Representations and Warranties in Investment Agreements: Scope, Caps

Every fundraise produces two conversations. The first is commercial: valuation, dilution, board seats, liquidation preference. The second is legal: what statements the company and founders make about the business, how long those statements remain alive, and how much money is on the line if any of them are wrong. That second conversation happens in the representations and warranties section of the SSA, SPA, or SHA. Most founders engage with it only superficially until a claim lands.

The R&W section is not boilerplate. It is the mechanism through which risk is priced and allocated. Investors use it to create recourse for facts they cannot independently verify. Founders use it to define the boundary of that recourse. Getting the scope, survival period, and cap right is one of the most consequential negotiations in the entire deal, and the least understood.

What is the standard framework for representations and warranties in an Indian investment agreement?

Representations and warranties in Indian investment agreements operate across three tiers: fundamental warranties (title, authority, incorporation) with unlimited or long survival and a full-consideration cap; general operational warranties (financial statements, IP, contracts, regulatory compliance) with 18 to 24 months survival and a 10 to 25% consideration cap; and tax warranties with survival anchored to the Income Tax Act 2025 limitation period of 6 years from the end of the relevant tax year, plus a buffer year. Each tier carries its own scope qualifiers, survival period, and cap, and the three must be negotiated separately.

What are representations and warranties and how does Indian law distinguish between them?

The distinction matters for remedies, even if most Indian agreements treat it as stylistic.

A representation is a statement of fact made to induce the other party to enter the contract. Under Section 18 of the Indian Contract Act (ICA) 1872, misrepresentation includes a positive assertion not warranted by the information of the person making it, and any act or omission that causes a party to make a mistake about the substance of the contract. A misrepresentation renders a contract voidable at the option of the aggrieved party under Section 19. Crucially, this remedy (voidability) operates independently of any contractual indemnity.

A warranty is a contractual promise. Its breach triggers damages under contract law, not rescission. The remedy for breach of warranty is compensation for the loss caused; the contract itself survives.

In Indian investment practice, the two are conflated into “representations and warranties” following US drafting conventions, but both legal bases remain available. An investor who discovers that a foundational representation (for example, “the company holds valid and subsisting title to all its shares free from any encumbrance”) was false can pursue both the contractual indemnity claim and the statutory voidability argument simultaneously. Founders who assume that a capped indemnity is their only exposure on a fundamental warranty are mistaken.

For practical purposes, the actionable distinction is this: indemnity claims are subject to the contractual cap, survival period, and basket. Voidability claims under Section 19 are not. Sophisticated investor counsel in PE and late-stage VC rounds will preserve Section 19 rights explicitly in the agreement, which is exactly why it matters that your fundamental warranties are either true or properly disclosed.

The three-tier taxonomy: fundamental, general, and tax warranties

Before negotiating any specific clause, establish the taxonomy. A flat warranty structure (one list, one survival period, one cap applying to everything) almost always ends up disadvantaging the warrantor, because the cap and survival period get set at the level appropriate for the most serious category and applied to all.

Bold caption: Three-tier warranty classification in Indian investment agreements

Tier	Examples	Knowledge qualifier permitted	Survival period	Indemnity cap
Fundamental	Title to shares, corporate authority, valid incorporation, authorised share capital, no injunctions, no litigation affecting the transaction itself	No	Unlimited or 6+ years	Full consideration or uncapped
General / operational	Financial statements, IP ownership, material contracts, FEMA compliance history, employee liabilities, no undisclosed debt, regulatory approvals	Yes (actual knowledge standard)	18 to 24 months from closing	10 to 25% of consideration
Tax	No undisclosed tax liabilities, correct TDS filings, advance pricing arrangements, transfer pricing compliance, no pending assessments	Sometimes (not on TDS)	6 years from end of relevant tax year (ITA 2025) plus 1 buffer year	Separate sub-cap, typically same as or up to 50% of general cap

Fundamental warranties cover existential facts the investor cannot accept qualified. They are either true as a matter of public record or they are not. An investor will not accept “to the best of founders’ knowledge, the company is duly incorporated.” That formulation introduces doubt into a fact that should have zero doubt.

