Disclosure Letter in M&A and Funding Deals

Every share purchase agreement or share subscription agreement in India contains a set of warranties: statements from the seller or founder about the state of the business that the buyer or investor is relying on to close. The disclosure letter is the document that qualifies those warranties by telling the other side, formally and in writing, every material fact that departs from what the warranties would otherwise imply. Done well, it blocks post-closing warranty claims on the matters it covers. Done poorly, it leaves the seller or founder exposed to indemnity liability for two to seven years after the deal closes. In India, where inadequate disclosure can trigger not just contractual indemnity claims but misrepresentation and fraud remedies under the Indian Contract Act, 1872, the disclosure letter is not a formality. It is where liability is actually set.

What is a disclosure letter and what does it actually do?

A disclosure letter is a formal written document delivered by the warrantor (the selling shareholder, the company, or the founders) to the buyer or investor at or before signing the principal transaction document. It qualifies the representations and warranties by disclosing facts, matters, or circumstances that are inconsistent with those warranties. Once a matter is fairly disclosed in the disclosure letter, the recipient cannot bring a warranty claim based on that matter.

The mechanism works as follows. The SPA or SSA contains a warranty: say, “there are no material litigation proceedings pending against the company.” If that warranty is untrue because an employment claim was filed last quarter, giving the warranty without disclosure exposes the warrantor to a breach of warranty claim and an indemnity payout if the claim succeeds post-closing. If the warrantor discloses the claim in the disclosure letter with sufficient detail, the buyer or investor cannot later claim breach of that warranty on that matter. The risk of the undisclosed matter shifts; the risk of the disclosed matter is accepted by the recipient.

This is why the disclosure letter, although often left until late in the deal timeline, is in practice where post-closing liability is decided.

Where does the disclosure letter sit in the deal structure?

The disclosure letter operates as a companion to the warranty schedule in the SPA or SSA. It does not stand alone: its legal effect is defined by the transaction document to which it relates. Most Indian deals contain a clause in the SPA or SSA along the lines of: “The Warranties are given subject to matters fairly disclosed in this Agreement or in the Disclosure Letter.” That clause is the anchor for everything the disclosure letter achieves.

For a full treatment of how representations and warranties are structured across the three tiers (fundamental, general, and tax), survival periods, and indemnity caps, see Treelife’s guide to representations and warranties in investment agreements. This article focuses specifically on the disclosure letter and the disclosure process.

The disclosure letter is typically prepared and delivered at signing, not at closing. Where a deal has a gap between signing and closing (because conditions precedent must be satisfied before money moves), some agreements permit a supplemental or bring-down disclosure at closing. Buyers resist this because it allows sellers to surface new problems after the buyer is commercially committed. The negotiation of whether bring-down disclosures are permitted is itself a material deal point.

Disclosure letter timeline in a typical Indian transaction:

Stage	What happens	Who drives it
Term sheet / pre-DD	Warranty schedule circulated with draft SPA/SSA	Buyer’s counsel
Due diligence	Data room populated, buyer’s legal team runs DD	Seller populates, buyer reviews
Post-DD	Initial draft disclosure letter prepared	Seller’s counsel
Pre-signing negotiations	Disclosure letter negotiated against warranty schedule	Both sides
Signing	Disclosure letter executed and delivered simultaneously	Warrantor to Buyer
Closing (if separate)	Bring-down or supplemental disclosure (if permitted)	Seller’s counsel

General disclosures versus specific disclosures

Every disclosure letter is divided into two structural parts. Getting this distinction wrong is the single most expensive drafting error in Indian M&A and VC documentation.

General disclosures

General disclosures are broad-sweep statements that qualify all warranties simultaneously, by reference to categories of information that the buyer is deemed to have access to. Typical general disclosures in Indian deals include:

• All documents filed with the Ministry of Corporate Affairs (MCA) via the MCA21 portal, including annual returns under Section 92, financial statements filed under Section 137, and charge registrations under Section 77 of the Companies Act, 2013
• The company’s memorandum and articles of association
• Audited financial statements for the last three financial years
• The entire contents of the virtual data room (VDR), as a class
• Board minutes and shareholder resolutions provided during DD

The VDR general disclosure is the most contested. Sellers push to include it because it is cheap insurance: any issue in any document in the data room could theoretically be said to have been disclosed. Buyers resist because a data room containing 3,000 documents is not a meaningful disclosure of any specific fact. A 600-page employment contract buried in a subfolder titled “Commercial Agreements: Miscellaneous” does not constitute fair disclosure of the change-of-control provision in Clause 18.4 of that contract.

