(Under the Companies Act, 2013, the Indian Contract Act, 1872, the Foreign Exchange Management Act, 1999 (FEMA) and applicable RBI Regulations, the Income Tax Act, 1961, the Competition Act, 2002, the Insolvency and Bankruptcy Code, 2016, and aligned sectoral regulations, including SEBI Regulations, DPIIT FDI Policy, and other applicable corporate and commercial laws in India)

Executive Summary

Term sheets in Indian transactions involve myriad legal considerations across corporate, securities, regulatory, and contractual domains. This checklist identifies key legal risks under Indian law and recommends safeguards. It covers the enforceability of term sheet provisions (e.g. binding vs. non-binding clauses), corporate law formalities (capital structure, approvals, pre-emptive rights), securities law (SEBI Takeover Regulations), foreign investment (FDI/FEMA rules and approvals), competition law filings, insolvency (ensuring no ongoing insolvency process), employment and ESOP compliance, intellectual property transfers, data protection obligations, AML/KYC due diligence, stamp duty issues, share transfer restrictions, detailed representations and warranties and indemnities, closing conditions (regulatory and contractual), escrow arrangements, valuation and pricing rules, ^anti-dilution and liquidation preferences for investors, corporate governance (board/observer rights), exit mechanisms (drag along/tag along, IPO lock ins), restrictive covenants (non-compete, non-solicit), confidentiality and exclusivity (often made binding), transaction timelines, dispute resolution (arbitration/courts) and governing law, and overall enforceability. For each item, we cite relevant statutes/regulations/judgments, explain the practical risk, and suggest mitigation steps including sample clause language.

Introduction

A term sheet outlines the principal terms of a proposed investment or acquisition. In India, term sheets are typically non-binding frameworks, but specific provisions (such as confidentiality, exclusivity, governing law and arbitration clauses) are often expressly made binding. Courts uphold the parties’ clear intent, in Oravel Stays (OYO) v. Zostel (Delhi HC, 2025), the High Court confirmed that only those clauses explicitly designated as binding (e.g. confidentiality, exclusivity, arbitration) are enforceable and refused to enforce other obligations absent a final agreement. Parties must therefore draft term sheets with precision, clearly flagging binding clauses and aligning with Indian contract law (Indian Contract Act 1872) and company law. This checklist systematically identifies legal issues in term sheets under Indian law, the applicable rules/judgments, the risks of non-compliance, and recommended safeguards (including sample clause wording).

1. Applicability and Legal Scope

·      Binding Nature and Scope of Term Sheet: A term sheet should explicitly state which provisions are binding. Indian law treats term sheets as non binding “‘agreement to agree” unless clearly stipulated otherwise. Risk: An unclear term sheet may inadvertently create binding obligations (or leave obligations unenforceable). In Oravel (OYO) v. Zostel, the court held the term sheet non binding except for expressly binding clauses. Mitigation: Clarify in the opening that the term sheet is non binding except as specified headings (typically confidentiality, exclusivity, costs, governing law/arbitration). Sample clause: “This term sheet is a non-binding expression of current intentions, except that the sections on Confidentiality, Exclusivity, Governing Law and Arbitration shall be binding on the parties.”

·      Corporate Power and Authority: Verify that the investee (and investor) has the corporate authority to enter the transaction. Under the Companies Act 2013, the board (subject to any shareholder resolutions) has the power to act for the company. Risk: Without board authority, agreements can be voidable. Mitigation: Include a closing condition requiring board approval of the deal. Sample clause: “Each party represents that its board of directors (or equivalent) has approved this investment in accordance with Section 179 of the Companies Act, 2013.”

·      Mandatory Regulatory Applicability: Determine which Indian laws/regulations apply to the transaction (e.g. Companies Act, SEBI, FEMA, Competition Act, sector specific laws). Risk: Overlooking a regulatory regime (such as FDI approval or stock exchange rules) can render the deal illegal. Mitigation: List applicable laws and approvals   in the term sheet and as conditions precedent (e.g. “Completion subject to receipt of all required regulatory consents”).

