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06 May 2024

Term Sheets in India – Binding and Non-Binding Explained

06 May 2024
Term Sheets in India – Binding and Non -Binding Explained

In the business landscape, term sheets play a vital role in facilitating agreements, particularly for investments and acquisitions. In the event of any corporate action, a term sheet is one of the vital documents that is executed by both the Parties to capture the important provisions and the basic framework of the proposed transaction. It lays down a broader framework for the parties to have meaningful commercial discussions towards the execution of definitive agreements and eventually, the closure of the transaction. While typically non-binding, certain provisions within the term sheet can be enforceable, making it a key element in the negotiation process. But what exactly are they, and how legally binding are they? This article dives into the world of term sheets in India, explaining the concept and the distinction between binding and non-binding versions.

What is a Term Sheet?

A term sheet is a pre-contractual agreement that outlines the key terms of a proposed transaction between two parties. It is generally non-binding. Nevertheless, term sheets frequently include legally binding clauses to protect sensitive information and prevent either party from pursuing other options during the negotiation period, often related to non-solicitation, exclusivity, secrecy, and more. Before signing final agreements, a term sheet is created. Think of a term sheet as a handshake that signifies a mutual interest in moving forward with a deal. It summarizes the core principles agreed upon by both sides, paving the way for a more comprehensive contract. The first crucial stage in a transaction is the creation of a term sheet.


What Does Term Sheets typically contain?

The specific content of a term sheet will vary depending on the nature of the transaction. For instance, an angel investment term sheet will differ significantly from a Series B and above transaction round. However, some common elements are frequently included in investment-related term sheets:

Type of Security It is important to determine the type of security, whether equity, debt, derivatives, or hybrid securities, to be offered to the other party in a deal.
Capital Structure This clause contains the paid-up capital, share capital which include face value of equity, preference shares, etc. It also mentions the shareholding pattern of the company as on the effective date of the term sheet.
Valuation This clause mentions the valuation of the company prior to the investment or financing, for the purpose of the proposed transaction.
Investment Amount This clause sets out the proposed amount to be invested into the company where post investment shareholding structure is also laid down.
Stake Percentage This specifies the ownership stake the investor will receive in the company in exchange for their investment.
Conversion Rights This clause gives the shareholders the ability to convert preferred shares to equity where the investor would get certain key rights.
Anti-Dilution Protection This right protects the investor from dilution of equity from future issues of stock if the stock is sold at a lower price than the initially invested price. 
Board Composition This clause mentions the composition of board members immediately after closing the deal where the investor may be given the right to nominate directors.
Transfer Restrictions This clause provides any condition or restriction on the ability of the shareholder to sell or transfer such securities, protecting the interests of the investors.
Conditions Precedent This clause mentions the list of conditions or obligations that need to be performed by the obligated party prior to a certain date, as agreed, to give effect to the term sheet.
Pre-emptive Rights This clause provides a right to the investors to participate in the future fund raise, where the first option is given to buy before public offering or whatsoever the case may be.
Confidentiality This clause obligates the parties to maintain confidentiality with respect to the term sheet, its terms, negotiations, and such other details.
Anti-dilution These clauses protect investors from their ownership stake being reduced if the company issues new shares at a lower valuation in future funding rounds.
Voting Rights The term sheet may outline the voting rights associated with the investor’s stake. This can be a point of negotiation, particularly for startups where venture capitalists might seek greater control over decision-making.
Liquidation Preference This provision specifies how proceeds from the sale of the company or its assets will be distributed among shareholders in the event of a liquidation event.
Governing Law and Jurisdiction This clause would determine the jurisdiction governing the term sheet as it may be entered between companies governed under the laws of two different jurisdictions.

Binding and Non-Binding Term Sheets in India

A common misconception surrounds term sheets in India – are they legally binding or not? The answer is nuanced. While a term sheet typically isn’t enforceable in its entirety, it can contain pockets of legally binding provisions.