Indian courts have not conclusively resolved whether a blanket general disclosure of an entire data room is effective against specific warranties. The “consensus ad idem” question (whether both parties genuinely agreed on what was disclosed) has been raised in Indian transactional disputes without definitive resolution. The safer position for sellers: use general disclosures as a supplement, not a substitute, for specific disclosures.

Specific disclosures

Specific disclosures are line-by-line qualifications against individual warranties. They are the disclosure letter’s substantive core. For each warranty that the warrantor cannot give cleanly, a specific disclosure states: what the actual situation is, what documents evidence it, and where possible, what the financial exposure looks like.

The level of detail required for a specific disclosure to be effective is set by the “fairly disclosed” standard in the SPA or SSA. A thin disclosure is not a protection; it is an invitation to a claim that no effective disclosure was made.

Examples of what specific disclosures look like in practice:

Against a warranty that there is no pending litigation: “The company is a respondent in Writ Petition No. [X] before the Delhi High Court, challenging [matter]. The petition was filed on [date], the company’s counter-affidavit was filed on [date], and external counsel estimates financial exposure in the range of ₹[X] to ₹[Y] lakhs. Copies of the petition, the counter-affidavit, and the last order sheet are at Annexure [X].”

Against a warranty that all tax filings are current: “The income tax assessment for AY 2022-23 is pending before the Commissioner of Income Tax (Appeals), arising from a disallowance of ₹[X] lakhs. The company has filed its appeal, and details including the assessment order and the appeal memorandum are at Annexure [Y].”

Against a warranty that all FEMA filings have been completed: “The FC-GPR for the company’s Series A round closed in March 2021 was filed on [date], approximately [X] days after the 30-day statutory deadline. A compounding application was filed with the Reserve Bank of India on [date] and is currently pending. Details and supporting documents are at Annexure [Z].”

Vague disclosures fail. “The company may have certain tax exposures” is not a disclosure of a pending assessment. “The company has had historical FEMA compliance gaps” is not a disclosure of a specific late FC-GPR. Vague language does not block the warranty claim; it leaves the buyer room to argue that no specific fair disclosure was ever made.

What does “fairly disclosed” mean and why it decides post-closing disputes?

“Fairly disclosed” is the operative standard that determines whether a disclosure is legally effective. The SPA or SSA typically defines it explicitly. A representative definition from Indian deal practice: “fairly disclosed with sufficient detail to allow a reasonable buyer to make an informed assessment of the nature and scope of the matter concerned.”

This is not a low bar. The four tests that Indian practitioners apply when assessing whether a disclosure meets this standard are:

1. Specificity: The disclosure must identify the specific matter, not a category of possibility. “The company has pending regulatory queries” is a category. “The company received a show-cause notice from SEBI dated [date] in connection with [matter]” is specific.

2. Completeness of supporting documents: A disclosure that references a matter without attaching the relevant documents is likely insufficient. The disclosure bundle (the annexures to the disclosure letter) is as important as the text.

3. No mere reference to a large document set: A disclosure that says “see the data room” without identifying which document, which folder, and which clause is not a fair disclosure. A 2025 UK High Court decision (applied by Indian practitioners under a comparable framework) confirmed that the question is whether there is sufficient detail “within the four corners of the disclosure letter” to allow a reasonable buyer to assess the matter. Oral statements, management presentations, and DD calls do not count unless specifically incorporated into the letter.

4. Consistency with the warranty being qualified: A disclosure is assessed against the specific warranty it qualifies. A disclosure about a tax dispute does not fairly qualify a warranty about litigation unless the disclosure explains how the two are connected.

Under Section 19 of the Indian Contract Act, 1872, a contract caused by misrepresentation is voidable at the option of the aggrieved party, with one narrow exception: if the party whose consent was caused by misrepresentation “had the means of discovering the truth with ordinary diligence,” the contract is not voidable. Sellers sometimes argue that because the buyer’s counsel reviewed the data room, the buyer had “means of discovering” any issue in it. This argument has limited traction. The Bombay High Court, in World Sport Group (India) Pvt. Ltd vs Board of Control for Cricket in India, observed that placing a document on the record of an organisation does not lead to the conclusion that every person associated with that organisation had the means of discovering its content. DD review of a data room is not equivalent to ordinary diligence discovering a specific undisclosed liability.

Sandbagging and anti-sandbagging: the clause most Indian founders skip

Sandbagging is one of the most practically significant and least understood concepts in the disclosure letter ecosystem. No Treelife article has covered it before; here is the framework every Indian founder needs to understand before signing.