General warranties cover the state of the business at closing. These are the longest section in any SSA or SPA: financial statements prepared under applicable Indian accounting standards, all material contracts disclosed, no undisclosed liabilities, all intellectual property owned or licensed cleanly, FEMA compliance history clean. Each of these involves the founders asserting facts they know better than the investor does. This is where knowledge qualifiers are appropriate and commercially reasonable to push for.

Tax warranties sit separately because their regulatory rationale is distinct. The applicable assessment limitation period under the Income Tax Act 2025 (see below) determines how long a tax warranty must remain alive to be commercially meaningful. A tax warranty that expires before the taxing authority can open an assessment leaves the investor holding a right they can never exercise.

Bring-down: why your warranties must be true twice

This is the gap most founders do not anticipate. In an SSA or SPA with a gap between signing and closing (which is standard wherever conditions precedent exist) the representations and warranties are typically given as of the signing date. But the investor’s closing obligation is conditional on those same representations being true as of the closing date.

This is the bring-down condition. A standard formulation reads: “The representations and warranties of the company and the founders shall be true and correct in all material respects as of the closing date as if made on the closing date.” Completion of the bring-down condition is itself a closing condition: if any representation has become false between signing and closing (because a new piece of litigation has been filed, a material contract has been terminated, or a regulatory notice has arrived), the investor can refuse to close.

The bring-down has two practical consequences for founders.

First, between signing and closing, the company is under an implicit obligation not to take actions that would make a signed representation false. Hiring decisions, new material contracts, regulatory filings, and any changes to the cap table between signing and closing all need to be considered against the existing representation set. Second, any event that makes a representation materially false between signing and closing should be disclosed to the investor promptly, ideally through a supplemental disclosure notice agreed as part of the closing mechanics. Investors who receive timely notice before closing can decide whether to proceed, waive the breach, or renegotiate the terms. Investors who discover the breach after closing are in a fundamentally different, and worse, negotiating position from the company’s perspective.

Some agreements resolve bring-down risk for general warranties by providing that the bring-down condition is only failed if the inaccuracy constitutes a Material Adverse Change (MAC) or Material Adverse Effect (MAE). This limiter is valuable and should be pushed for in every deal.

How does the MAC/MAE qualifier interact with warranties?

A Material Adverse Change (MAC) or Material Adverse Effect (MAE) qualifier does two jobs in an investment agreement. The first is as a closing condition: “no MAC shall have occurred between signing and closing.” The second is as a scope qualifier on warranties: a warranty that “there are no pending legal proceedings” may be qualified to “no pending legal proceedings that would, individually or in aggregate, result in a Material Adverse Effect.”

The definition of MAC/MAE is itself a negotiation. Investors draft it broadly; founders should narrow it. Key carve-outs to push for:

• Changes affecting the company’s industry generally, not the company specifically
• Changes in macro-economic conditions, regulatory frameworks, or financial markets
• Events disclosed in the disclosure schedule before signing
• Changes resulting from the transaction itself (a known customer relationship that might shift post-close due to the investment is not a MAC)
• Changes resulting from the investor’s own actions or communications

Indian courts have limited direct precedent on MAC/MAE interpretation in the investment context. The broader contract law principle under Section 32 of the ICA (governing contingent contracts) is the applicable framework. Courts look at whether the event is material and enduring in its effect on the business, applying an objective standard.

The MAC qualifier on the bring-down condition is the most commercially important use of the MAC concept. A deal where the bring-down condition fails only on a MAC-standard means that minor operational changes between signing and closing do not give the investor a walk-away right. Without this qualifier, every minor warranty breach between signing and closing could theoretically be used to refuse closing, creating a perverse incentive for investor counsel to find technical inaccuracies as leverage.

