SHA vs SPA vs Subscription Agreement – Guide for Startups & Founders

When a funding round closes in India, three documents sit at the centre of it: the Share Subscription Agreement (SSA), the Share Purchase Agreement (SPA), and the Shareholders’ Agreement (SHA). Each one does a different job, each one carries a different set of risks, and in almost every round, at least one of the three is signed by a founder who has not read it fully. The stakes are higher than they look. The SHA governs your governance rights and exit economics for years after signing. The SSA or SPA determines whether new shares are issued or existing ones change hands, a distinction with direct FEMA and tax consequences. This guide maps the function, structure, negotiation pressure points, and regulatory obligations of all three, so you understand what you are agreeing to before the documents land in your inbox.

What is a Share Subscription Agreement and when is it used?

A Share Subscription Agreement (SSA) is a contract between the company and an investor under which the company agrees to issue fresh shares to the investor in exchange for capital. The company’s paid-up share capital increases. No existing shareholder is selling. The investor receives newly created equity, and the founding team’s ownership percentage dilutes accordingly.

An SSA is the primary investment document for almost every priced equity round in an Indian startup: seed, pre-Series A, Series A, and beyond. The investor subscribes to new shares (almost always Compulsorily Convertible Preference Shares, or CCPS, in institutional rounds), the company gets capital, and the SSA records the terms of that transaction. Because new shares are being created, the SSA triggers a board resolution under Section 62(1)(c) of the Companies Act, 2013, which requires shareholder approval through a special resolution for preferential allotment to parties other than existing shareholders.

The core contents of a well-drafted SSA are:

• Number, class, and series of shares being subscribed (equity or CCPS, with conversion terms)
• Subscription price per share and total investment quantum
• Conditions Precedent (CPs): what must be done before funds transfer (DD completion, regulatory approvals, AoA amendment, board composition change)
• Representations and warranties by the company and founders (ownership, litigation, IP, FEMA status)
• Investor covenants pre-closing
• Conditions Subsequent (CSs): what must be done after allotment (FC-GPR filing, MCA filings, ESOP pool creation)
• Indemnity for breach of representations
• Closing mechanics: wire timeline, share certificate delivery, board resolution sequence

One SSA nuance that frequently surprises first-time founders: when a foreign investor participates in the round, the SSA closing triggers the FC-GPR filing obligation under Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules). The company has 30 days from the date of share allotment to file Form FC-GPR with its Authorised Dealer bank. Missing this deadline is a compoundable offence under Section 13 of the Foreign Exchange Management Act (FEMA) 1999, with penalties that can reach three times the transaction amount, though in practice compounding orders for technical delays are substantially lower.

What is a Share Purchase Agreement and when is it used?

A Share Purchase Agreement (SPA) is executed when one party buys existing shares from another party: a founder sells some of their equity to an incoming investor, or an early investor exits to a later-stage fund. The company is not involved except to record and help complete the share transfer. No new shares are created, paid-up capital does not change, and the only movement is ownership from the seller’s column to the buyer’s column on the cap table.

SPAs appear in two distinct contexts in the Indian startup world. The first is a secondary component of a primary round: when the lead investor at Series A puts ₹30 crore into the company as primary subscription via SSA and simultaneously purchases ₹5 crore worth of founder shares as secondary via SPA. The second is a pure secondary transaction: a founder or early investor selling their full stake to a strategic acquirer, a PE fund, or another investor without any new shares being issued.

From a tax standpoint, the SPA triggers capital gains in the hands of the seller. For unlisted shares held over 24 months, the rate is 12.5% long-term capital gains under Section 112 of the Income Tax Act, 1961 (as amended by the Finance Act, 2024, effective 23 July 2024). Shares held 24 months or less attract short-term capital gains taxed at the seller’s applicable slab rate, up to 30%. The valuation used in the SPA must comply with Rule 11UA for domestic transactions. For transactions involving a non-resident buyer, the pricing must also comply with FEMA NDI Rules pricing guidelines, typically DCF or a SEBI-approved method, with a Registered Valuer or Chartered Accountant certificate.