What is sandbagging?

Sandbagging in M&A refers to a situation where the buyer discovers, during due diligence, that one of the seller’s warranties is false or inaccurate. The buyer proceeds to close the deal anyway without raising the issue, and then brings a warranty claim against the seller post-closing for the known breach.

From the buyer’s perspective, sandbagging is commercially rational: the buyer is using its legal rights under a warranty that was given without carve-out. From the seller’s perspective, it is deeply unfair: the buyer knew the warranty was wrong before they signed, chose not to renegotiate on it, and is now claiming indemnity for a risk they accepted with open eyes.

Whether sandbagging is permissible depends entirely on what the SPA or SSA says.

Pro-sandbagging clauses

A pro-sandbagging clause expressly preserves the buyer’s right to bring a warranty claim even if the buyer knew of the breach before closing. A typical formulation: “The right of the Buyer to seek indemnification under this Agreement shall not be affected or limited by any investigation conducted, or knowledge acquired, by the Buyer prior to closing.”

This is the buyer-friendly position. It means that even if the buyer’s legal team found the issue during DD, even if it came up on a management call, and even if it was discussed informally, the buyer can still run a warranty claim on it post-closing, as long as the seller did not include it in the disclosure letter.

Anti-sandbagging clauses

An anti-sandbagging clause prevents the buyer from bringing a warranty claim for breaches that the buyer knew about before closing. A typical formulation: “The Buyer shall not be entitled to indemnification for any breach of warranty if the Buyer had actual knowledge of such breach on or before the closing date.”

This is the seller-friendly position. It reduces post-closing exposure for the warrantor, but its protection depends entirely on what “knowledge” means. If knowledge is defined as actual personal knowledge of named individuals, the clause is narrow. If it extends to constructive knowledge (what the buyer would have known on reasonable enquiry, including anything in the data room), it is very broad and may unintentionally bar the buyer from claims on matters they never actually identified.

What Indian law says

Indian courts have not issued a definitive ruling on sandbagging in M&A. The Bombay High Court in GWL Properties Ltd v James Mackintosh & Co Pvt Ltd (MANU/MH/2781/2012) upheld an arbitral award in favour of a buyer where the SPA contained a pro-sandbagging provision, holding that the buyer’s reliance on representations and warranties would not be affected by the due diligence conducted prior to the transaction. This is the closest Indian judicial precedent to a clear pro-sandbagging endorsement.

Where the agreement is silent on sandbagging (as most Indian deals are), the position is uncertain. Under Section 19 of the Indian Contract Act, a contract is voidable for misrepresentation unless the party had “means of discovering the truth with ordinary diligence.” This has been argued to mean that a buyer who discovered an issue during DD cannot later claim to have been misled by the warranty on that issue, which is effectively an implied anti-sandbagging position. But this argument has never been conclusively accepted in an Indian court in the M&A context.

The practical implication for sellers and founders: an undisclosed warranty breach that the buyer discovered during DD is not automatically protected. If the agreement has a pro-sandbagging clause or is silent, the buyer may bring a warranty claim post-closing. If the agreement has an anti-sandbagging clause, the seller is protected on that specific matter. But the only reliable protection across all scenarios is to include the matter in the disclosure letter with fair and specific disclosure. A properly disclosed matter cannot found a warranty claim regardless of sandbagging provisions.

The practical implication for buyers: including a pro-sandbagging clause protects the buyer’s right to claim on matters they discovered during DD but which were not specifically disclosed. This matters most where the buyer found an issue, decided the risk was acceptable, and wants to preserve the ability to claim post-closing if the risk materialises into actual loss.

Sandbagging vs disclosure: they are not substitutes

A common misunderstanding: founders sometimes believe that if the buyer “knew” about an issue from DD, the seller is protected from a warranty claim even without a formal disclosure. This is wrong. The disclosure letter and the sandbagging clause operate on different axes. The disclosure letter is the seller’s mechanism. The sandbagging clause is the buyer’s. A buyer who has a pro-sandbagging clause and knows of a breach can still claim post-closing; only a proper disclosure letter blocks that claim regardless of sandbagging provisions.

The VDR is not a disclosure letter: why this distinction costs founders money

The most frequent and most expensive mistake in Indian M&A and VC transactions is treating the data room and the disclosure letter as interchangeable. They are not. They serve different legal purposes, run on different timelines, and produce different protections.

Due diligence is an investigative exercise on behalf of the buyer. The buyer asks questions; the seller provides documents and answers. The buyer’s counsel reviews the data room and produces a DD report or memo identifying issues and risks. This process exists to protect the buyer.