Scope mechanisms: what narrows or widens a warranty

Four mechanisms determine how broadly or narrowly a warranty captures facts:

Materiality qualifiers limit a warranty to matters that are material to the transaction or the business. “The company has complied with all applicable laws in all material respects” is a warranted, limited scope. “The company has complied with all applicable laws” is absolute. The difference matters because minor technical non-compliances (historical GST filing delays, late ROC forms) fall inside an absolute warranty and outside a materiality-qualified one. Define materiality monetarily: “material means an adverse impact exceeding ₹[X] individually or ₹[Y] in aggregate,” because subjective materiality invites disputes.

Knowledge qualifiers limit a warranty to facts actually known by the warrantor. “To the actual knowledge of the founders and the company” is the appropriate standard for general operational warranties. Resist constructive knowledge formulations that define “knowledge” to include what the warrantor would have known on reasonable enquiry. This converts the qualifier into an objective due diligence obligation, eliminating most of its protective value. Actual knowledge means knowledge personally held.

Disclosure schedules are the most powerful tool in the founder’s R&W toolkit. Any fact disclosed in the schedule against a specific warranty cannot give rise to an indemnity claim for breach of that warranty. Building a comprehensive, well-organised disclosure schedule is more valuable than negotiating the indemnity cap, because a cap applies to claims that arise while a disclosure prevents the claim from arising at all. See Treelife’s guide on investor due diligence readiness for how to structure the disclosure schedule alongside your data room.

Specific carve-outs exclude identified matters from warranty coverage entirely. A pending regulatory notice that cannot be remediated before closing, a known IP dispute that is in settlement, or a historical FEMA gap that is being compounded: these are better structured as explicit carve-outs with quantified remediation timelines than as disclosure schedule entries, because a carve-out removes the matter from the warranty entirely rather than qualifying it.

What are survival periods and how should they be set?

A survival period is the contractual window after closing during which a claim for breach of a warranty can be brought. Once the period expires, the warranty is spent, even if the breach occurred before expiry and is discovered after.

The starting point is Indian limitation law. Section 124 of the ICA defines indemnity contracts, but imposes no statutory time limit on them. The Limitation Act 1963 ordinarily provides a 3-year period for contract breach claims, running from the date the cause of action accrues. For indemnity claims, the Supreme Court’s position, established in a 1967 bench decision and reaffirmed in Kailash Kumar Kanoria v. Shiv Shankar Pasari (2008), is that the cause of action for an indemnity claim arises when the claimant is actually damnified (suffers the loss), not when the underlying breach occurred. This can extend the statutory period significantly beyond closing.

Parties set contractual survival periods precisely to impose certainty over this open-ended statutory position. The contractual period overrides the statutory period when clearly stated.

Standard survival periods in Indian investment transactions:

• Fundamental warranties: unlimited, or equal to the longer of 6 years and the applicable statutory limitation period
• General / operational warranties: 18 to 24 months from the closing date
• Tax warranties: 7 years from the closing date (6 years aligned with the Income Tax Act 2025 limitation period, plus a 1-year buffer)

What the Income Tax Act 2025 changes for tax warranty survival

The Income Tax Act 2025 received Presidential assent on 21 August 2025 and came into force on 01 April 2026. It replaced the Income Tax Act 1961 as the charging statute for income earned from Tax Year 2026-27 onwards. The 1961 Act continues to govern tax years up to and including AY 2026-27 (income earned before 01 April 2026).

The 2025 Act is a structural consolidation. Tax rates, deductions, and exemptions are substantively unchanged. The dual “previous year / assessment year” terminology is replaced by a single “tax year” concept under Section 3 of the 2025 Act. The practical limitation period for most ordinary tax assessments under the 2025 Act remains 6 years from the end of the relevant tax year, consistent with the framework under the 1961 Act.

Two changes that directly affect R&W drafting:

First, any SSA or SPA signed after 01 April 2026 should reference the Income Tax Act 2025 (not the 1961 Act) as the statutory anchor for tax warranty survival. Investor counsel templates that reference “the Income Tax Act, 1961” in agreements signed post-01 April 2026 are using outdated references. Flag and update them.