The SPA’s most negotiated clauses are:

• Representations and warranties: the seller makes promises about their clean title to shares, no encumbrances, no SHA transfer restrictions triggered
• Indemnity cap, basket, and survival period: founders should push for a cap of 10-15% of consideration and 18-24 months survival for general reps, with longer survival only for tax and fundamental reps
• Conditions Precedent: existing SHA compliance (ROFR waiver, board approval, shareholder consent where required)
• Escrow holdback provisions: typically 10-20% of consideration held for 12-18 months
• Non-compete undertaking: duration and geography; keep it narrow, as overly broad non-competes carry enforceability risk under Section 27 of the Indian Contract Act, 1872

When a non-resident acquires existing shares from a resident seller, the transaction triggers a Form FC-TRS filing with the AD bank within 60 days of receipt of consideration or transfer of shares, whichever is earlier (NDI Rules, Schedule I, para 9).

What is a Shareholders’ Agreement and what does it actually govern?

The SHA is not a transaction document. It is a governance document. It does not record how shares change hands. It records how shareholders relate to each other and to the company after the transaction closes. The SHA sits alongside the company’s Articles of Association (AoA) as the private contract that governs everything the public constitutional document leaves unspoken.

A typical Indian startup SHA covers:

• Board composition: number of seats, investor nomination rights, quorum requirements, observer rights
• Reserved matters: the list of actions the company cannot take without investor consent (new issuances, acquisitions, related party transactions above thresholds, change of business)
• Anti-dilution rights: the formula (weighted average or full ratchet) and instrument-level triggering events
• Pre-emption rights: investors’ right to participate pro-rata in future rounds to maintain their ownership percentage
• Right of First Refusal (ROFR) and Right of First Offer (ROFO): restrictions on founders and investors transferring shares without offering them internally first
• Tag-along rights: the investor’s right to sell alongside a founder if the founder finds a buyer
• Drag-along rights: majority’s right to force minority shareholders to sell when a full exit is negotiated
• Liquidation preference: the order in which sale proceeds are distributed (the most economically consequential clause in the document)
• Information rights: what financial data the investor receives, at what frequency
• Founder vesting and lock-in: the schedule under which founder shares vest (reverse vesting) and the lock-in period post-investment
• Exit mechanics: IPO obligations, put and call options, drag timelines

The SHA is negotiated alongside the SSA. They are usually executed on the same day, often as part of a single closing process. In many early-stage transactions, particularly angel rounds and small institutional rounds, the SSA and SHA are combined into a single document referred to as an SSA-SHA or simply as the SHA. Whether to combine or separate them is a drafting choice that affects how future amendments are handled. A combined document requires all parties to amend together even for changes that affect only the subscription mechanics.

The AoA alignment problem. The SHA’s enforceability has an important structural limit in Indian law. The Supreme Court’s ruling in V.B. Rangaraj v. V.B. Gopalakrishnan (1992) 1 SCC 160 established that restrictions on share transfers in a shareholders’ agreement that are not mirrored in the company’s AoA may not be enforceable against third parties. This means that your ROFR, tag-along, drag-along, and transfer restrictions in the SHA need to be reflected in the AoA to bind parties outside the SHA itself. Investors with experienced counsel will require an AoA amendment as a Condition Precedent in the SSA before funds transfer.

When does a deal use all three agreements: SSA, SPA, and SHA?

Most priced startup rounds use two or three documents depending on whether a secondary component exists.

Primary-only round (SSA + SHA): The investor puts capital into the company. The company issues new shares. This is the standard structure for seed, pre-Series A, and many Series A rounds. Two documents: SSA recording the subscription mechanics, SHA recording the governance framework going forward.

Primary and secondary round (SSA + SPA + SHA): The investor subscribes to new shares from the company via SSA and simultaneously purchases existing shares from a founder or early investor via SPA. Three documents. This structure is common at Series A and B where the investor wants a larger stake than new issuance alone provides, or where a founder or seed investor wants partial liquidity at closing. The SSA and SPA are separate documents because they involve different parties (the company is a party to the SSA but typically only a facilitating party on the SPA), different tax consequences (new share issuance is capital event for the company; secondary sale triggers capital gains for the seller), and different regulatory filings (FC-GPR for SSA, FC-TRS for SPA, if foreign investor).

Pure secondary (SPA + SHA amendment): An existing investor exits fully, and their shares are purchased by a new investor with no new equity issued. The SHA must be amended to remove the exiting investor and add the incoming one, or a new SHA is executed. No SSA is required.