The disclosure letter is a protective exercise on behalf of the seller. The seller reviews the warranty schedule and identifies every fact that qualifies or contradicts a warranty. The seller then formally discloses those facts to the buyer in writing. This process exists to protect the seller (and in a VC round, the founders) from warranty claims.

The same information can appear in both exercises. An employment dispute might be in the data room (as an uploaded HR letter) and also disclosed in the disclosure letter (with full narrative and supporting documents). Appearing only in the data room is not sufficient. The Bombay High Court position is that placing a document on a company’s records does not mean every reader of that record had the means to identify its significance. Appearing only in the disclosure letter is sufficient to block the warranty claim.

Three patterns where Indian sellers get this wrong:

Pattern 1: The seller provides extensive DD responses answering every question on the DD checklist, uploads 200 documents, and then produces a two-page disclosure letter that says “the company has provided full disclosure through the VDR.” The investor’s counsel rejects the VDR general disclosure; the specific disclosures are absent. At signing, both sides accept a thin disclosure letter because they are exhausted and want to close. Post-closing, a warranty claim lands.

Pattern 2: During a management presentation three weeks before signing, the founder discloses a pending GST demand of ₹40 lakhs. The investor’s counsel makes a note. No one includes it in the disclosure letter because both sides assume the “other side knows.” Post-closing, the demand is crystallised at ₹62 lakhs. The investor brings a warranty claim. The founder points to the management presentation notes. The investor’s counsel produces the SPA clause requiring disclosures to be in writing in the disclosure letter.

Pattern 3: The seller includes a disclosure covering a tax demand but does not attach the assessment order, the appeal memorandum, or the last order sheet. The investor argues the disclosure was not “fair” because the supporting documents were absent. Indian arbitral proceedings have turned on exactly this question.

The fix is the same in every case: the disclosure letter must be specific, complete, and supported with documents. The data room and DD calls are inputs to the disclosure process, not substitutes for it.

The Indian legal framework: what happens when disclosure is inadequate

The Indian Contract Act, 1872 governs what happens when a warranty is false and the matter was not disclosed. Three sections are directly relevant and operate independently of each other.

Section 17 (Fraud): Fraud includes the suppression of a material fact when the person has a duty to speak, and any act fitted to deceive. In an M&A or VC context, the warrantor is explicitly making statements of fact to induce the other party to close. A seller who knew a warranty was false and deliberately omitted the matter from the disclosure letter is within the Section 17 definition of fraud. Fraud liability is typically uncapped in Indian deal documents: the contractual indemnity cap and survival period do not apply to fraud claims. This is not a theoretical risk. It is the reason why a seller who saves themselves the discomfort of disclosing one inconvenient fact can end up with uncapped liability post-closing.

Section 18 (Misrepresentation): Misrepresentation is broader than fraud. It includes any positive assertion of a fact not warranted by the warrantor’s own information, and any act or omission that causes the other party to make a mistake. Critically, misrepresentation under Section 18 does not require intent. An innocent misrepresentation (where the warrantor genuinely believed the warranty was accurate but should have known it was not) still gives the buyer the right to rescind the contract under Section 19.

Section 19 (Voidability): A contract caused by fraud under Section 17 or misrepresentation under Section 18 is voidable at the option of the aggrieved party. In M&A practice, buyers rarely seek rescission post-closing because unwinding a completed transaction is commercially complex and courts are reluctant to order it. But the statutory right exists, and buyers preserve it explicitly in most Indian deal documents by providing that nothing in the agreement limits statutory rights for fraud.

The Satyam Computer Services case (now Mahindra Satyam) is the most cited Indian example of how misrepresentation in a corporate context can produce catastrophic consequences. While not an M&A disclosure case in the technical sense, Indian courts have applied its principles in assessing warranty breach claims where financial statements were inaccurate. The Madras High Court’s analysis in All India Insurance established that for warranties (as distinct from representations), the incorrectness of the warranted fact is a defence regardless of materiality or good faith. Both the factual accuracy of the warranty and the completeness of the disclosure against it matter.

How disclosed matters lead to indemnities: and the FEMA constraint

Disclosure in the disclosure letter does not eliminate financial exposure. It changes its form.

When a seller discloses a specific issue, two outcomes are possible. The buyer accepts the disclosure and treats the matter as the seller’s acknowledged pre-existing problem, with no specific indemnity. Or the buyer responds: “You’ve told us about this risk. We accept it as disclosed for warranty purposes, but we want a specific indemnity covering ₹[X] of exposure if the risk crystallises.”