Non-Binding Term Sheets

In India, a non-binding term sheet is typically used in the early stages of negotiation to outline the broad terms of a potential deal, such as a business partnership, investment, or acquisition. This document serves as an expression of intent rather than a legally enforceable agreement. Non-binding term sheets are instrumental in facilitating discussions between parties by identifying key deal points and areas of agreement and divergence without committing either party to final terms. Although the term sheet itself is non-binding, it often contains a few binding clauses related to confidentiality, exclusivity, and sometimes, dispute resolution mechanisms to protect the interests of the parties during negotiations. The primary advantage of a non-binding term sheet is its flexibility, allowing parties to explore potential cooperation with minimal legal risk and costs before committing significant resources to due diligence and contract drafting.

  • This is the more prevalent type of term sheet in India.
  • It serves as a roadmap for negotiations, outlining key deal points without legal enforceability.
  • Both parties have the flexibility to walk away or renegotiate terms before finalizing a binding contract.

However, some clauses within a non-binding term sheet can be legally binding. These typically include:

  • Confidentiality: Protects sensitive information disclosed during negotiations.
  • Non-Solicitation: Prevents either party from soliciting business from the other’s counterparties during the negotiation period.
  • Exclusivity: Limits the ability of both parties to pursue other deals for a specific timeframe.
  • Governing Law and Jurisdiction: Specifies the legal framework and courts that will govern any disputes arising from the term sheet’s binding clauses.

Binding Term Sheets

A binding term sheet is a preliminary document used in various business transactions, including mergers, acquisitions, and venture capital financing, that outlines the key terms and conditions of an agreement between parties. Unlike a non-binding term sheet, which serves merely as a framework for discussions, a binding term sheet legally obligates the involved parties to adhere to the terms specified within it, except those specifically designated as non-binding. It typically includes essential details such as the structure of the deal, pricing, timelines, confidentiality obligations, and conditions precedent that must be met for the transaction to proceed. By signing a binding term sheet, parties demonstrate their commitment to moving forward under the outlined terms, subject to due diligence and final contract negotiations. This document helps streamline subsequent negotiations by clarifying the critical elements of the deal, reducing ambiguity, and facilitating a smoother path to the final agreement.

  • Less common in India, a Binding term sheet implies that the parties are bound to follow the obligations contained therein, and it can be enforceable in a  court of law. 


The partially binding nature is usually indicated in the ‘preamble’ of a term sheet where it states, “this term sheet is non-binding except for Clause XYZ which shall be legally binding on the parties”. Below are term sheet sample clauses for your reference:

Binding Term Sheet Preamble (Sample Binding Term Sheet Clause):

“This Binding Term Sheet (“Term Sheet”) is entered into as of [Date], by and between [Party A], a [Type of Entity] organized and existing under the laws of [Jurisdiction], and [Party B], a [Type of Entity] organized and existing under the laws of [Jurisdiction]. This Term Sheet sets forth the principal terms and conditions agreed upon by the Parties with respect to [brief description of the transaction], and constitutes a binding agreement between the Parties hereto, subject to the terms and conditions set forth herein. Each Party acknowledges that it is entering into this Term Sheet with the intention of being legally bound hereby, and agrees to negotiate in good faith to finalize the definitive agreements contemplated hereby.”


Non-Binding Term Sheet Preamble (Sample Non-Binding Term Sheet Clause):

“This Non-Binding Term Sheet (“Term Sheet”) is entered into as of [Date], by and between [Party A], a [Type of Entity] organized and existing under the laws of [Jurisdiction], and [Party B], a [Type of Entity] organized and existing under the laws of [Jurisdiction]. This Term Sheet sets forth the principal terms and conditions agreed upon by the Parties with respect to [brief description of the transaction], and serves as a framework for further discussions and negotiations between the Parties. The Parties acknowledge and agree that this Term Sheet does not create any legally binding obligations, rights, or liabilities on either Party, except as otherwise expressly provided herein. The Parties further acknowledge that they are not obligated to proceed with the transaction contemplated hereby unless and until mutually acceptable definitive agreements are executed and delivered by the Parties.”

Case Law: Zostel Hospitality Pvt. Ltd. vs. Oravel Stays Pvt. Ltd. (Oyo)

Factual Background

Zostel Hospitality Private Limited, a startup offering backpacker hostel accommodations in India, entered into negotiations with Oravel Stays Private Limited (OYO), a company providing hotel rooms through its platform. Oyo expressed interest in acquiring Zostel’s business, leading to the signing of a Term Sheet. This Term Sheet outlined the transfer of Zostel’s business assets, customer data, key employees, software, and IP rights to Oyo in exchange for a 7% shareholding in Oyo. Notably, the Term Sheet was explicitly stated as non-binding in its preamble.