Bold caption: Transaction structure matrix

Round type	SSA needed	SPA needed	SHA / SHA amendment
Seed (new shares only)	Yes	No	New SHA
Series A with secondary	Yes	Yes	New SHA or full amendment
Pure secondary exit	No	Yes	SHA amendment to add new investor
Founder buyout of co-founder	No	Yes	SHA amendment
Acqui-hire (asset purchase)	No	No	Not applicable
Full acquisition (share purchase)	No	Yes	SHA may terminate on acquisition

How do SSA, SPA, and SHA interact, and what happens when they conflict?

The three documents work in sequence but are negotiated simultaneously, which creates a specific problem: terms agreed at the SHA level sometimes conflict with the mechanics set out in the SSA, or vice versa. The most common inter-document conflict in Indian venture transactions is between the SSA’s representation that “the company has no pending FEMA violations” and the actual state of the company’s regulatory history, which DD then uncovers. When this happens, the representation is either qualified (with a disclosure schedule) or a CP is added requiring remediation before closing.

A more structural conflict arises around anti-dilution. The SSA often records the instrument being issued (say, Series A CCPS with a weighted average anti-dilution). The SHA then sets out the detailed anti-dilution formula and triggering events. If the two documents use different formulas or define “down round” differently, the SHA formula governs post-investment, but the SSA’s characterisation of the instrument may have already been filed with the MCA on Form PAS-3. Amending the CCPS terms post-allotment requires a special resolution and can be operationally difficult.

The hierarchy rule: where the SSA and SHA are separate documents and contain conflicting provisions, most well-drafted SHA templates include an explicit clause providing that the SHA prevails over the SSA in matters of governance and the SSA prevails over the SHA in matters of the subscription transaction itself. Where the two documents are combined, this distinction collapses and conflicts need to be resolved on a case-by-case basis during drafting.

The SPA interacts with the SHA primarily through the ROFR mechanism. Every SHA that contains a ROFR requires the selling shareholder to offer their shares to existing shareholders before approaching a third-party buyer. If a founder signs an SPA with a third party before obtaining ROFR waivers from existing investors, they are in breach of the SHA. This breach can give the investors grounds to challenge the transfer under the specific performance provisions of the Indian Contract Act, 1872.

What are the stamp duty obligations on SSA, SPA, and SHA?

This is where most founders and even many lawyers are working from outdated information. The stamp duty landscape for share-related documents has two layers: a centralised layer for the transfer or issuance of securities, and a state layer for the underlying agreements.

Post-1 July 2020 centralisation. The Finance Act, 2019 amended the Indian Stamp Act, 1899 to centralise stamp duty on the transfer of securities. For shares transferred in demat form, stamp duty at 0.015% of the consideration is collected by the depository (CDSL or NSDL) and remitted to the state of the seller’s residence. This centralisation applies to the transfer of securities themselves, not to the underlying agreements.

State-level stamp duty on the agreements (SSA, SPA, SHA) continues to apply separately under state stamp acts. This is the layer that most deals get wrong.

• SSA: treated as an agreement to subscribe shares. In Maharashtra, SSAs attract stamp duty under Article 25 of the Maharashtra Stamp Act, 1958, typically 0.20% of the subscription amount, subject to caps. In Karnataka, the stamp duty on agreements is generally ₹2,000. In Delhi, Article 5 of the Indian Stamp Act applies; the Delhi High Court has treated SSAs as agreements with monetary consideration, attracting duty at 0.20% of the value.
• SPA: treated as a conveyance or agreement to sell. Maharashtra imposes 0.20% on SPAs as instruments creating enforceable monetary rights. Karnataka applies ₹2,000 on agreements unless separately classified as conveyances. Delhi’s treatment has been in flux. A circular from the Delhi State Government in July 2025 clarified stamp duty on share issuance, though the SPA treatment remains governed by existing Article 23 provisions.
• SHA: treated as an agreement among parties. In Maharashtra, SHAs attract stamp duty that varies based on the consideration embedded in the agreement (reserved matter triggers, put/call option mechanics, and so on). A simple governance SHA without embedded monetary rights typically attracts ₹500 to ₹1,000. Karnataka caps at ₹2,000. Delhi charges ₹100 on standard agreements.

