Introduction

Cross-border Mergers and Acquisitions (“M&A”) involve parties located in different jurisdictions, where the acquiring entity assumes ownership, control, and assets of the target. M&A transactions involving Indian companies demand far more than commercial foresight. A Share Purchase Agreement (“SPA”) sits at the heart of a share acquisition, translating commercial intent into enforceable legal protection. The complex legal and regulatory web of India makes the SPA a crucial shield for cross-border buyers (“Buyer”). Every SPA operates within a layered legal framework where each clause is shaped by judicial and regulatory interpretations. It serves as a roadmap for the Buyer to navigate the procedural and regulatory hurdles, transforming an uncertain investment into a legally secure and strategically sound transaction. This article will equip Buyers with practical insights about the potential risks and how to adequately capture them in the SPA to safeguard their interests. 

Understanding SPA in India

An SPA is a legal contract which governs share transfers by defining the terms of the deal and protects interests of all the parties. It serves as the backbone on which the whole transaction is structured by detailing the terms and conditions under which the Buyer shall acquire the shares of the target Indian company including the scope of transactions, the shares to be transferred, consideration, conditions precedent, closing mechanism and much more. 

SPAs are generally drafted after the parties have completed due diligence and mutually agreed to the valuation, closing conditions, price, etc. In India, an SPA must align with the Companies Act, 2013, the Indian Contract Act, 1872 and in case of cross-border deals, the Foreign Exchange Management Act, 1999 (“FEMA”) and allied rules and regulations and other regulatory frameworks. 

Key Clauses for Cross-border Buyers

While an SPA as a whole plays a crucial role, certain key clauses which must be focused upon are:

1. Representations and Warranties: Under this clause, the Buyer is assured about the accuracy of information pertaining to the assets, business, liabilities, ownership status, compliance, etc. To ensure adequate protection this clause must be worded in a broad and robust manner as it will act as the foundation for raising claims if any of the statements are found to be inaccurate. It must give a clear scope of warranties pertaining to tax status, undisclosed liabilities and title and should survive for a reasonable period post-closing and should have a ‘bring down' representation at the time of closing to confirm the representation are still true at the time of closing. Disclosure schedules attached with the SPA will function as evidence for due diligence conducted on the statements made under this clause. 
2. Conditions Precedent, Closing Mechanics, and Post-Closing Covenants: Condition precedents are the conditions which must be fulfilled before closing of the deal. They must adequately set out the regulatory clearances and approvals required including FEMA clearances and third-party approvals. The closing mechanism is recommended to be carried out by escrow arrangements. Post-closing covenants should cover non-compete obligations, indemnity, and the commitment to undertake business in the ordinary course between signing and closing. 
3. Indemnity, Liability Cap and Escrow: Given the elevated risk in cross-border transactions, the indemnity clause should cover loss arising out of breach of representations and warranties, hidden liabilities, and tax issues. The liability caps, time limit to raise claims, escrow arrangements and hold-back mechanisms must be adequately captured to ensure overall security of the Buyer. 
4. Governing Law, Dispute Resolution and Enforcement: For a Buyer purchasing shares in India, the choice of governing law and dispute resolution become crucial. The SPA should clearly specify whether Indian law or foreign law will govern the transaction and the avenues for dispute resolution including arbitration and litigation and enforceability of the awards. Failure to specify this information could render the Buyer helpless. 

Regulatory Pitfalls and Protections

1. FEMA and allied regulations: They play a crucial role on every cross-border transaction pertaining to transfer and issue of security and are governed by FEMA (Non-Debt Instruments) Rules, 2019. Any transfer from resident to non-resident or vice versa must be reported by filing Form FC-TRS within 60 (sixty) days from date of transfer as provided under the Reserve Bank of India Master Directions. The Buyer should also ensure that foreign investment is permitted in the sector in which the shares are to be acquired either through the automatic route or the government route and the resulting equity from such transaction does not breach the prescribed limits. The consideration value must comply with the pricing guidelines. There are limits on repatriation and restrictions on transferability of shares which must be taken into consideration. All these protections against regulatory approvals and filings must be captured in the SPA with the help of warranties, indemnity, and condition precedent. 
2. Tax Liabilities: The SPA must carve out protections against taxation liabilities for the Buyer because the tax regime is quite complex. Capital gains tax will be applicable on sale of shares which will be decided based on the period of holding of such shares. In case a non-resident is selling shares, the Buyer may have the obligation to withhold tax in India as per rates determined by the applicable Double Taxation Avoidance Agreement between India and the Buyer's jurisdiction. Therefore, protections must be captured in the SPA through warranties for tax compliance, correct treatment of past transactions, and indemnities for retrospective tax exposures along with condition precedent for obtaining tax clearances.
3. Competition Regime: In India, acquisition of assets, shares or control might trigger mandatory combination filings if thresholds are met under the Competition Act, 2002 (“Competition Act”). Any filing delay or failure may lead to penalties. Therefore, the SPA must include a condition precedent that, if required, filings under the Competition Act must be made along with indemnity for delayed filings and termination in case the transaction is not approved. 

Material Adverse Change Clause in India

An M&A deal comprises of various steps which usually leads to a gap between the signing and closing. This is a crucial phase during which the conditions for the transaction could change tremendously due to regulatory updates, currency fluctuations and even deterioration in the business of the target company. The Material Adverse Change (“MAC”) clause provides the Buyer with an opportunity to walk away from the transaction or renegotiate the terms if a ‘significant' adverse event occurs between the signing and closing of the SPA. However, MAC clauses have been challenging to enforce as the courts have held that the threshold of contract frustration or impossibility must be extremely high and mere economic difficulty cannot be a ground to enforce MAC. Therefore, the MAC clause in the SPA must be drafted with precision and clarity about the definition of material adverse change and explicitly address the exceptions. A long stop date, which is the date by which the closing must happen otherwise the Buyer may walk away, should be clearly provided. In case MAC triggers, the Buyer should have right to terminate, renegotiate, and even hold the seller liable. 

Conclusion

Buyers looking to enter into India's rapidly evolving M&A market need business acumen along with protection structured in law. An SPA will act not just as a contractual necessity but as a strategic risk-management instrument to navigate the complex legal and regulatory journey. A carefully drafted SPA will allocate risk through representations, indemnities, MAC triggers, and precise closing conditions. Every clause should assist in ensuring transparency, compliance, and enforceability where every possible risk is anticipated and addressed before it becomes a dispute.

Frequently Asked Questions

Does SPA need to be registered in India?

An SPA transferring shares does not require registration under the Indian law. Notarisation is optional but recommended. However, stamp duty must be paid in accordance with applicable state stamp laws. 

Are there any sectoral restrictions that Buyers should be aware of when negotiating an SPA in India?

Yes. Under the Foreign Direct Investment Policy of India, most sectors permit foreign investment, but certain sectors such as defence, insurance, telecom, and media have sectoral caps and require prior government approval. Buyers must verify the target's sector classification and existing foreign ownership before execution.

How are dispute resolution clauses typically structured in cross-border SPAs involving Indian entities?

Most cross-border SPAs prefer arbitration as the dispute resolution mechanism, with the seat in a neutral jurisdiction such as Singapore or London. Parties must ensure that governing law and seat of arbitration are clearly defined to avoid enforcement challenges. 



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