Specific indemnities in Indian deals almost always flow from matters raised in the disclosure letter. The disclosure process is the mechanism by which buyers identify what to seek indemnities for. Indemnities for specific disclosed matters are typically not subject to the general warranty cap or survival period: they are negotiated separately with their own quantum and duration.

The FEMA constraint for cross-border transactions: Under FEMA and the Reserve Bank of India notification dated 20 May 2016, in a share purchase transaction with a non-resident buyer, the seller can provide an indemnity of up to 25% of the total sale consideration, for a period of up to 18 months from the date of payment of full consideration, without requiring RBI approval. Any indemnity beyond this limit in amount or duration requires prior RBI approval.

In practical terms, the FEMA 25%/18-month rule constrains how large and how long a specific indemnity can be structured in a cross-border deal. A disclosure that surfaces a ₹10 crore potential tax liability in a ₹30 crore SPA creates an indemnity negotiation that runs up against the 25% ceiling (₹7.5 crore on a ₹30 crore deal). If the specific indemnity is negotiated at full ₹10 crore coverage, the mechanism for the investor to collect above ₹7.5 crore requires Indian court enforcement rather than a pre-funded escrow, materially increasing recovery risk and usually driving down the investor’s accepted indemnity quantum.

This constraint means that early identification and specific disclosure of material issues allows both parties to structure specific indemnities within FEMA limits. Issues surfaced late and poorly disclosed lead to indemnity negotiations that strain the FEMA ceiling and, in some cases, require RBI approval as a closing condition.

What a disclosure letter must cover: category checklist

The disclosure letter’s scope follows the warranty schedule. Warranties in Indian M&A and VC deals cluster around the following categories, and each must be worked through as a line item.

Corporate constitution and records:

• MOA/AOA consistency with SHA and SPA terms
• Board composition and any vacancies or defects in director appointments
• All MCA filings complete and current (PAS-3, MGT-7, AOC-4, CHG-1, DIR-12)
• Any resolutions passed informally or by circulation without proper records
• Cap table discrepancies between statutory records and internal documents

Financial statements and accounts:

• Any departure from applicable accounting standards (Ind AS or AS)
• Contingent liabilities not appearing on the balance sheet
• Off-balance-sheet obligations: operating leases, guarantees, comfort letters
• Any material events between the accounts date and signing
• Related-party transactions not disclosed in the notes to accounts

Tax:

• Pending income tax assessments or appeals
• Any notices under Section 148 of the Income Tax Act for reassessment
• GST disputes, unreconciled input credit, or pending GSTR-9/GSTR-9C filings
• TDS shortfalls on employee remuneration, professional fees, or rent
• Transfer pricing positions and any open arm’s-length assessments
• Any ESOP perquisite tax liability not yet deposited

Litigation and regulatory:

• All pending civil, criminal, arbitral, or regulatory proceedings
• Any orders, show-cause notices, or penalties from SEBI, RBI, MCA, ED, or sectoral regulators
• Any regulatory investigations or inspections in progress
• Any settlement negotiations or consent orders

Intellectual property:

• Registered IP portfolio status (patents, trademarks, copyrights)
• Any IP that is not cleanly assigned to the company from founders or early employees
• Third-party IP used under licence without a formal licence agreement
• Any infringement disputes or cease-and-desist notices received
• Source code ownership where third-party contractors were involved

Employees and ESOP:

• Headcount against statutory records
• Any departures of key personnel between signing and closing
• ESOP scheme document, all grant letters, vesting schedules, and exercise records
• Any pending employment tribunal claims or POSH complaints
• PF/ESI compliance history and any defaults or pending assessments

Material contracts:

• Any contract above a defined threshold value or strategic significance
• Change-of-control provisions in material contracts that require consent for the transaction
• Any breach notice received or sent under a material contract
• Exclusivity or non-compete obligations that may affect post-closing operations
• Any undisclosed side letters or amendments

FEMA and foreign investment:

• FC-GPR filings for all prior foreign investment rounds, with dates and any lateness noted
• FC-TRS filings for any prior secondary transfers involving non-residents
• Any prior approvals obtained from the Foreign Investment Promotion Board (FIPB) or subsequently from MCA (now subsumed under the revised FDI policy framework)
• Compliance with applicable sectoral FDI caps and conditions
• Any RBI correspondence or notices regarding prior foreign investments

Related-party transactions:

• Loans, security deposits, or other financial dealings with promoters, directors, or affiliates
• Contracts with entities in which promoters have a direct or indirect interest
• Any transactions not on arm’s-length terms
• All related-party disclosures as required under Section 188 of the Companies Act, 2013

This checklist is illustrative, not exhaustive. Each warranty in the schedule must be individually reviewed against the company’s actual position. The disclosure working session, described below, is the mechanism for doing this systematically.