The practical rule: pay stamp duty based on the substance of each document, not the label. An SSA that also contains put/call option mechanics for ROFR will attract higher duty than a purely mechanics-focused SSA. Incorrect stamping makes a document inadmissible in evidence under Section 35 of the Indian Stamp Act and attracts a penalty of up to 10 times the deficient duty. In Treelife’s transaction work, stamp duty deficiency is flagged in roughly one in four deals reviewed in due diligence.

What FEMA filings does each agreement trigger?

FEMA compliance is not a post-closing formality. It is a condition the agreements themselves create, and the timelines are strict.

SSA with foreign investor (FDI route): The SSA closing triggers the FC-GPR filing. Under the FEMA NDI Rules and RBI Master Direction on Reporting (as updated in 2019 and amended subsequently), the company must file Form FC-GPR with its Authorised Dealer (AD) bank within 30 days of allotment of shares to the non-resident investor. The filing includes the allotment details, the valuation certificate, the FC-GPR form, and the board resolution for allotment. A delay in FC-GPR filing is a compoundable offence under Section 13 of FEMA 1999. Treelife’s experience across 250+ transactions is that FC-GPR delays are the most common post-closing compliance gap, almost always because the CA and the legal counsel each assumed the other was handling it.

SPA with non-resident buyer (secondary sale): The SPA triggers FC-TRS within 60 days of the earlier of the date of transfer of shares or the date of receipt of consideration. FC-TRS is filed with the AD bank and must be accompanied by the SPA, the valuation certificate, and the FIRC (Foreign Inward Remittance Certificate) if consideration has been received. For SPA involving a non-resident seller (existing foreign investor exiting to an Indian buyer), the filing obligation is the same.

SHA: The SHA itself does not trigger a FEMA filing. However, if the SHA’s investor rights (reserved matters, anti-dilution, put/call options) constitute a guarantee or comfort letter from an Indian entity to a foreign shareholder, those provisions need to be structured carefully to avoid triggering external commercial borrowing or derivative instrument rules.

Annual FLA return: Any company that has received FDI (via SSA with a foreign investor) must file the Foreign Liabilities and Assets (FLA) return with the RBI by 15 July of each financial year. Missing the FLA return is an independent FEMA violation, separate from the FC-GPR obligation.

Bold caption: FEMA obligations by agreement type

Agreement	FEMA trigger	Form	Deadline	Penalty for breach
SSA (foreign investor)	FDI receipt via allotment	FC-GPR	30 days from allotment	Up to 3x transaction value (Section 13, FEMA)
SPA (non-resident buyer)	Secondary share transfer	FC-TRS	60 days from transfer/receipt	Up to 3x transaction value (Section 13, FEMA)
SPA (non-resident seller)	Exit by foreign investor	FC-TRS	60 days from transfer/receipt	Up to 3x transaction value (Section 13, FEMA)
SHA	None directly	N/A	N/A	N/A
Any FDI round	Annual reporting	FLA return	15 July each year	Compoundable FEMA violation

Founder negotiation pressure points by document

Most founders negotiate the SHA because it is the document their investors send them (investors draft SHAs in their favour). The SSA and SPA receive less attention because they look more mechanical. This is the wrong allocation of attention. Here is where to push back in each document:

In the SSA

The representations and warranties section is the risk allocation mechanism in the SSA. Founders make representations about the company’s compliance history, ownership structure, IP assignment, and FEMA status. Every representation that is absolute (with no knowledge qualifier) is a potential indemnity trigger if it turns out to be incorrect. Push for knowledge qualifiers on all business-state representations: “to the knowledge of the founders and the company” on anything that is not a verifiable fact from a public register. Fundamental representations (authority to enter the agreement, authorised share capital, absence of injunctions) typically cannot be knowledge-qualified and should not be.

Conditions Precedent deserve careful reading. CPs that require “all approvals” without specifying which approvals can be used to delay closing indefinitely if an investor’s relationship sours between term sheet and signing. Name every required approval explicitly.

In the SPA

Indemnity caps, baskets, and survival periods are the three parameters that determine your actual exposure as a seller. An uncapped indemnity with a 7-year survival period on a secondary sale of ₹10 crore of shares could cost you far more than ₹10 crore in liability if undisclosed issues surface. The market standard in Indian venture transactions: indemnity cap at 10-15% of consideration, basket (de minimis threshold before indemnity kicks in) at 0.5-1% of consideration, general rep survival at 18-24 months, tax rep survival at the relevant limitation period plus a buffer.