2. Corporate and Securities Law Requirements

·      Authorized Share Capital & Fresh Issue: Verify the company’s authorized capital is sufficient for any proposed share issuance. Companies Act s.61 requires shareholder approval for capital increase, and s.62 mandates that fresh shares be first offered pro rata to existing shareholders (pre-emptive rights). Risk: Issuing shares beyond authorized capital or ignoring pre-emption can invalidate the issuance and attract penalties. Mitigation: Amend the AOA (if needed) to authorize the new issue; obtain board resolution; ensure compliance with s.62 offer requirements. Sample clause: “The Company shall have an authorized share capital of ₹[X], and any further issue of shares shall comply with Section 62 of the Companies Act (including offering rights to existing shareholders).”

·      Share Transfers and Allotments: Ensure share transfers/allotments follow the statutory procedure. Section 56(1) of the Companies Act requires submission of a proper instrument of transfer for registration. Section 58(4) provides that a contract in respect of transfer of securities (e.g. shareholders’ agreement or term sheet allocation) is enforceable as a contract. Risk: Failure to register a stamped transfer instrument voids the transfer, or one party may renege. Mitigation: Include a condition that share certificates and transfer forms must be duly stamped and delivered within 2 months as per s.56(4); consider locking an investor’s commitment in a binding sale/purchase agreement. Sample clause: “The Seller shall deliver share certificates and properly stamped transfer forms within [30] days of Closing.”

·      Private Placement Compliance: If issuing new shares to select investors, comply with Companies Act s.42 on private placement: board and (if applicable) shareholders’ resolution, private placement offer letter in prescribed format, and file filings with ROC. Risk: Non-compliance can render the issue illegal and attract fines. Mitigation: Treat the term sheet as basis for a Private Placement Offer Letter and satisfy s.42 conditions (no direct citation here).

·      Securities Law (Takeover Regulations): If the target is a listed company or acquisition exceeds thresholds, SEBI’s SAST Regulations, 2011 may trigger an open offer. Regulation 3 mandates a mandatory offer when an acquirer (with PACs) crosses specified thresholds (normally 25% shareholding or a change of control). Risk: Failing to make a required open offer can lead to heavy penalties and undo the deal. Mitigation: Determine applicability: if public, incorporate a condition that the acquirer will comply with SEBI Takeover Regulations (including open offer obligations). Sample clause: “If this acquisition triggers any obligations under SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011, the Acquirer shall file and consummate the required open offer and approvals.”

3. Foreign Investment and FEMA Compliance

·      FDI Sectoral Caps and Approvals: Check whether the target sector permits foreign direct investment (FDI) and under what conditions. Consult the Government of India’s FDI Policy. Risk: Unauthorized FDI (e.g. in a prohibited or capped sector) renders the investment illegal, and profits can be disgorged. Mitigation: Include a closing condition that necessary government/RBI approvals under FEMA are obtained if required. Sample clause: “Closing is subject to receipt of all approvals under FEMA and the FDI Policy; the Company represents that it is in a sector permitting [XX]% FDI.”

·      Pricing and Payment: For foreign purchasers, comply with RBI’s FEMA 20(R) / 21(R) regulations on pricing of shares. Shares must be priced by a SEBI registered merchant banker’s valuation, and payment in foreign exchange must meet Liberalized Remittance norms (e.g. No prior reserve bank permission is needed for fully fungible foreign equity). Risk: Non-compliant pricing or payment (e.g. issuing shares at below prescribed formula or paying via unauthorized means) can attract penalties. Mitigation: State that foreign investment will follow FEMA pricing guidelines. Sample clause: “The consideration for any shares issued to foreign investors will comply with FEMA Notification 20(R) (as amended) and RBI pricing guidelines.”

4. Competition Act Compliance

·      Pre merger Filing: If the transaction qualifies as a “combination” under the Competition Act, 2002 (generally if the parties’ combined assets or turnover exceed ₹1,550 crore in India or the deal value exceeds ₹3,900 crore, or lower asset thresholds if Government entities involved), notify the Competition Commission of India (CCI) and obtain approval before Closing. Risk: Closing a reportable merger without CCI approval can lead to fines and unwinding of the deal. Mitigation: Include as a condition precedent that no Closing occurs without CCI clearance (and allow “waiting period” beyond which Closing is void without approval). Sample clause: “The parties shall file the requisite notification with the CCI and shall not close the transaction until the expiry of the statutory waiting period or receipt of antitrust clearance.”