How to run a disclosure working session

The disclosure letter for a mid-market Indian M&A deal runs 30 to 80 pages including annexures. A Series B VC round disclosure letter is shorter but the exposure for missing items is identical. The operational process for producing a disclosure letter that actually provides protection is as follows.

Step 1: Freeze the warranty schedule. Disclosures cannot be finalised until the warranty schedule is in near-final form. Changes to warranty wording after the disclosure letter is drafted can invalidate specific disclosures that were drafted against earlier versions. Do not begin the disclosure letter until the SPA or SSA warranties are at least 90% agreed.

Step 2: Assemble the right people. The disclosure working session requires input from: the company’s legal counsel (who knows the warranty schedule), the company secretary (who has the statutory records and knows MCA filing status), the chief financial officer or finance lead (who knows the tax position, GST compliance, and accounts status), the HR lead (who knows the ESOP records and any employment disputes), and the founder or promoter personally (who knows what is undisclosed elsewhere). A disclosure letter produced without input from all of these people will have gaps.

Step 3: Walk through every warranty line by line. For each warranty, ask: is this clean? Completely clean? If not, what exactly is the deviation, what is the document that evidences it, and what is the financial exposure range? Do not approximate. Do not use vague language. If a disclosure cannot be made with specificity, it should not be made at all. It should be remediated before signing, or addressed as a specific carve-out from the warranty.

Step 4: Build the disclosure bundle. Every specific disclosure must be supported by the relevant documents, attached as numbered annexures. No disclosure is complete without its supporting document.

Step 5: Review the interaction clause. Every Indian deal document contains a clause specifying the relationship between the disclosure letter and specific indemnities. The most common version provides that no disclosure in the disclosure letter operates to reduce or discharge any specific indemnity obligation. Read this clause before finalising the disclosure letter. A disclosure that covers the same matter as a specific indemnity does not eliminate the indemnity.

Step 6: Negotiate the general disclosures. General disclosures are negotiated with the buyer’s counsel. The seller will push for the broadest possible general disclosures (including the full VDR). The buyer will push to limit them to specifically indexed documents. The final agreed position on general disclosures affects the scope of protection across all warranties.

Disclosure letter in M&A deals versus VC and PE funding rounds: what is different

The disclosure letter appears in both contexts, but its character differs in ways that matter.

In an SPA (M&A, secondary sale), the warrantor is an exiting shareholder. They will not be running the company post-closing. Their interest is to maximise the protection of the disclosure letter and minimise post-closing tail risk. Sellers push for wide general disclosures, comprehensive specific disclosures, and the narrowest possible indemnity obligations on disclosed matters.

In an SSA (VC round, primary subscription), the warrantor is typically both the company and the founders, who are not exiting. They are raising capital and continue to run the business. The disclosure letter in a VC SSA is usually shorter, but the personal liability exposure for founders can be more acute because:

• Founders are often required to give warranties personally alongside the company
• Personal indemnity exposure on undisclosed matters persists for the survival period
• FEMA compliance issues from prior rounds are the most predictable trigger for warranty claims in Indian VC deals, as Treelife’s own experience confirms
• An undisclosed matter that surfaces post-closing can damage the investor relationship and complicate future rounds

The disclosure letter also performs a different commercial function in a VC round. When a founder discloses a material issue in the disclosure letter, the investor has the option to: accept the disclosure as is, require remediation as a closing condition, seek a specific indemnity, or reprice the round. The founder’s willingness to over-disclose rather than under-disclose signals trustworthiness, which is a real commercial asset in the founder-investor relationship.

Common mistakes that cost sellers and founders

Waiting until late in the deal to start

The disclosure process requires a full review of the company’s corporate, tax, employment, IP, and FEMA history against every warranty category. For a company with three to seven years of operating history, this takes two to four weeks minimum. Founders who begin only after the SPA or SSA is in near-final form are already late.

Treating VDR responses as disclosures

As covered in detail above: they are not. Every issue surfaced during DD that is also a warranty exception must be replicated in the disclosure letter, specifically and with supporting documents. There is no shortcut around this.

Using vague language

“The company may have certain regulatory exposures” is not a disclosure. “The company received a show-cause notice from [regulator] dated [date], details of which are at Annexure [X]” is a disclosure. Vague language does not provide warranty protection; it invites the buyer’s counsel to argue that no specific fair disclosure was made.