Non-compete clauses in SPAs are often written too broadly. An Indian court will not enforce an unreasonably wide non-compete under Section 27 of the Indian Contract Act, 1872. Push back on scope beyond your actual role and geography, and keep duration to 2 years maximum.

In the SHA

The three clauses that have the most material impact on your economics at exit: liquidation preference (1x non-participating versus 1x participating), anti-dilution formula (weighted average versus full ratchet), and drag-along threshold (the percentage that can force a sale). Full ratchet anti-dilution means that in a down round, the investor’s entire position reprices as if they had invested at the lower price. This can leave founders with effectively no economics at exit even in a moderate down scenario. Weighted average anti-dilution is the market standard and significantly more founder-friendly. Document every push-back and track what you concede and why, so that future rounds do not extend concessions you never intended to make permanently.

Common mistakes that cost founders time and money

Mistake 1: Signing an SPA without obtaining the ROFR waiver first. The SHA’s ROFR mechanism requires the selling shareholder to offer their shares to existing shareholders before selling to a third party. Founders who sign an SPA with a buyer, then seek ROFR waivers, are already in breach of the SHA at the moment of signing. The correct sequence is: identify buyer, obtain SHA-compliant ROFR waivers or ROFO exercise periods, then execute the SPA.

Mistake 2: Missing the FC-GPR 30-day deadline after foreign investor closing. The 30-day clock runs from allotment, not from when the money hits the bank. Allotment happens at the board meeting where shares are formally allocated. If that meeting precedes the fund transfer (which it sometimes does when wire timelines are tight), the clock is already running. Set a compliance reminder at the board meeting itself, not at fund receipt.

Mistake 3: Failing to align the SHA with the AoA. Founders and investors execute an SHA with detailed ROFR, tag-along, and drag-along provisions, then continue operating under an AoA that does not reflect those provisions. The V.B. Rangaraj ruling means that transfer restrictions in the SHA that are not in the AoA may not bind third parties. The fix: always amend the AoA simultaneously with executing the SHA, and treat this as a Condition Precedent in the SSA rather than a Condition Subsequent.

Mistake 4: Accepting unlimited or very long indemnity survival periods on representations in the SPA or SSA. Most templates sent by investor counsel have survival periods of 7-10 years for tax representations. Practical compounding under the Income Tax Act, 1961 is typically 6 years from the end of the relevant assessment year, plus one year. A survival period beyond the applicable limitation period creates exposure without a corresponding regulatory rationale. Under the Income Tax Act, 2025 (which replaced the 1961 Act from 1 April 2026), the practical limitation period for most tax assessments is 6 years from the end of the relevant tax year. Push for parity with this period.

Mistake 5: Not reading the SHA’s reserved matters list carefully. Reserved matters require investor consent before the company acts. Lists that are too broad (covering routine decisions like entering into contracts above ₹5 lakhs or hiring anyone above a certain salary) can make the company operationally paralysed. Every item on the reserved matters list should pass the test: is this genuinely a significant enough action that an investor with a minority stake deserves a veto? If not, remove it.

Case study

Situation: Pre-Series A B2B SaaS startup, Bengaluru. Two co-founders. Had raised ₹4 crore from four angel investors, two of whom were US-based NRIs, in FY2022-23.

Challenge: FC-GPR had never been filed for the NRI angels’ investments. SHA had ROFR and tag-along provisions not mirrored in the AoA. Series B term sheet required clean FEMA status as a Condition Precedent.

What Treelife did: Filed two belated FC-GPR applications through the AD bank with LSF calculations. Ran an EGM to pass a special resolution amending the AoA to mirror SHA transfer restrictions. Prepared regulatory opinion confirming remediation for investor’s legal counsel.

Outcome: Both FC-GPR filings cleared in 9 weeks. AoA amendment completed in 3 weeks. Series A closed on schedule. Total regularisation cost: ₹1.8 lakhs in LSF and ROC fees. Investor’s legal counsel accepted Treelife’s compliance confirmation letter without requiring a full secretarial audit.