Second, the replacement of “assessment year” with “tax year” in the 2025 Act means that survival periods expressed as “X years from the end of the relevant assessment year” need to be updated to “X years from the end of the relevant tax year.” The substantive period is the same; the terminology differs.

A tax warranty survival period beyond 7 years (6 plus buffer) has no regulatory justification for standard startup-stage transactions. Templates from institutional investor counsel with 10-year survival on tax representations, sometimes justified by reference to transfer pricing assessment windows, should be pushed back on. Transfer pricing limitation periods under the 2025 Act do not materially exceed 6 years for most transactions.

Indemnity caps, baskets, and de minimis thresholds

The cap, basket, and de minimis threshold are the three financial parameters that determine whether a breach actually results in payment. For the detailed mechanics of how indemnity clauses are structured in SSAs, see Treelife’s comprehensive guide on the indemnity clause in a Share Subscription Agreement. What follows here is the deal-size calibration context that that article does not cover.

Cap is the maximum aggregate amount the indemnifying party will pay on all warranty claims combined. Fundamental warranties typically carry either an uncapped liability or a cap equal to full consideration. General warranties carry a lower cap.

Basket (or threshold) is the minimum aggregate claim level that must be reached before the indemnity obligation triggers. A tipping basket means once the threshold is crossed, the claimant recovers from the first rupee. A deductible basket means only the excess over the threshold is recoverable. Tipping baskets are more common in Indian venture transactions.

De minimis is a floor below which individual claims cannot be brought toward the basket at all. It filters out trivial claims.

Bold caption: Indemnity structure benchmarks in Indian investment transactions (FY 2026-27)

Parameter	Angel / Seed (under ₹5 crore)	Series A (₹10-50 crore)	Series B+ (₹50 crore+)	PE / strategic SPA
General warranty cap	15-25% of investment	10-20% of consideration	10-15% of consideration	15-25% of consideration
Fundamental warranty cap	Uncapped or full consideration	Full consideration	Full consideration	Full consideration
Tax warranty cap	Same as general, or separate	Separate sub-cap, up to 25-50% of consideration	Separate sub-cap	Separate sub-cap, often 50% of consideration
Basket (tipping)	0.5-1% of consideration	0.5-1% of consideration	0.5-1% of consideration	0.5-0.75% of consideration
De minimis per claim	0.1-0.25% of consideration	0.1-0.25% of consideration	0.1-0.25% of consideration	0.1-0.25% of consideration

Caps, baskets, and de minimis provisions apply to indemnity claims arising from warranty breaches. They do not apply to claims grounded in fraud or wilful misrepresentation. Section 17 of the ICA governs fraudulent misrepresentation, and claims under it sit outside the contractual limitation architecture. The agreement should confirm this explicitly and founders should not negotiate to bring fraud claims inside the cap.

Tax gross-up on indemnity payments: a clause most founders miss

When the investor receives an indemnity payment from the company or founders for a warranty breach, that payment may be treated as taxable income in the investor’s hands under the Income Tax Act 2025, likely as “income from other sources” taxed at the investor’s applicable rate, potentially 30% for a corporate investor.

If the agreement has no gross-up provision, the investor net-receives less than the loss amount they claimed, which means the indemnity does not make them whole. Investors push for a gross-up clause that requires the indemnifying party to pay an additional amount equal to the tax on the indemnity payment itself, so that the investor’s net receipt after tax equals the full loss claimed.

The gross-up formula:

Gross-up payment = Loss amount x [Tax rate / (1 – Tax rate)]

At a 30% corporate tax rate: If the investor’s loss is ₹1 crore, the gross-up payment required is ₹1 crore x [0.30 / (1 – 0.30)] = ₹42.86 lakhs. The investor receives ₹1.4286 crore, pays ₹42.86 lakhs in tax, and nets ₹1 crore.