Not attaching supporting documents

A disclosure without its supporting document is incomplete. The disclosure bundle is as important as the letter text. Courts and arbitral tribunals assessing whether a disclosure was “fair” will look at whether the recipient had enough information and documentation to assess the risk.

Assuming the disclosure covers the indemnity

In most Indian deals, the interaction clause provides that disclosures do not reduce specific indemnity obligations. If the SPA provides a specific indemnity for a tax dispute, disclosing the tax dispute in the disclosure letter does not eliminate the indemnity. Both documents must be read together, and the interaction clause governs.

Not addressing post-accounts date events

Most warranties are given as of the signing date. Events arising between the financial statement date and signing must be disclosed. A court order received in February against a company with a 31 March accounts date will not appear in the audited accounts but must appear in the disclosure letter.

Missing the sandbagging clause entirely

Most Indian founders do not notice or negotiate the sandbagging provision. Where the SPA is silent on sandbagging and the buyer later discovers an issue the founder assumed was “known” from DD, the founder may have no protection. Review the sandbagging or anti-sandbagging provision in every SPA or SSA before signing. If the agreement is silent, push to include an anti-sandbagging clause with an actual knowledge standard.

Treelife practitioner note

In the M&A and funding engagements Treelife has run, the disclosure letter is consistently the document that receives the least proportionate attention relative to the risk it manages. Founders focus on valuation, investors focus on governance rights, and both sides treat the disclosure letter as a paperwork formality to be completed under time pressure in the final days before signing.

The pattern we see most often is what we call the verbal disclosure problem. A founder discloses a pending tax demand or a regulatory query verbally during a management presentation. The investor’s team notes it. It comes up on a DD call. Everyone proceeds on the assumption that the “other side knows.” Six weeks later, at signing, the disclosure letter is a thin three-page document. No one goes back and checks whether the verbally disclosed items made it into the letter. They typically have not.

The second pattern is the insufficient specific disclosure. The warrantor discloses that “the company has a pending employment matter” and attaches a single letter. The actual situation involves three related employment disputes arising from the same restructuring, one of which has escalated to a formal claim. Two of the three disputes were known at signing but not individually disclosed. Post-closing, when those two crystallise, the investor’s counsel brings warranty claims. The single-line disclosure does not cover the undisclosed disputes.

The fix for both is a structured disclosure working session conducted with legal counsel who knows the warranty schedule cold, with dedicated input from finance, HR, legal, and company secretarial. That session typically runs two to four hours for a startup at Series A or B. It is the most valuable risk-management time spent in any transaction, because it converts uncertain post-closing liability into defined, negotiated exposure.

Relevant regulatory anchors: Sections 17, 18, and 19 of the Indian Contract Act, 1872; Section 137 of the Companies Act, 2013 (annual financial statements with MCA); FEMA (Non-Debt Instruments) Rules, 2019, Rule 9(6)(iii) (FEMA indemnity escrow limits); RBI notification dated 20 May 2016 (25% / 18-month threshold for share purchase indemnities).

Frequently asked questions

Q: What is a disclosure letter and when is it required?
A: A disclosure letter is a formal written document delivered by the warrantor (seller, company, or founder) to the buyer or investor at or before signing the SPA or SSA, that qualifies the representations and warranties by setting out known exceptions. It is not mandated by statute but is standard practice in every professionally documented M&A or VC deal in India. Its absence does not reduce warranty risk: it just means both sides have no written record of what was disclosed, which increases litigation risk for everyone.

Q: Who prepares the disclosure letter?
A: The warrantor’s legal counsel prepares the disclosure letter, with input from the company’s finance, HR, and company secretarial functions. The buyer or investor’s counsel reviews and negotiates it. The disclosure letter is delivered by the warrantor to the buyer at signing.

Q: Does the disclosure letter protect the buyer or the seller?
A: Both. It protects the seller or founder by blocking warranty claims on fairly disclosed matters. It protects the buyer by providing a written inventory of known risks, enabling informed price negotiations and targeted indemnity requests.

Q: What is the difference between a general disclosure and a specific disclosure?
A: General disclosures qualify all warranties and cover broad categories of information (MCA public filings, data room contents, accounts). Specific disclosures qualify individual warranties and detail particular exceptions. Specific disclosures carry more legal weight; they are the substantive core of the disclosure letter. General disclosures alone are insufficient protection.

