Private equity investors in India will have more power to enforce contracts with promoters using specific clauses outlined in legislation known as the Companies Bill, released by the government this month.
Previously, there was some ambiguity in relation to the enforceability of contracts between two or more persons with regards to the transfer of shares in India, according to a statement from local law firm Amarchand Mangaldas. However, investor rights have now clearly been defined, with contracts deemed enforceable and thus “removing the ambiguity”.
“Effectively what that means is that the shareholder agreement is going to be a valid agreement and that is in itself quite a big [difference],” said Sanjeev Krishan, head of private equity at PricewaterhouseCoopers India.
The companies bill includes provisions that would allow private equity firms certain protections as minority shareholders, such as reserving their right to sell their stake along with the majority shareholder.
“There is also this very interesting concept of entrenchment in the articles. What it is saying is that private equity investors can actually insist that certain specific articles in the constitution of the company be changed only to [what the PE firm sees as] positive effect. So the
Just by the way the wording and provisions are in the bill, I think it should give more confidence to private equity investors about investing in India
company would need the consent of the private equity firm – that is something that is going to empower private equity,” he added.
However, Krishan adds that GPs are looking for further clarity on certain procedures and definitions that relate to private equity investors.
For example, the ‘tag along’, which allows minority shareholders to sell a stake alongside the majority shareholder; and the ‘drag along’ provision, which says majority shareholders can force a minority shareholder to sell, still require more clarification from the government.
Moreover, despite entrenching the validity of shareholder agreements in India, the bill may not always help the country’s difficult dispute resolution process.
“Dispute resolution is a very subjective matter because it is about people so it is always going to be a challenge. If [someone’s] main objective is to delay a [dispute outcome], then they may continue to act in a certain way. Having said that, just by the way the wording and provisions are in the bill, I think it should give more confidence to private equity investors about investing in India,” Krishan believes.