From the founder’s perspective, accepting a gross-up provision in the indemnity clause converts a ₹1 crore warranty cap into a materially higher actual exposure when claims are made. Founders should either resist gross-up provisions entirely, or negotiate a cap that accounts for the gross-up uplift. The effective cap on losses recovered by the investor should govern, not the cap on payments made by the founder.

An alternative position: require the investor to first obtain a tax opinion confirming that the indemnity payment is actually taxable. Many indemnity payments in the nature of capital receipts (reimbursement of a reduction in asset value) may not be taxable as income. If not taxable, no gross-up is due.

Joint and several liability vs waterfall structure for founder indemnities

Where multiple parties (typically the company plus two or more founders) jointly give warranties in an SSA, how they share the indemnity liability matters enormously to individual founder exposure.

Joint and several liability means each indemnifying party is individually liable for the full indemnity obligation. If the company cannot pay, each founder is exposed to the full cap amount personally. Investor counsel will push hard for joint and several liability because it maximises recovery options.

A waterfall structure means the company indemnifies first, founders are liable only if the company cannot satisfy the obligation, and each founder’s personal liability is limited to a pro-rata share of the cap. This is the more founder-friendly structure and is appropriate in all but the most high-risk transactions.

The middle ground, which appears most often in Indian institutional VC deals at Series A, is a partial waterfall: the company bears primary liability up to a threshold (often the full cap on general warranties), after which founders are jointly and severally liable for fundamental warranty claims. Tax warranty liability sits with the company alone where the company is the taxpayer, and with the relevant founder personally where the warranty relates to the founder’s personal tax position.

For the full mechanics of how indemnity liability is structured between company and promoters, see Treelife’s guide to the indemnity clause in an SSA.

The FEMA 18-25 rule for cross-border indemnity escrow

Where an investment involves a non-resident buyer acquiring shares from a resident seller, or a resident buyer acquiring from a non-resident, the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (NDI Rules) impose two hard constraints on deferred consideration and indemnity escrow under Rule 9(6)(iii):

• The amount placed in escrow or subject to a holdback cannot exceed 25% of the total consideration.
• The escrow or holdback period cannot exceed 18 months from the date of the transfer agreement.

The January 2025 RBI Master Direction on Foreign Investment in India updated and codified these rules for Foreign-Owned and Controlled Companies (FOCCs) in addition to direct foreign investors.

In practical terms: if a Singapore-based VC fund buys ₹20 crore of founder shares via SPA, the maximum escrow is ₹5 crore (25% of ₹20 crore) for up to 18 months. Where full consideration is paid upfront, the seller may instead provide a personal indemnity, but the FEMA-regulated enforcement mechanism (the escrow) is still capped at 25% and 18 months.

A structural nuance in the application of Rule 9(6)(iii): the FEMA framework regulates cross-border money movement. It does not cap the size of the contractual indemnity obligation itself. A founder can contractually commit to a 30% cap on a cross-border SPA, but the mechanism for the investor to actually receive payment, including the escrow or holdback, is capped at 25%. Recovering the additional 5% requires Indian court enforcement, not a pre-funded escrow, which increases recovery risk for the investor and reduces its practical leverage.

W&I insurance and nil-recourse deal structures in India

Representations and Warranties Insurance (RWI), also called Warranty and Indemnity (W&I) insurance, is an insurance product that allows an investor to recover warranty breach losses from an insurer rather than from the selling founder or company. It is materially reshaping deal economics in PE and late-stage VC transactions in India.

In a buyer-side W&I policy (the more common structure), the investor purchases a policy. If a warranty breach is discovered after closing, the investor claims against the insurer rather than against the founder. The seller receives clean exit economics and full consideration, with limited post-closing exposure.

The market trend is significant. A growing share of private deals globally are now structured as nil-recourse or walk-away deals, meaning sellers carry no post-closing liability on general warranties absent fraud. Even deals without W&I insurance are adopting seller-friendly nil-recourse structures at rising rates, a pattern that has accelerated sharply since 2022.