5. Insolvency and Bankruptcy Considerations

·      Corporate Insolvency Proceedings (CIRP): Confirm the target company is not undergoing insolvency (as debtor) under IBC 2016 (no Section 7/9/10 petition admitted). Risk: If the target enters CIRP, shares may be frozen or even stripped by a resolution process. Mitigation: Condition closing on a certificate from the NCLT (via KMP) that no CIRP petition is pending or admitted, and that no resolution plan is agreed. Sample clause: “The Target represents it is not subject to any current or pending insolvency or liquidation proceedings under the Insolvency & Bankruptcy Code, 2016.”

·      IP and Employee Transfer in CIRP: If investing in a business acquired from a liquidation, ensure compliance with IBC plan (Section 32’s applicability to liens). Risk: A failed acquisition attempt could fall foul of IBC’s avoidance provisions. Mitigation: Generally, avoid deals involving distressed companies unless through a formal resolution plan (outside this term sheet scope).

6. Employment, ESOPs and Labour Law

·      Employee Transfer and Retention: If key employees or contracts are part of the deal, ensure compliance with labour laws. Under the Industrial Disputes Act, 1947, certain thresholds trigger requirements for retrenchment compensation (typically 15 days pay per year of service) if mass layoffs occur post transaction. Risk: Forced termination or reduction of workforce post deal can create liabilities. Mitigation: Include representations/warranties on no layoffs, and consider transition covenants to retain staff. Sample clause: “The Company will (a) maintain all existing employment terms for founders and key personnel through Closing, and (b) provide indemnity for any post Closing severance liabilities.”

·      ESOP and Share Vesting: If founders/employees are to vest shares, comply with Section 62(1)(b) (shareholder approval needed for issuing shares to employees) and relevant ESOP rules. Risk: Invalid ESOP issuances or dilution disputes. Mitigation: Obtain a fresh board/shareholder resolution approving any share vesting or ESOP grants. Sample clause: “Any shares to be issued to employees/founders shall be approved in writing by the Board and comply with Companies Act Section 62(1)(b).”

7. Intellectual Property

·      IP Ownership and Assignment: Verify that all material IP (patents, trademarks, copyrights, domain names, proprietary software) is owned or licensed by the target. Under Indian law, IP rights transfer must be in writing (Trademark Act, Copyright Act, Patents Act). Risk: If IP is unassigned or infringed, the investor’s business could be jeopardized. Mitigation: Require warranties that the Company owns or has valid exclusive rights to its IP and has filed necessary assignments. Sample clause: “The Company represents that it owns or is licensed under all necessary intellectual property for its business. The Founders shall assign any relevant trademarks and copyrights to the Company at Closing.”

·      Technology Licenses: If the business uses licensed technology, ensure transferability of licenses (some software licenses restrict assignment). Risk: A prohibited license transfer could terminate rights. Mitigation: Verify contract terms or plan alternative licensing; possibly include escrow of source code if key.

8. Data Protection and Privacy

·      Personal Data Compliance: If the target collects/processes personal data (e.g. customer databases), ensure it has been complying with the Digital Personal Data Protection Act, 2023 (DPDP Act). Under DPDP Act section 4, a data fiduciary must process personal data only lawfully and with notice to data principals. Risk: Data breaches or DPDP violations can lead to penalties up to ₹500 crore or 2% of turnover. Mitigation: Represent that the Company has been DPDP/IT Act compliant (privacy policies, consents). Sample clause: “The Company represents that it has complied with the Indian IT Act and, if in force, the Digital Personal Data Protection Act, 2023, including lawful notice and consent requirements for all personal data.”

·      Cross-border Data Transfer: Check if any data export restrictions apply (DPDP Act may restrict transfer of sensitive data abroad without government approval). Mitigation: Restrict use of data per law and obtain consents.

