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This article is written by Adv Gaurav Prakash, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from


Whenever a company wants to expand its capital, it does so by either borrowing funds from a bank or by borrowing it from an Angel investor or by issuing shares of its company to the proposed investors.

The investors of the company who wants to invest in the company can become the shareholders of the company on shares being issued by the company to the shareholders. This is one of the most common ways through which the company enhances the capital of its company. The consideration for the purchase of the shares goes to the company and in return, the investor has the stake in the company and is therefore interested in its growth. Strategic investors will make the benefit of their expertise and network available to the company post such purchase. As the shareholder of a company one will be liable to get dividends only when a company is able to make a profit that year. In other scenarios like debentures or borrowing of funds from banks or Non- banking institutions irrespective of whether a company has incurred a profit or loss, the Company is liable to pay the interest to debenture holders. 

When a company raises its capital through issuing shares then the company generally enters into the Shareholders Agreement and Share Subscription Agreement with the investors of the company. Whenever a company wants to raise its capital by selling the stake of the present promoters of the company, then, in that case, the company enters into a Share Purchase agreement.

Shareholders Agreement

Shareholders Agreement- Shareholders Agreement is the agreement which is drafted between the company and the shareholders. It can be drafted between a particular section of the shareholder and the company or every shareholder of the company. The shareholder’s agreement details the rights and obligations of the shareholders, regulating the sale of shares, protecting the shareholders (especially, minority shareholders) and the company, how the company’s important decisions are to be taken and how it is going to operate. The appointment of directors and quorum requirements, determining the matters requiring special resolution or providing veto rights to certain shareholders, financial needs of the company, restrictions on the right to transfer shares freely, defining the obligation of each of the shareholders towards the company.

The agreement talks about the right of minority shareholders. It determines the shareholders’ right responsibilities, privileges, and protections. A shareholders agreement is not mandatory in the Indian law but it is binding in nature as it is a contractual agreement. Minority shareholders are those shareholders who have less than 50% stake in the company. Most of the time majority stakeholders in the company are the founders & promoters of the Company. The crucial and vital decisions of the company are taken by them only. In such scenarios, it is very important that the minority shareholders of the company have a shield that protects their interests. He will demand that the Shareholders agreement contains clauses that ensure that the money that a shareholder invests in a company is not siphoned off for any other purpose. 

The following elements must be taken into consideration before making an SHA-

  1. Commercial Intent- The commercial intent of the investor i.e. shareholders and the investee i.e. the Company differs. The investor is interested in getting a return on its investment and for the smooth functioning of the company so that an investor can yield a high return on his investment. The investee is interested in getting funds from the investors and to work without the major interference of the shareholders.
  2. Terms of the Deal- The Shareholder agreement should contain what type of security the shareholder is allotted with. Whether it is an equity share, preference share, a debenture, or even a hybrid share. These must be defined in the Shareholders Agreement.
  3. Representation, Warranties, and Indemnity- The investee should give representation and warranties to the investor that they will use the funds for the operation of the Company.

Anti-dilution rights

Anti-dilution rights provide for an adjustment in the investor’s shareholding if new shares are issued to a third party at a lower valuation than the valuation at which the investor had invested. They are only triggered when the company’s valuation has reduced in a subsequent round of funding called a down-round. Let us understand this with an example. Consider a company that has a total of 500 issued shares of the face value of Rs.10. Of the 500 shares, an investor subscribed to 100 shares at Rs.60 per share, thus valuing the company shares as 500x 60 = Rs 30,000.

In case a new investor intends to invest, the company can issue shares to him at the same or a higher valuation -subject to the consent from the existing investor for the issue of fresh shares, and for any waiver of their pre-emption rights. However, what will happen, if say a new investor to 100 shares at Rs40? In that case, the company valuation will go down to Rs 600×40=RS24,000. The new investor had invested at a much higher valuation and hence will remain in a position of economic stability. In such a situation fresh securities should be issued to him such that his subscription price for the company’s share adjusts back to Rs 40 (from the much higher price of Rs 60 that he paid.)
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Share Purchase Agreement 

Share Purchase Agreement is an agreement that is drafted between the purchaser and buyer of the share. It is drafted when one of the shareholders of the company wants to sell his equity to another shareholder and wants to exit the company. The buyer can be an individual and even a company. The Share Purchase Agreement is drafted into the following cases:

  • Either existing promoters will sell the shares.
  • Or new investors will purchase shares from existing shares to give them an exit.