In Indian transactions, W&I adoption is accelerating in PE and growth-equity transactions above ₹100 crore but remains limited in early-stage VC rounds, primarily because premium costs as a percentage of deal size are prohibitive for smaller deals, and because Indian insurers’ capacity for complex technology-sector warranties is still developing.

For founders, W&I insurance changes the negotiation in two ways:

First, if the investor is purchasing W&I cover, the investor’s counsel may accept materially lower indemnity caps and shorter survival periods on general warranties from the company and founders, because the insurance fills the gap. The founder’s exposure becomes primarily limited to fraud carve-outs and the retained portion of the policy (the “retention” or deductible).

Second, the insurer will require the buyer to have conducted thorough due diligence and the seller to have produced a comprehensive disclosure schedule. A thin disclosure schedule increases the insurer’s risk and either increases the premium or reduces the cover. This creates a direct alignment between the quality of the disclosure schedule and the overall cost of the transaction.

W&I insurance coverage mirrors the contractual warranty terms: the survival period and the matters covered by the policy are tied to the agreement. General warranties typically get a 3-year policy term; tax and fundamental warranties get up to 7 years. Any survival period in the agreement that exceeds the policy term creates an uninsured gap: the investor holds a warranty right that the insurer will not back.

Common mistakes that cost founders money

Accepting constructive knowledge as the qualifier standard. Investor counsel will often define “knowledge” to include what the warrantor would have known on reasonable enquiry. This converts a subjective qualifier into an objective due diligence obligation. Actual knowledge (what the founder personally and actually knew at signing) is the appropriate standard on general business warranties.

Failing to separate the bring-down condition from the initial warranty. Founders who focus solely on the warranties at signing miss the bring-down condition at closing. Any event that makes a warranty materially false between signing and closing must be disclosed promptly, through a supplemental disclosure notice included in the closing mechanics. Silence creates a warranty breach at closing even where the original warranty was true at signing.

Not using the MAC qualifier on the bring-down condition. An unqualified bring-down condition gives the investor a closing walk-away right on any warranty inaccuracy between signing and closing. Adding the MAC qualifier means only inaccuracies that constitute a material adverse change trigger the investor’s right to refuse closing. This is the single most valuable modification to a standard bring-down provision.

Accepting a flat warranty structure instead of the three-tier taxonomy. A single survival period and single cap applied to all warranties benefits the investor, not the founder. The cap and survival period will be set at the level appropriate for fundamental warranties and applied to operational ones. Push for three tiers from the first redline.

Ignoring gross-up provisions. A gross-up clause can increase the effective payout obligation under a warranty by 40 to 50% compared to the nominal cap. A ₹3 crore cap with a gross-up at 30% tax becomes a ₹4.28 crore effective exposure. Negotiate either to exclude gross-up or to set the nominal cap at a level that accounts for the gross-up uplift.

Not reading the remedies hierarchy beyond the indemnity. An indemnity claim is one remedy; set-off rights against future tranches, escrow drawdown, and specific performance are others. Set-off against future equity consideration is particularly dangerous: it can disrupt the company’s capital position at a time when operating funds are committed. Push to limit set-off rights to the escrow only.

Treelife practitioner note

In the transaction agreements engagements we have run at Treelife, the warranty clause negotiation that takes the most calendar time is almost never the cap or the survival period. It is the disclosure schedule. Founders who believe the disclosure schedule is an administrative attachment to be filled in after negotiation are wrong. The schedule is the negotiation. Every item properly disclosed against a specific warranty eliminates that item as a future claim trigger. Every item left out of the schedule because it felt minor, or because no one built time into the deal timeline to address it, is a potential indemnity claim.

The pattern we see most often in pre-Series A and Series A transactions is a disclosure schedule that is either too general (broadly incorporating the data room without mapping items to specific warranties, which sophisticated investors will reject) or too thin (listing only the most obvious known issues, leaving regulatory history, historical contract deviations, and IP chain-of-title gaps undocumented). Our standard process is to run a structured disclosure session with founders before the investor’s counsel begins reviewing drafts, mapping every known company fact to a specific warranty category, assessing whether it constitutes a breach, and deciding whether to disclose, remediate, or carve out each item.