9. Anti Money Laundering (AML) and KYC

·      KYC on Investors: Indian PMLA 2002 and RBI KYC directions require financial institutions (and by extension, companies receiving large investments) to conduct due diligence on incoming funds. Risk: Failure to verify investor identity/source can attract penalties and investigation. Mitigation: Perform thorough KYC on the investor entity/persons (PAN, address proof, source of funds statements) before closing. Include a representation that investor is not a blacklisted or PMLA designated entity. Sample clause: “The Investor shall deliver certified true copies of its KYC documents and certify that it is not a Proscribed Person under any anti money laundering law.”

10. Stamp Duty and Transaction Taxation

·      Stamp Duty on Agreements: Ensure all transaction documents (Share Purchase Agreement, Shareholders’ Agreement, transfer forms) are duly stamped under the relevant State Stamp Act. For example, Maharashtra Stamp Act may levy up to 0.5% on share purchase. Risk: An unstamped or under stamped document may be inadmissible in court and can attract penalties. Mitigation: Estimate stamp duty and execute on appropriate stamp paper or pay via franking. Sample clause: “All instruments under this transaction shall be properly stamped with duties paid by the respective parties as required by applicable stamp law.”

·      Capital Gains and GST: Address whether GST applies (normally exempt for sale of shares) and which party bears capital gains tax (usually the seller). Mitigation: Include indemnity for any unexpected tax on the investor’s side if statutory interpretations change.

11. Transfer Restrictions & Pre-Emptive Rights

·      Articles of Association (AOA) / SHA Restrictions: Check the company’s charter for any transfer restrictions (e.g. right of first refusal, lock in, or permissible transferees). Under CA Act s.58(4), even agreements to restrict transfer are enforceable as contracts. Risk: Violating AOA processes (e.g. not offering shares to existing members or ignoring shareholder agreements) can void the transfer. Mitigation: Include condition that all share transfers will comply with the AOA and any SHA provisions. Sample clause: “The parties shall ensure any share transfer complies with the Company’s Articles and shareholders’ agreements. Transfer instruments shall be delivered only upon satisfying all requisite rights of first refusal.”

·      Securities Transfer Formalities: The selling shareholder should initiate and register the transfer as required by Section 56, delivering stamped transfer form and (if any) share certificates. Mitigation: Usually documented in Share Purchase Agreement. Sample clause: “Seller agrees to execute all documents necessary to register the transfer of shares in Buyer’s name upon receipt of payment, per Section 56 of the Companies Act.”

12. Representations, Warranties & Indemnities

·      Scope of R&W: A term sheet may list key representations (e.g. due incorporation, authority, compliance, no undisclosed liabilities) and indemnities (e.g. for breaches of R&W). Risk: Without clear R&W, parties may face unforeseen liabilities post closing. Mitigation: Identify material risks (litigation, tax, regulatory non-compliance) and require seller/target to warrant and indemnify them. Sample clause: “The Founders and Target represent they are not subject to any material undisclosed liability and shall indemnify the Investor against breaches of these representations.”

·      Material Adverse Change (MAC): Include a clause allowing investors to back out or re negotiate if a MAC occurs between signing and closing. Sample clause: “If a Material Adverse Change in the Company’s business occurs prior to closing, the Investor may terminate or seek revised terms.” (No statute, standard contract term.)

13. Valuation and Pricing

·      Valuation Methodology: Clarify how share price/valuation is determined (pre money valuation or formula). Risk: Disputes over valuation lead to deal breakdown. Mitigation: Use clear formula or mutually agreed third party valuation. If a foreign investor, mention RBI/SEBI pricing norms. Sample clause: “The Equity Purchase Price is based on a pre money valuation of ₹[X], as agreed by the parties (validated by an independent chartered accountant).”

·      Regulatory Valuation Rules: For issuance to Indian residents, the Companies Act (Schedule VII, Rule 13) requires valuation by a CA. For foreign investors, RBI’s pricing rules apply. Sample clause: “Any new shares issued shall be priced by a registered merchant banker’s valuation, and for foreign remittances shall comply with RBI FEMA pricing rules.” (No direct cite provided; consider RBI Notification references.)