The major difference between a Share purchase agreement and a share subscription agreement is that in a Share purchase agreement the consideration is credited into the account of the seller of the share (who is generally an investor or promoter of the company) who wants to sell his stake in the company. Whereas in the case of Share subscription agreement the consideration paid by the buyer of the shares is credited in the account of the Company as the company issues additional shares at a predetermined price. A Share Purchase Agreement is a faster method to acquire the stake in the company as compared to the Share Subscription Agreement. The share Purchase agreement also does not lead to the dilution of the stake of the existing shareholders of the company. Before this agreement is given effect, it is very important that the outgoing partner has got the written consent of the company or the outgoing. 

The following elements must be taken into consideration before making a SPA-

  1. Parties- In the Share Purchase agreement, parties that are involved in the transaction should be clearly stated in the name clause. The buyer of the shares generally has the duty to conduct Due- diligence of the seller as well as the company whose shares he/she is buying. The buyer should make sure that the company in which he is investing is not a shell company and that company has a future.
  2. Indemnity- The acquirer should be provided with indemnity in case the company has not concealed information regarding any litigation process against the company or the company was functioning without any license and it led to the winding up of the company.
  3. Resolution of dispute and arbitration – Arbitration is not so popular in India but as the supreme court ruled that if both parties are Indian then they can choose to have a seat in India and if one party is an outsider then they may have a seat outside India. This clause should be explicit on the procedural law, the seat of arbitration language, number of arbitrators.
  4. Execution and Effective Date- The execution date is the date when the agreement is signed between two parties and the effective date is the date at which from which such an agreement becomes enforceable. For example, on 25th July 2020the agreement can be executed between the party, but this agreement will come in effect on the fulfilment of certain conditions of the agreement.

Share Subscription Agreement

Share Subscription Agreement is an agreement that is entered into between the company and the subscriber of the new shares issued by the company. When a company wants to issue new shares of the company, they go for a shares subscription agreement. The most important point which we must consider when talking about the Share Subscription Agreement is that when a company issues new shares it can lead to the dilution of the stake of the shares already held by the shareholders.

Whenever a company seeks additional investment through equity, they have two ways: either they sell their stake to an investor or they issue new shares to the investors. When a Company issues new shares the consideration of that shares goes into the account of the company whereas when any founder sells his/her share the consideration of that shares goes into the account of the founder. Share Subscription agreement is drafted by the company when a company wants to issue new shares of the company. It is done when a company wants to diversify its business or wants to enhance the scale of its business. It is executed when the company wants to issue new shares rather than the founders selling their shares. A share subscription agreement acts as a promise by the company issuing shares to the investor that it is going to issue a certain number of shares to an investor at a certain price. 

The following elements must be taken into consideration before making an SSA-

  1. Conditions precedent- Now whenever a company is ready to issue shares to subscribers, it always goes for due-diligence, same goes for the investor, the investors (or the subscribers in this case) want that where they are investing that company is having the ability to return a profit. So, after extensive due-diligence from both sides, some conditions are laid down by both the parties to make this arrangement alive and functional. The company must have got the approval of the SEBI for issuing shares.
  2. Representation and warranties- This clause is considered to be the most important clause as a saviour clause because this clause gives the guarantee and protection that saves both the company and investor from any potential fraud. It gives a company certain warranty that the subscriber is not entering into this agreement with the knowledge that has not been publicly disclosed (we are referring here insider trading), the subscriber has received all the relevant documents of the companies. In the same, it gives certain guarantees to the investor that the company in which they are investing is not a bogus company and is incorporated under the companies act 2013.
  3. Share issue and subscription- This clause apprises the subscriber about the number of shares that a company is issuing and out of that how much shares are issued to him. It also tells him about the percentage of stake which the subscriber will be entitled to.
  4. Confidentiality- Every company has a strict non-disclosure and confidentiality clause in their share subscription agreement, as every terms and condition discussed with the subscribers at the time of allotment with the subscribers have some trade secrets about the company and a company always has these apprehensions of the possibility that many investors with the sole motive of getting away with trade secrets may enter into a share subscription agreement.


From the above paragraph, it can be concluded that each agreement entered between shareholders and the company is entered into to protect the interest of investor as well as the company. In order to have legal validity of all these agreements, it is always advisable that all these agreements should be stamped and notarized.

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