Share Purchase Agreement

Buying or selling shares in an Indian private company involves more than agreeing on a price. The Share Purchase Agreement (SPA) is the legal framework that holds the entire deal together — price mechanics, conditions that must be satisfied before money moves, representations each side makes, and the indemnity structure that determines who pays when something turns out to be wrong after closing.

Since 1 October 2024, most unlisted company shares must be held and transferred in DEMAT form, which means physical-only share-transfer mechanics no longer work at closing. Layer in Section 56(2)(x) of the Income-tax Act — the rule that can make a bargain price taxable income in your hands as the buyer — and you have a transaction that demands legal and tax structuring from day one, not a template downloaded from the internet.

At a Glance

• Who needs it: Founders selling a stake, investors buying in, strategic acquirers, buyout firms, and NRIs transferring shares — any private or unlisted public company share transfer where a governing contract is required.
• Governing law: Section 56 & 56(2)(x), Income-tax Act; FEMA 20(R); Companies Act 2013 (Section 56, Form SH-4, DEMAT transfer); Indian Stamp Act 1899 as amended; Press Note 3 (2020) for border-country investors.
• Turnaround: 10–20 working days from deal brief to signed document, depending on diligence depth, regulatory clearances required, and the number of negotiation rounds.
• DEMAT mandatory: For virtually all unlisted private and public company transfers since 1 October 2024 — physical-only SH-4 transfers are no longer accepted for companies already linked to a depository.
• Stamp duty: 0.015% of consideration, uniform across India since the 2020 amendment; collected by NSDL or CDSL at the point of the DEMAT transfer instruction.
• FDI requirement: Form FC-TRS required within 60 days if either party is a non-resident; Press Note 3 declaration mandatory for beneficial ownership from any country sharing a land border with India.
• Section 56(2)(x) threshold: Buyer faces deemed income tax if the price paid is below Rule 11UA Fair Market Value by more than ₹50,000 — remedied by pre-closing valuation and price benchmarking.

What's New for FY 2026-27

Several regulatory and tax changes affect share purchase transactions in FY 2026-27. Here is what has shifted.

• DEMAT transfer now standard: Since 1 October 2024, virtually all unlisted private company share transfers must be executed via DEMAT delivery through NSDL or CDSL — physical SH-4-only mechanics no longer complete a transfer for most companies.
• Rule 11UA methodology tightened: DCF and net asset value computations now require input from a SEBI-registered Category I Merchant Banker or Registered Valuer for formal transactions — self-certification is no longer defensible in a structured SPA.
• AIS / TIS cross-matching live: The Income Tax Department's Annual Information Statement (AIS) now pulls share transaction data directly from depositories and Registrar & Transfer Agents — mis-priced or undisclosed transfers are flagged automatically in AY 2027-28 assessments.
• DPDP Act representations required: Where the target company holds personal data, representations and warranties must address Digital Personal Data Protection Act 2023 compliance — buyers are beginning to include this as an express condition precedent.
• Press Note 3 scope unchanged: Government approval route remains mandatory for investors with beneficial ownership from countries sharing a land border with India — the SPA must wire this in as an explicit closing condition where applicable.

Who Needs a Share Purchase Agreement

• Founder-to-investor transactions: Angel rounds, seed deals, and pre-Series A secondary sales where a founder transfers part of their stake to an incoming investor — the SPA governs price, representations, closing conditions, and post-closing covenants.
• Strategic acquisitions: A company buying a controlling or majority stake in a target needs an SPA covering the full transfer: price, regulatory approvals, warranties on financials and litigation, escrow mechanics, and indemnity for discovered risk.
• Management buyouts: Promoter retirement or a management team purchase of a company stake — often involving seller financing, deferred consideration, or earn-outs that need careful SPA drafting to function as intended.
• Secondary investor exits: Venture capital or private equity funds selling to another fund or a strategic buyer — standard institutional SPA with clean representations, a verified cap table, and market-standard indemnity.
• NRI and cross-border transfers: Any transfer involving a non-resident buyer or seller triggers FEMA pricing rules, RBI reporting, and FC-TRS filing — the SPA must include all of these as explicit closing conditions, not afterthoughts.
• ESOP secondary sales: Employee share option holders selling vested shares to the company or a third party — ESOP plan terms, SPA mechanics, and tax withholding must align, and the company's board approval process must be sequenced correctly.