14. Anti-Dilution & Liquidation Preferences

·      Anti-Dilution Protection: If granted (e.g. weighted average or full ratchet), ensure the calculation method is explicit. Risk: Ambiguous language can lead to investor dilution or litigation. Mitigation: Clearly define triggering events (future issuances, stock splits) and formula. Sample clause: “In the event of a dilutive issuance, the investor’s share price shall be adjusted on a [(broad-based weighted average/full ratchet) basis].”

·      Preference / Liquidation Rights: If investors receive preference shares, India law requires that all non-cumulative/participating rights be spelt out. While no specific statute caps preference share terms, include ranking on liquidation. Sample clause: “Holders of Series A Preferred Shares are entitled to a 1x non-participating liquidation preference (i.e. receive 1× their investment back before common shareholders).”

15. Governance and Board/Observer Rights

·      Board Representation: If investor is allotted board seats or nomination rights, ensure compliance with Companies Act. Directors must meet qualification/disqualification criteria (e.g. not undischarged insolvent, not convicted under Company Act s.164). Risk: A disqualified nominee cannot serve, voiding meetings decisions. Mitigation: Vet nominees, including indemnity if a nominee must step down. Sample clause: “Investor’s nominee director shall be appointed under Section 161 of the Companies Act. The Company warrants the nominee meets all fit and proper criteria.”

·      Statutory Board Requirements: If the target is listed, it must have independent directors (Co Act s.149) and committees (Audit, NRC under ss.177-178). Ensure that adding a director does not disturb the required composition. Mitigation: Plan additional independent directors if needed.

·      Observer Rights: Often investors request attendance at board/committee meetings. Include confidentiality on board matters. Sample clause: “Investor shall have the right to appoint a nonvoting observer to Board meetings, subject to confidentiality obligations.”

16. Drag Along, Tag Along and Exit Rights

·      Drag Along Rights: If included, ensure this minority sell out right is clearly drafted (one selling party can “drag” others to sell on same terms). Risk: Under IBC, in liquidation, all creditors/shareholders must be treated equally, a drag clause cannot override insolvency laws but is valid as a contract otherwise. Sample clause: “If shareholders holding [>50%] of shares agree to sell, other shareholders shall be obliged to sell on identical terms.”

·      Tag Along Rights: Provides minority shareholders a right to join in a sale by majority. Sample clause: “If any majority shareholder proposes to sell more than [30%] of its shares to a third party, each minority shareholder has the option to sell a pro rata portion of their shares on the same terms.”

·      Exit Mechanisms (Call/Put Options): Check for regulatory limits on call/put (e.g. FEMA restrictions, foreign investment lock ins). Include any agreed exit rights (e.g. founder buyback, right of first offer on exit). Sample clause: “Investor shall have a one time put option to sell all its shares back to Founders at a [X] valuation after [Y] years.”

·      IPO Lock Up: If planning an IPO exit, note that SEBI typically requires promoters and key shareholders to lock up a portion of shares for 1 year post IPO. Include investor lockup obligations if relevant.

17. Covenants (Post Closing Undertakings)

·      Non-Compete / Non-Solicitation: Carefully draft with Indian law in mind. Section 27 of the Indian Contract Act 1872 renders agreements in restraint of trade void, except a seller of a business may agree not to compete (goodwill exception) with reasonable limits. Risk: Overbroad post-closing non-competes (e.g. founders barred from any related business) may be void. Mitigation: Limit non-compete to reasonable scope (time, geography, specific activities, and tied to goodwill sale). Sample clause: “The Founders agree not to compete with the Company in [specific business] within [region] for a period of [2 years] post closing (representing sale of goodwill).”

·      Non Solicit of Employees/Customers: Indian courts are more lenient enforcing non-solicit than non-compete. Sample clause: “For [2] years, the Founders shall not solicit any current employees or customers of the Company for competing activities.”

·      Negative Covenants: Include any “no shop” (exclusivity) clause: “Until [date], the Company will not negotiate with other investors.” Note: Exclusivity is generally enforceable as a restrictive covenant (subject to Contract Act) and often binding by design. Sample clause: “During the Exclusivity Period (till [date]), the Company shall not entertain any competing offer.”

