Share Purchase Agreement (India)

The transfer of shares in an Indian private limited company involves several legal steps governed by the Companies Act 2013 and the company's Articles of Association. Step 1 — Pre-Emption Rights: The seller must first comply with any pre-emption rights in the AoA or SHA — typically offering the shares to existing shareholders at the proposed price before offering to an external buyer. If existing shareholders decline to exercise their pre-emption rights within the specified period, the seller is free to transfer to the proposed buyer. Step 2 — Execution of SPA: The seller and buyer execute a Share Purchase Agreement specifying the price, number of shares, representations and warranties, conditions precedent, and completion mechanics. Step 3 — Share Transfer Form (SH-4): The seller executes a share transfer form (Form SH-4) as required by Rule 11(1) of the Companies (Share Capital and Debentures) Rules 2014. SH-4 must be stamped with the applicable stamp duty under the Indian Stamp Act 1899 or the applicable state Stamp Act (stamp duty on share transfers is typically 0.25% of the higher of the consideration or the market value of the shares). Step 4 — Delivery to the Company: The executed SH-4 form and the original share certificate(s) being transferred are delivered to the company for registration. Step 5 — Board Approval: The Board of Directors passes a resolution approving the transfer (subject to any restrictions in the AoA). In a private company, the Board may have the discretion to refuse registration under the AoA.

Representations and warranties (R&Ws) in an Indian Share Purchase Agreement (SPA) are statements of fact made by the seller (and sometimes the company) to induce the buyer to proceed with the acquisition. If any R&W proves to be inaccurate, the buyer has a contractual remedy (damages, indemnity, or rescission) against the seller under the Indian Contract Act 1872. Standard Seller R&Ws in an India SPA include:

1. Title and Capacity: The seller is the legal and beneficial owner of the shares being sold, free from all encumbrances, pledges, charges, and third-party claims. The seller has full legal capacity and authority to enter into and perform the SPA. 2. Corporate Authorisation: For corporate sellers, the SPA has been duly authorised by the board and shareholders (if required), and does not violate the seller's constitutional documents or any agreement binding the seller. 3.

When a foreign investor (non-resident) purchases shares in an Indian company, the transaction is regulated by the Foreign Exchange Management Act 1999 (FEMA), the Foreign Direct Investment (FDI) Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT), and the Foreign Exchange Management (Non-debt Instruments) Rules 2019 (NDI Rules) issued by RBI. Key FEMA/FDI Requirements:

1. Entry Routes: Most sectors allow FDI under the 'Automatic Route' (no prior government approval required) up to specified sectoral limits. Certain sectors require prior Government Approval through the Foreign Investment Facilitation Portal (FIFP). Prohibited sectors (e.g., gambling, lottery, chit funds, real estate other than certain categories) cannot receive FDI. 2. Pricing Guidelines: For shares of unlisted Indian companies, the price must not be less than the Fair Market Value (FMV) determined by a SEBI-registered merchant banker using any internationally accepted pricing methodology (e.g., DCF valuation). The buyer (foreign investor) must pay at least FMV, and the seller cannot receive less than FMV for shares sold to a foreigner. This is the 'pricing guideline' under the NDI Rules — a departure from pure arms-length pricing. 3. Reporting to RBI: (a) The Indian company must report the FDI (receipt of foreign investment) to the RBI in the prescribed format (Form FC-GPR) within 30 days of allotment of shares or transfer of shares.

Capital gains tax on the sale of shares of an Indian private limited company (unlisted shares) is governed by Sections 45, 48, and 112 of the Income Tax Act 1961. Holding Period: The holding period determines whether the gain is Long-Term Capital Gain (LTCG) or Short-Term Capital Gain (STCG). For unlisted shares of companies, the threshold is 24 months (2 years). Shares held for more than 24 months attract LTCG; shares held for 24 months or less attract STCG. Long-Term Capital Gain (LTCG) on Unlisted Shares: Taxable at 20% with indexation (benefit of adjusting the cost of acquisition for inflation using the Cost Inflation Index). For non-residents, the rate is 10% without indexation on gains from unlisted shares under Section 112 (subject to applicable Double Taxation Avoidance Agreements — DTAAs). Short-Term Capital Gain (STCG) on Unlisted Shares: Taxable at the seller's applicable income tax slab rate (up to 30% for the highest slab, plus surcharge and cess). No indexation benefit is available. Angle Tax (Section 56(2)(viib)): When a company issues shares at a value exceeding the FMV, the excess is taxable as income ('other income') in the hands of the company — not as capital gains for the seller, but this affects the buyer's cost base. TDS for Non-Residents: When shares are purchased from a non-resident seller, the Indian buyer must deduct TDS at applicable rates under Section 195 of the Income Tax Act 1961 (typically 10%–20% on the capital gains portion, depending on the DTAA).

Stamp duty on share transfers in India is governed by the Indian Stamp Act 1899 (for certain instruments) and by individual state Stamp Acts. As stamp duty is a state subject, the applicable rates vary by state. Stamp Duty on Share Transfer Form (SH-4): Under Article 62(b) of Schedule I to the Indian Stamp Act 1899 (as amended), stamp duty on the transfer of shares (including those represented by share certificates) is 0.25% of the consideration or market value of the shares, whichever is higher. For example, if shares worth ₹1,00,000 are transferred, the stamp duty is ₹250. The stamp duty must be paid before or at the time of execution of the SH-4 form. Electronic Stamp Duty (e-Stamp): Many states have adopted the SHCIL (Stock Holding Corporation of India Limited) e-stamping system for payment of stamp duty online without purchasing physical stamp paper. The e-stamp certificate must be affixed to the SH-4 form. Stamp Duty on the SPA Itself: The SPA (the agreement documenting the share sale, separate from the SH-4 transfer form) is typically stamped as an 'Agreement' under the applicable state Stamp Act. Rates for agreements vary by state — in Maharashtra, for example, agreements are stamped at 0.1% of the consideration (capped at ₹10,000) under Article 5(h) of the Maharashtra Stamp Act 1958. In other states, flat rates may apply. Note on State Variation: Maharashtra, Karnataka, Rajasthan, Delhi, and other major commercial states have their own stamp acts with different rates.

Conditions Precedent (CPs) in an Indian Share Purchase Agreement (SPA) are conditions that must be satisfied (or waived) before the completion of the share transfer can occur. They protect the buyer (and sometimes the seller) from being required to complete the transaction if certain material conditions are not met. Common Conditions Precedent in an India SPA:

1. Regulatory Approvals: If the transaction requires approval from a government body — such as SEBI, RBI (for FDI transactions), Competition Commission of India (CCI) under the Competition Act 2002 (for deals above the threshold of ₹2,000 crore + combined assets or ₹6,000 crore + combined turnover), or NCLT — the relevant approval must be obtained before completion. 2. Third-Party Consents: Consents from key counterparties who have change-of-control provisions in their contracts with the company (e.g., major customers, lenders, licensors) must be obtained. 3. No Material Adverse Change (MAC): A representation that no material adverse change in the business, assets, or financial condition of the company has occurred between signing and completion. If a MAC has occurred, the buyer may be entitled to terminate the SPA. 4. Pre-Emption Clearances: Completion of the pre-emption rights procedure (confirmation from all existing shareholders that they have waived their ROFR) must be obtained. 5. Board and Shareholder Approvals: Passing of the required board resolution (and shareholder resolution if needed under the AoA or SHA) approving the share transfer. 6.