How It Actually Works

A share purchase transaction has six distinct phases. Each phase feeds the next — skipping or rushing one creates problems that surface at closing, or worse, eighteen months later.

Step 1: Transaction Brief & Deal Structuring

Before a word of the SPA is drafted, you walk us through the deal — who is buying, who is selling, how many shares, at what price, and how payment is structured (upfront, deferred, earn-out, or a mix). We identify the FDI route (automatic or approval), whether CCI notification thresholds are crossed, and any lender or contractual consents that need to be obtained before closing. This brief drives the entire document set — errors here cost weeks later.

Step 2: Term Sheet & Diligence Coordination

A binding term sheet locks the commercial deal — price, exclusivity, no-shop period, and break fee if applicable — before either side incurs significant diligence costs. Legal, tax, and financial due diligence then proceeds on the target company. The findings translate directly into the SPA: risk areas become specific representations and warranties, material concerns become closing conditions, and unresolved items become indemnity claims — diligence shapes the deal, not the other way around.

Step 3: Rule 11UA Valuation & Tax Structuring

A SEBI-registered valuer computes Fair Market Value under Rule 11UA of the Income-tax Rules, using DCF or net asset value depending on the company's stage and sector. The SPA price is benchmarked against this valuation before it is agreed. We also work out the seller's capital gains position, withholding obligations under Section 195 (for non-resident sellers), and any gross-up mechanism where the buyer agrees to bear the withholding cost.

Step 4: SPA & Disclosure Schedule Drafting

The core SPA covers: definitions; sale and purchase mechanics (shares, class, price, payment); conditions precedent; representations and warranties (seller's, buyer's, and company's); closing deliverables; indemnification (cap, basket, tail, claims process, and survival); post-closing covenants; and dispute resolution, typically ICC or SIAC arbitration seated in India. The Disclosure Schedule qualifies the representations — what the seller discloses means that known fact cannot later generate an indemnity claim. Ancillary documents — escrow agreement, AOA amendments, SHA touch-points — are drafted as part of the same consistent set.

Step 5: Negotiation & Signing

We manage the mark-up process with counterparty counsel — running a clean comparison of each version and flagging positions that are commercially significant versus those that are drafting preferences. You are kept focused on the three numbers that matter most: the indemnity cap, the basket, and the tail period. Once positions are agreed, the signature-ready document set is produced for execution — SPA, Disclosure Schedule, escrow agreement, and any ancillary deeds.

Step 6: Closing, DEMAT Transfer & Regulatory Filings

At closing, conditions precedent are confirmed as satisfied (or formally waived), the escrow is released (or consideration is wire-transferred directly), and DEMAT delivery instructions are executed through NSDL or CDSL. Board approval of the transfer is passed, the register of members is updated, and Form SH-4 is filed with the company. For cross-border transactions, FC-TRS is filed with the authorised dealer bank within 60 days of receipt of consideration — FC-GPR is filed where any primary share issuance forms part of the deal.

A Real Example: ₹5 Crore Secondary Sale

Here is how the key mechanics work on a ₹5 crore secondary sale — a founder transferring 20% of their stake to an incoming investor.

• Shares & price: 2,00,000 equity shares at ₹250 each = ₹5,00,00,000 consideration. Rule 11UA valuation returns ₹235 per share — the price is above FMV, so Section 56(2)(x) does not apply to the buyer.
• Stamp duty: 0.015% × ₹5,00,00,000 = ₹7,500 — collected by CDSL at the DEMAT transfer instruction. No separate stamps on SH-4 are required for this DEMAT transfer.
• Seller's capital gains: If the founder acquired shares at ₹10 each (cost basis ₹20 lakh), the long-term capital gain is ₹4.80 crore — taxed at 12.5% without indexation for unlisted equity held more than 24 months, giving an approximate liability of ₹60 lakh.
• Escrow: 10% of consideration (₹50 lakh) held in a bank escrow for 18 months against indemnity claims — released automatically at the end of the tail period if no claim is outstanding.
• Indemnity cap: 100% of consideration (₹5 crore) for title and fundamental warranties; 25% (₹1.25 crore) for general representations; ₹25 lakh de minimis per individual claim.
• FC-TRS: If the buyer is an NRI, Form FC-TRS is filed within 60 days of FIRC receipt, with the Rule 11UA valuation certificate and board resolution attached.