18. Confidentiality and Exclusivity

·      Confidentiality: A binding NDA clause should be included or referenced. Parties should keep terms and business secrets confidential, except disclosures required by law or to professional advisors. Risk: Unauthorized disclosure could damage business or lead to claims under Contract Act. Mitigation: State confidentiality obligations with typical carve-outs. Sample clause: “Each party shall keep the Term Sheet and all proprietary information confidential and use it only to evaluate the transaction.” (Oyo and others recognize confidentiality obligations as binding even if rest is non-binding.)

·      Exclusivity (No Shop): Agree that seller will not solicit other offers for a defined period. Risk: Breach wastes resources. Mitigation: Treat exclusivity as binding. Sample clause: “For [15] business days after execution, neither party shall engage with any third party regarding a competing transaction.” (e.g. Oyo Term Sheet used 15 day exclusivity.)

19. Timelines, Deadlines and Limitation

·      Term Sheet Expiry: Define an expiration date (“the term sheet lapses if no binding agreement is executed by [date]”). Risk: Without expiry, obligations may linger indefinitely. Sample clause: “This Term Sheet expires at 11:59 PM IST on [Date], unless a definitive agreement is executed by then.”

·      Closing Date and Milestones: Specify target closing date and interim milestones (e.g. completion of due diligence, board approvals). Mitigation: If deadlines are missed, include rights (termination, extension).

·      Limitation Period: Note Indian Limitation Act, 1963, contract claims generally barred after 3 years from breach. Mitigation: Keep term sheet obligations and closing within a reasonable timeframe to avoid stale claims.

20. Dispute Resolution and Governing Law

·      Arbitration/Governing Law: Indian law allows parties to choose arbitration or courts. The Arbitration and Conciliation Act, 1996 recognizes arbitration clauses in writing. Risk: Absent a dispute clause, jurisdictional uncertainties arise. Mitigation: Include a binding arbitration clause with seat (e.g. India) or exclusive courts. Sample clause: “All disputes arising out of this Term Sheet shall be resolved by arbitration in New Delhi under the Arbitration & Conciliation Act, 1996, governed by Indian law.”

·      Enforceability of Arbitration Clause: Under Section 7(2) of the Arbitration Act, a term sheet’s arbitration clause (even if the rest is non-binding) can be enforced provided it is in writing. “An arbitration clause may be an arbitration agreement even if other substantive terms are unsigned, so long as it is in writing”.

·      Choice of Forum: If opting for courts, specify a venue (e.g. courts of Mumbai) and applicable law (usually Indian law). Ensure this aligns with any arbitration clause.

21. Enforceability and Miscellaneous

·      Indian Contract Act Compliance: Represent that the agreement is made without coercion/undue influence, free of unconscionable terms (per Sections 14-24). Mitigation: Keep terms balanced, avoid illegal terms.

·      Severability: Include that invalidation of one clause (e.g. a void non compete under Sec.27) does not void the remainder of the term sheet. Sample clause: “If any provision is held unenforceable, the remainder shall survive.”

·      Counterparts/Electronic Signatures: Term sheets often allow execution in counterparts or via electronic exchange. Sample clause: “This Term Sheet may be executed in counterparts and may be delivered by electronic transmission, each an original.”

22. Risk Mitigation and Closing Conditions

·      Conditions Precedent: List specific conditions (e.g. accuracy of R&W, third party consents, no material breach of covenants, financing). Mitigation: Standard closing conditions clause. Sample: “The obligations to close are subject to satisfaction of all conditions precedent, including no pending litigation, valid approvals, and true R&W.”

·      Escrow of Funds/Shares: If desired, structure the investment via an escrow or trustee to secure obligations (e.g. placement of purchase price pending share transfer). Mitigation: Arrange an escrow agent with clear instructions.

·      Warranty Insurance or Earn Out: For high risk representations, consider asking for a price holdback (escrow) or warranty insurance. Mitigation: Document in term sheet as a term of offer.