Frequently asked questions

Q: What is the difference between an SSA and a subscription agreement?
A: They refer to the same document. “Share Subscription Agreement” and “subscription agreement” are used interchangeably in the Indian startup context. In some transactions, particularly those involving convertible instruments or SAFE-like structures, the document may be called a “subscription and conversion agreement” to reflect the two-stage nature of the investment. The function is the same: it records the terms on which the investor subscribes to new shares issued by the company.

Q: Do I need an SHA if I have an SSA?
A: Almost always, yes. The SSA covers the mechanics of the investment transaction. It does not cover the ongoing governance of the company post-investment: board rights, reserved matters, anti-dilution, ROFR, tag-along, drag-along, or exit mechanics. Without an SHA, there is no private agreement governing investor-founder relations after the shares are allotted. Some angel-level transactions run with SSAs only and loose letters of intent for governance, but this creates enforcement ambiguity in any future dispute.

Q: Can the SSA and SHA be combined into one document?
A: Yes. Many Indian early-stage rounds execute a single combined SSA-SHA document. The advantage is simplicity and a single reference point. The disadvantage is that any future amendment, even to only one of the two components, requires all parties to sign. In rounds with multiple investors, unanimous amendment is harder to achieve than a separate SSA amendment or separate SHA amendment.

Q: What stamp duty should I pay on an SHA in Maharashtra?
A: An SHA in Maharashtra attracts stamp duty under Article 25 of the Maharashtra Stamp Act, 1958. For a purely governance SHA with no embedded monetary rights, duty is typically ₹500 to ₹2,000. Where the SHA contains put/call option mechanics, liquidation preferences with quantified floors, or other instruments that create directly enforceable monetary rights, the document is assessed on its substance and can attract duty at 0.20% of the embedded consideration. Pay via e-stamping and retain the stamping receipt as part of the deal file.

Q: What happens if the SSA closes with a foreign investor and I miss the 30-day FC-GPR deadline?
A: Missing the FC-GPR deadline is a compoundable FEMA contravention under Section 13 of FEMA 1999. The company must file a belated FC-GPR through its AD bank. The AD bank will calculate a Late Submission Fee (LSF) based on the duration of delay and the transaction amount. In practice, for technical delays on FC-GPR (as opposed to structural FEMA violations), the LSF is manageable, but the process takes 8-10 weeks, which can delay your next fundraise if the existing violation surfaces in DD.

Q: Does a domestic SPA require any regulatory filing?
A: A domestic secondary sale (resident seller to resident buyer, private company shares) does not require an RBI or SEBI filing. The company must update its statutory register of members under the Companies Act, 2013, file Form SH-4 (share transfer form) with the relevant stamp duty paid, and update its cap table records. The MCA form PAS-3 is not required for a transfer of existing shares; it is only required on allotment of new shares.

Q: If a co-founder exits and we buy their shares via SPA, does the SHA need to be amended?
A: Yes. The exiting co-founder is likely a party to the existing SHA. Their exit from the cap table should be reflected in the SHA by way of a deed of retirement or a formal SHA amendment removing them as a party and confirming that any residual obligations (non-compete, confidentiality, IP assignment) remain in force per the terms of the SPA. Failing to formally retire the exiting co-founder from the SHA creates a risk that they retain technical party status and information rights under the document.

Q: Can a DPIIT-recognised startup use a convertible note instead of an SSA?
A: Yes. DPIIT-recognised startups can issue convertible notes to investors under Section 62(3) of the Companies Act, 2013 read with the FEMA NDI Rules, 2019 (for foreign investors). Convertible notes are a debt instrument with the option to convert to equity. The minimum investment per investor is ₹25 lakhs and the maximum tenure is 10 years. The DPIIT Startup India notification of 4 February 2026 raised the turnover threshold for standard startup recognition from ₹100 crore to ₹200 crore (the 10-year recognition period is retained). An SSA is not used for convertible note issuance; the instrument is a Convertible Note Agreement. The SHA, if any, governs the note holder’s rights post-conversion.

Q: What happens to the SHA if the company is acquired?
A: Most SHAs contain a drag-along provision that allows a majority (threshold negotiated, typically 75% of all investor-held shares plus founder consent, or some variation) to force remaining shareholders to sell on the same terms as the drag-along sale. On a full acquisition via SPA, the SHA typically terminates on closing. This is often expressed as a survival clause in the SHA itself, listing which provisions survive closing (confidentiality, non-compete, specific indemnities) and which terminate. Founders should verify the survival clause before signing.