On the tax warranty front specifically: the single most common source of warranty claims in early-stage Indian transactions continues to be FEMA compliance history. A representation that “all required FEMA filings have been made” without a corresponding disclosure of late, missing, or pending FC-GPR and FC-TRS filings is the most predictable indemnity trigger we encounter. If you have FEMA history that is not perfectly clean, it must go into the disclosure schedule with full specifics: dates, amounts, and status of any compounding application. A vague disclosure (“the company may have historical FEMA compliance gaps”) is not a valid specific disclosure and will not protect you.

Section 124 of the Indian Contract Act, 1872 defines indemnity contracts and imposes no statutory limits on them. That is exactly why contractual framing matters.

Frequently asked questions

Q: What is the practical difference between a representation and a warranty in an Indian investment agreement, and why does it matter?
A: A representation is a statement of fact that induced the other party to contract; if false, it can make the contract voidable under Section 19 of the ICA 1872. A warranty is a contractual promise whose breach triggers damages under contract law. In practice, most agreements conflate the two, but the distinction matters because voidability claims operate outside the indemnity cap and survival period. A false fundamental representation can give the investor a statutory right to avoid the agreement in addition to any contractual indemnity claim.

Q: Can a founder give a “to their best knowledge” qualifier on a fundamental warranty?
A: No. Fundamental representations cover facts (title, incorporation, authority) that are either true or false as matters of public record. A knowledge qualifier introduces doubt into a category that should have none. Investors will not accept it and doing so signals to the investor that the fundamental facts may be uncertain.

Q: What is a bring-down condition and how does it relate to warranty scope?
A: A bring-down condition requires the representations and warranties to be true as of the closing date, not just as of signing. If a warranty becomes materially inaccurate between signing and closing, the investor can refuse to close. Founders should negotiate a MAC qualifier on the bring-down so that only material inaccuracies, not minor operational changes, give the investor a walk-away right.

Q: What is the market standard survival period for tax warranties post-Income Tax Act 2025?
A: For agreements signed after 01 April 2026, tax warranty survival should be anchored to the Income Tax Act 2025. The practical limitation period for most assessments under the 2025 Act is 6 years from the end of the relevant tax year. Market standard is 7 years (6 years plus a 1-year buffer) from the closing date. Survival periods beyond 7 years have no regulatory justification for most startup-stage transactions.

Q: What does the FEMA 18-25 rule mean for a founder selling secondary shares to a foreign investor?
A: Under Rule 9(6)(iii) of the NDI Rules 2019, the escrow or holdback on a cross-border secondary sale is capped at 25% of the total SPA consideration for a maximum of 18 months. If the SPA consideration is ₹10 crore, the maximum pre-funded escrow is ₹2.5 crore. Any contractual indemnity above this amount exists but must be enforced through Indian courts rather than an escrow, increasing recovery risk for the investor. Structure the escrow within the FEMA limits and set the contractual cap at or near that level.

Q: What is a tax gross-up on an indemnity payment, and should founders accept it?
A: A tax gross-up clause requires the indemnifying party to pay an additional amount to cover any tax the investor pays on the indemnity receipt. At a 30% tax rate on a ₹1 crore claim, the gross-up is approximately ₹42.86 lakhs, bringing total payout to ₹1.43 crore. Founders should resist gross-up provisions, or alternatively set the nominal cap accounting for the gross-up uplift. If resisted, ask the investor to first obtain a tax opinion confirming the payment is actually taxable. Many warranty indemnity payments may be capital receipts rather than income.

Q: What is W&I insurance and does it affect how founders should negotiate the R&W section?
A: W&I (Warranty and Indemnity) insurance allows the investor to recover warranty breach losses from an insurer rather than from the founder. Where the investor is purchasing a W&I policy, founders may be able to negotiate lower indemnity caps and shorter survival periods on general warranties, because the insurance backstops the recovery. W&I adoption in India is growing but remains largely limited to PE and growth-equity transactions above ₹100 crore.