The acquisition hinged on several conditions, including Oyo’s successful completion of due diligence, necessary approvals from Zostel, and the signing of definitive agreements. Zostel claimed to have fulfilled all prerequisites mentioned in the Term Sheet, but Oyo refrained from formalizing the acquisition. Oyo countered that due diligence revealed liabilities that deterred them from finalizing the deal. They argued that the non-binding nature of the Term Sheet meant it was not enforceable.

Arbitral Tribunal Observations

The sole arbitrator found that despite the non-binding declaration in the preamble, the contents and the parties’ actions suggested a commitment to complete the transaction. The detailed conditions and the progress towards fulfilling them implied a de facto binding agreement. Zostel’s transfer of key assets and information, alongside Oyo’s engagement with the due diligence, created expectations protected by the arbitral tribunal.

Analysis of the Arbitral Award

The tribunal highlighted that the conduct of both parties and the substantial completion of transactional obligations effectively negated the stated non-binding nature of the Term Sheet. The arbitrator ruled that such conduct, coupled with the definitive nature of the obligations undertaken, amounted to a binding agreement, warranting enforcement.

This case illustrates that even a “non-binding” Term Sheet can lead to enforceable obligations if the parties act in a manner that indicates a clear intention to complete the transaction. The specific terms and the extent of actions taken by the parties in reliance on these terms play a crucial role in determining the binding nature of a Term Sheet.

Broader Implications for Drafting Term Sheets

From a drafting perspective, clarity about the binding or non-binding nature of each clause can prevent ambiguities. Typically, certain clauses like exclusivity, confidentiality, and governing law are binding, even in a non-binding Term Sheet. The enforceability of a Term Sheet often depends on how it is drafted and the nature of obligations explicitly stated or implied through conduct.

This case serves as a critical reminder of the legal implications that can arise from the practical execution of terms agreed upon in a Term Sheet, highlighting the importance of precise language and a clear understanding of the terms’ enforceability.


Term sheets in India serve as pivotal documents in facilitating business agreements, providing a roadmap for negotiations and potential partnerships. While traditionally non-binding, their enforceability can hinge on specific clauses and the actions of the involved parties, as exemplified in the Zostel vs. Oyo case.

This duality stems from the intent and actions of the parties involved, which can transform an ostensibly non-binding document into a legally enforceable commitment. The critical analysis of such cases in India underlines the importance of careful drafting, explicit stipulations of binding and non-binding clauses, and the profound implications of the parties’ conduct post-agreement.

Frequently Asked Questions about Term Sheets in India

  1. What is a term sheet?
    A term sheet is a pre-contractual agreement outlining the basic terms and conditions under which an investment will be made. It serves as a template to develop more detailed legally binding documents.
  1. Are term sheets legally binding?
    Generally, term sheets are not legally binding in terms of the investment or acquisition itself. However, they often contain binding provisions such as confidentiality, exclusivity, and governing law clauses.
  1. What are the essential elements of a term sheet?
    Essential elements typically include the type of security being offered, valuation, investment amount, capital structure, stake percentage, voting rights, anti-dilution protections, and any rights to future capital sales.
  1. How is a binding term sheet different from a non-binding term sheet?
    A binding term sheet obligates the parties to proceed with the transaction under the terms laid out, subject to due diligence and definitive agreements. A non-binding term sheet serves as a preliminary agreement with some binding clauses but does not compel the parties to finalize the transaction.
  1. What makes a term sheet binding?
    A term sheet becomes binding if both parties engage in actions that indicate a commitment to proceed based on the terms outlined, such as transferring assets or sensitive information, or if specific clauses in the term sheet are expressly stated to be binding.
  1. What is the importance of confidentiality in a term sheet?
    Confidentiality protects the sensitive information exchanged during negotiations from being disclosed to third parties. It is one of the commonly binding clauses in a term sheet to ensure that business details and negotiations remain private.
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Last updated on
May 06, 2024, 12:01pm


The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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