stamp duty on transfer of shares is payable to the state government, typically at a rate of 0.25 percent of the consideration, though rates vary by state. For foreign buyers, FEMA compliance is mandatory: within 60 days of share acquisition, the buyer must file Form FC-TRS (Foreign Contribution Technical Remittance Statement) with the RBI's FEMA division. The share transfer deed must be properly stamped before registration; unstamped documents are inadmissible in evidence.

Dispute Resolution and Due Diligence

Most Indian SPAs include an arbitration clause rather than court litigation. Common seats are India (Mumbai, Delhi, Bangalore) or Singapore, with LCIA or ICC rules. Arbitration is faster and more confidential than court proceedings. Comprehensive due diligence always precedes SPA execution: legal due diligence examines corporate records, contracts, litigation, compliance; financial due diligence reviews accounts and tax positions; technical due diligence (for technology-heavy targets) checks IP and software assets. Many issues discovered in due diligence are resolved through representations, warranties, or price adjustments before signing. Understanding these moving parts helps both buyers and sellers negotiate a balanced, enforceable SPA.