Q: Does an NRI founder who is a party to the SHA need to comply with FEMA?
A: This depends on the NRI’s FEMA residential status. An NRI (non-resident Indian) holds shares in an Indian company on a repatriation or non-repatriation basis. The SHA itself does not trigger FEMA obligations. If the NRI founder’s shareholding changes (through buyback, secondary sale, or bonus issuance), FEMA pricing and reporting obligations apply depending on the mode of change. An NRI selling shares to a resident Indian triggers FC-TRS just as a foreign investor’s sale would.

Q: What is the correct sequence for executing SSA, SPA, and SHA in a round that has all three?
A: The standard sequencing in Indian practice: (1) Conditions Precedent are confirmed complete by both sides, including AoA amendment, ROFR waivers on secondary shares, and due diligence sign-off; (2) SSA, SPA, and SHA are executed simultaneously on the same closing date; (3) share allotment (for SSA) and share transfer (for SPA) are completed by board resolution within 15-30 days of execution; (4) FC-GPR is filed within 30 days of allotment and FC-TRS within 60 days of transfer, if foreign investor; (5) PAS-3 is filed with the MCA within 30 days of allotment for new shares.

Q: What is the difference between tag-along and drag-along in an SHA, and which one protects founders?
A: Tag-along is an investor protection. If a founder sells their shares to a buyer, the investor has the right to tag along and sell their own shares to the same buyer at the same price and terms. This protects investors from being left behind in a founder exit. Drag-along is a majority-shareholder mechanism. If the majority (above a negotiated threshold) wants to sell to a buyer, they can force the minority shareholders to sell on the same terms. Drag-along can work in a founder’s favour, allowing a majority sale to proceed without a minority holdout, but it can also be used against a founder if investor-held shares constitute the majority. Founders should negotiate the drag-along threshold carefully: the higher the threshold, the harder it is to use the drag against you.

Q: How long does it take to negotiate and execute SSA, SPA, and SHA from term sheet to closing?
A: For a mid-complexity Series A round (domestic investor, no secondary component, straightforward FEMA history), 8-10 weeks from term sheet to closing is realistic. Add 4-6 weeks for a secondary component requiring SPA and ROFR waiver processes. Add 6-12 weeks if there are FEMA remediation items (belated FC-GPR, FLA returns, compounding applications). Pure documentation turnaround on the three agreements (assuming clean due diligence) is 3-4 weeks once the first drafts are exchanged. The timeline is almost always driven by due diligence findings and regulatory remediation, not by drafting speed.

Regulatory references

• Companies Act, 2013: Section 62(1)(c) (preferential allotment, shareholder approval); Section 62(1)(b) (ESOP shareholder approval); Section 27 (Indian Contract Act, 1872, non-compete enforceability)
• Foreign Exchange Management Act (FEMA), 1999: Section 13 (penalty for contravention)
• Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules): Schedule I, para 9 (FC-TRS timelines); FC-GPR 30-day filing requirement
• RBI Master Direction on Reporting under FEMA, 2019 (as amended): FC-GPR and FC-TRS reporting obligations
• Income Tax Act, 1961 / Income Tax Act, 2025 (effective 1 April 2026, renumbered but substantively unchanged): Section 112 under the 1961 Act (LTCG on unlisted shares at 12.5%, effective 23 July 2024 via Finance Act, 2024); Rule 11UA (valuation for unlisted shares in domestic transactions)
• Indian Stamp Act, 1899 (as amended by Finance Act, 2019, centralised stamp duty on securities effective 1 July 2020)
• Maharashtra Stamp Act, 1958: Article 25 (agreements)
• V.B. Rangaraj v. V.B. Gopalakrishnan (1992) 1 SCC 160 (AoA-SHA alignment and enforceability of transfer restrictions)
• Companies Act, 2013: Section 58 (recognition of transfer restrictions in AoA for private companies)

External sources

• Ministry of Corporate Affairs
• Reserve Bank of India, FIRMS portal for FEMA filings
• Income Tax India
• DPIIT, Startup India