Q: What is a tipping basket versus a deductible basket?
A: A tipping basket means once aggregate claims exceed the basket threshold, the investor recovers from the first rupee of loss. A deductible basket means only the excess above the threshold is recoverable. Tipping baskets are more investor-friendly and more common in Indian venture transactions. Push for a deductible basket where your deal size and leverage permit.

Q: Can a warranty be both materiality-qualified and knowledge-qualified?
A: Yes, and this is common practice for general operational warranties. A warranty that “to the actual knowledge of the founders, there are no pending legal proceedings that would have a Material Adverse Effect” carries both qualifiers. The materiality qualifier eliminates minor claims; the knowledge qualifier eliminates claims based on facts the founders did not actually know. Stacking both qualifiers significantly narrows the warranty’s scope and is appropriate on business-state representations.

Q: Does the investor give warranties to the company?
A: Yes, but investor warranties are narrow. They typically cover: the investor’s authority to enter the agreement, the investor’s compliance with its own constitutional documents, no conflicts with existing agreements, and (for foreign investors) compliance with FEMA and the NDI Rules. They do not cover the business or the investment thesis. The warranty asymmetry reflects the purpose of the R&W section: to give the investor recourse for facts about the target that they could not independently verify.

Q: What happens to warranty claims if the company is subsequently acquired?
A: Post-closing warranty claims survive a change in control of the company unless the agreement specifically extinguishes them. The indemnity is a contract between the investor and the indemnifying parties (company and founders). A new acquirer who buys the investor’s shares acquires those contractual rights, including any outstanding warranty claims. In a full acquisition, the buyer’s counsel will review the existing R&W section and any pending or potential claims as part of due diligence. Outstanding warranty claims against founders are disclosed in acquisition due diligence.

Q: What is the difference between a warranty and a covenant in an investment agreement?
A: A warranty is a statement that a fact is true as of a specific date (signing or closing). A covenant is a promise to do or not do something in the future, after closing. Typical covenants include obligations to file regulatory returns on schedule, maintain insurance, obtain board approval for certain actions, and comply with reserved matters lists. Breach of a warranty gives rise to an indemnity claim; breach of a covenant gives rise to a separate breach of contract claim, often without the cap and basket limitations that apply to warranty indemnities. The distinction matters because certain agreements impose caps only on warranty indemnity claims, leaving covenant breach claims uncapped by default.

Q: How does the disclosure schedule interact with due diligence findings?
A: Due diligence and the disclosure schedule are parallel processes that feed each other. When an investor’s legal team discovers an issue during due diligence (a missing FC-GPR filing, a material contract with an unusual termination clause, a pending tax demand) they will either (a) require remediation as a closing condition, (b) accept it as a disclosure item in the schedule, or (c) reprice the deal. The disclosure schedule does not retroactively protect the company from facts the investor independently found during due diligence; it provides warranty protection for facts disclosed before the investor ran their independent investigation.

Regulatory references:

• Indian Contract Act, 1872: Section 17 (fraud), Section 18 (misrepresentation), Section 19 (voidability for misrepresentation), Section 32 (contingent contracts), Section 73 and 74 (damages for breach), Section 124 (indemnity contracts)
• Limitation Act, 1963: Article 55 (3-year limitation for contract breach); limitation for indemnity claims measured from date of actual damnification per Supreme Court precedent
• Income Tax Act 2025 (Presidential assent 21/08/2025, effective 01/04/2026): Section 3 (tax year concept replacing assessment year); Section 536 (repeal and savings, ITA 1961 governs pre-01/04/2026 tax years); limitation periods for tax assessments (6 years from end of relevant tax year for most ordinary assessments)
• Income Tax Act, 1961: continues to govern Tax Year 2025-26 / AY 2026-27 and prior years