The escrow and indemnity structure means the buyer does not have to chase a dispersed founder for ₹50 lakh eighteen months from now — the money is already ringfenced in an escrow account.

What Happens After Closing

Signing the SPA is not the end of the transaction — it is the beginning of a compliance timeline that runs for months or years.

• FC-TRS / FC-GPR filing: Within 60 days of receipt of consideration for any cross-border transfer. Missing the window requires FEMA compounding — fines plus interest — and is an adverse finding in any later due diligence on the company.
• ITR disclosure: The seller reports capital gains in their income tax return for the year of transfer. The buyer includes the transaction in Schedule AL where the asset exceeds the prescribed threshold.
• Register of members: Updated within the timeline required under the Companies Act. The company's board resolution approving the transfer must be passed at or before closing — it cannot be backdated.
• Escrow administration: The escrow agent releases funds at the end of the tail period, or earlier if an indemnity claim is fully settled. Most escrow agreements require a joint written release instruction — the mechanics must be clear before closing, not at the point of release.
• Reps survival & expiry: Representations survive closing for the specified tail period. After that period expires, new claims cannot be brought even if a breach is discovered — the buyer's risk is capped in time as well as amount.
• Post-closing covenants: Non-compete, non-solicit, and information rights typically run for 2–3 years from the closing date. These operate independently of the indemnity tail and often generate the most post-closing friction between parties.

Where Share Purchase Agreements Go Wrong

• Physical mechanics in a DEMAT world: SPAs that reference physical share certificates and SH-4-only transfer for companies already linked to a depository will fail at closing — shares cannot be transferred through the physical registry alone.
• No Rule 11UA valuation before price is agreed: A price set without a pre-closing valuation certificate can trigger Section 56(2)(x) deemed income for the buyer — a tax liability that a properly structured deal would have eliminated entirely.
• Disclosure schedule treated as a formality: If the seller does not properly populate the Disclosure Schedule, every material fact about the company is a potential warranty breach after closing. The schedule exists to limit that exposure — a blank schedule does the opposite.
• FC-TRS filed late: The 60-day window from receipt of consideration runs quickly. A late filing requires FEMA compounding and can delay future regulatory approvals for the company.
• Indemnity cap set too low for the deal risk: A 10% cap sounds reasonable until due diligence surfaces a disputed tax assessment equal to the entire cap — the right number requires judgment about the specific risk profile, not a formula.
• Lender or contractual consents not obtained: If the target company's loan agreement contains a change-of-control clause, closing without the lender's NOC can trigger an immediate default. This must surface in diligence and be wired into conditions precedent — not discovered at closing.
• Press Note 3 declaration omitted: Where the buyer has direct or indirect beneficial ownership from a border-adjacent country, the government approval requirement applies even on the automatic FDI route. Missing it can void the transfer entirely.

The three most common failures in Indian SPAs — no pre-closing valuation, a blank Disclosure Schedule, and late FC-TRS filing — are all preventable. They require sequencing the work correctly from the start.

What You Receive at the End

• Executed Share Purchase Agreement with all schedules and annexures
• Disclosure Schedule, populated by the seller and countersigned by all parties
• Escrow Agreement and escrow account setup confirmation (where applicable)
• Rule 11UA / Fair Market Value Valuation Certificate from a SEBI-registered valuer
• Board Resolution approving the share transfer, passed at or before closing
• Executed Form SH-4 and updated Register of Members
• DEMAT delivery instruction confirmation from the relevant depository (NSDL / CDSL)
• FC-TRS / FC-GPR filing acknowledgement for cross-border transactions
• Post-closing compliance checklist with deadlines for each outstanding obligation

How to Get Started

Share your deal brief with us — buyer, seller, number of shares, indicative price, and whether any party is a non-resident. You do not need a signed term sheet to begin; in many cases we help draft the term sheet as the first step. From there, we scope the diligence, identify the valuation requirements, map the regulatory approvals needed, and provide a fixed-fee proposal before any work begins.

Most SPAs run on a 10–20 working day timeline from brief to signed document, assuming a smooth diligence process and a single round of negotiation. Cross-border transactions and deals requiring CCI or sectoral regulator clearance add time to that schedule. We manage the full document and regulatory sequence — so you are not coordinating between your chartered accountant, your lawyer, and your depository participant in parallel.