Q: What does “fairly disclosed” mean in practice?
A: A disclosure is fairly disclosed if it contains enough detail to allow a reasonable buyer to assess the nature and scope of the matter. This requires specificity (the exact matter, not a category of risk), completeness of supporting documents, and written inclusion in the disclosure letter itself. Oral disclosures, VDR documents without specific reference, and management presentation notes are not fair disclosures for warranty purposes.

Q: What is a sandbagging clause and why does it matter?
A: A sandbagging (or pro-sandbagging) clause preserves the buyer’s right to bring a warranty claim even if the buyer knew of the breach before closing. An anti-sandbagging clause bars such claims. Where the SPA or SSA is silent, the position is uncertain under Indian law. For sellers, only a proper disclosure in the disclosure letter is reliable protection against post-closing claims, regardless of sandbagging provisions.

Q: Are due diligence responses the same as disclosures?
A: No. DD responses are answers to the buyer’s questions, produced on behalf of the buyer’s investigation. They are not formal disclosures against warranties. Every material exception to a warranty must be specifically included in the disclosure letter. Assuming that something in the data room constitutes a disclosure is the most common and expensive mistake in Indian M&A transactions.

Q: What are the legal consequences of making a false warranty without disclosure?
A: Under Section 17 of the Indian Contract Act, 1872, deliberate omission of a material fact that the warrantor had a duty to disclose is fraud. Fraud claims in most Indian deal documents are uncapped and survive the contractual indemnity limitations. Under Section 18, even innocent misrepresentation gives the buyer the right to rescind the contract under Section 19.

Q: How does the FEMA 25%/18-month rule affect indemnities arising from disclosures?
A: Under the RBI notification of 20 May 2016 and the FEMA (NDI) Rules 2019, in a share sale with a non-resident buyer, the escrow or holdback mechanism for indemnity payment is capped at 25% of total consideration for up to 18 months. Indemnities above this amount or duration exist contractually but must be enforced through Indian courts rather than a pre-funded mechanism, which increases recovery risk. Specific indemnities negotiated after disclosures should be sized and structured with this constraint in mind.

Q: Can disclosures be added after signing?
A: Only if the SPA or SSA expressly permits a bring-down or supplemental disclosure at closing. Buyers typically resist this. Where permitted, bring-down disclosures are strictly scoped and the buyer retains closing walk-away rights if a material new matter is disclosed.

Q: What is a disclosure bundle?
A: The disclosure bundle is the set of documents attached to the disclosure letter as numbered annexures. Each specific disclosure references the relevant annexure, which contains the underlying contract, order, notice, or correspondence. A disclosure without its supporting document is generally treated as incomplete.

Q: How long does preparing a disclosure letter take?
A: For a complex M&A deal, two to four weeks if the company’s records are clean. For companies with FEMA clean-up requirements, pending tax assessments, or complex IP ownership issues, four to eight weeks. Starting the disclosure process at term sheet stage rather than after the SPA is near-final is the single most effective way to reduce signing-day pressure.

Q: Is there a difference between a disclosure letter and a disclosure schedule?
A: They serve the same legal function. UK and India-influenced deals use “disclosure letter” as a standalone document. US-influenced deals use “disclosure schedules” integrated into the acquisition agreement. In Indian transactions with US investors, both naming conventions appear. The legal mechanism and the protection they provide are identical.

Q: Does a disclosure block a specific indemnity obligation?
A: In most Indian deals, no. The interaction clause in the SPA or SSA typically provides that no disclosure in the disclosure letter reduces or discharges a specific indemnity obligation. A seller who discloses a tax dispute in the disclosure letter and also gives a specific indemnity covering that dispute remains bound by the specific indemnity even though the disclosure was made.

Q: What happens if both sides sign a deal and the disclosure letter was thin?
A: The warrantor carries warranty risk for every matter that was not fairly disclosed, for the entire survival period. If the buyer discovers a breach post-closing on an undisclosed matter, a warranty claim runs through the contractual indemnity mechanism. If the undisclosed matter was known to the warrantor at signing and deliberately omitted, fraud liability under Section 17 of the ICA is uncapped. A thin disclosure letter is not a neutral outcome: it is ongoing liability that the warrantor carries through the survival period.

Regulatory references:

• Indian Contract Act, 1872: Section 17 (fraud and suppression of material facts), Section 18 (misrepresentation), Section 19 (voidability of contracts caused by misrepresentation), Section 73 (compensation for breach)
• Companies Act, 2013: Section 77 (registration of charges), Section 92 (annual return), Section 137 (filing of financial statements with MCA), Section 188 (related-party transactions)
• FEMA (Non-Debt Instruments) Rules, 2019, Rule 9(6)(iii): escrow and holdback limits in cross-border share sales