PE VC Essentials: Understanding a Share Subscription Agreement

June 30, 2025 - By Nakshatra Gujrati

In PE/VC investing, the term sheet signals interest, but it’s the Share Subscription Agreement (SSA) that crystallizes a transaction. The SSA marks the transition from intent to a legally enforceable commitment, especially under Indian law.

Why the Share Subscription Agreement Matters?

The SSA is the first binding contract between the investor and the company. Once signed, it triggers:

Companies Act, 2013 obligations under Section 42 (private placement) and Section 62(1)(c) (preferential allotment), involving PAS‑4 offer letters and Form PAS‑3 reports.
FEMA (NDI) Rules, 2019 compliance for foreign investments—including pricing checks and FC‑GPR filings.

In IDFC Ltd. v. SEBI (SAT, 2012), the SAT held that private subscription agreements must comply with placement norms—no exceptions for “private” deals

Key Clauses in Share Subscription Agreements

Clause	Commentary
Subscription & Payment Terms	Specifies the class, number, and price of shares, and payment schedule. In cross-border deals, strict adherence to FEMA (NDI) Rules, 2019 pricing guidelines and timely filing of Form FC‑GPR is essential. Under Sections 42 and 62 of the Companies Act, incorrect pricing or filing lapses risk penalties and invalidation of allotment
Conditions Precedent (CPs)	Lists conditions—such as board/shareholder approvals, regulatory filings, IP assignments, and due diligence—required before closing. These are legally binding, and failure to satisfy them allows investors to terminate or delay the transaction .
Tranche Structure	When funding is tied to milestones, ambiguity in definitions can cause disputes and stalled investments. Each milestone should be clearly defined and measurable to ensure enforceability .
Representations & Warranties	Legal assertions by the company (and often promoters) about business, compliance, contracts, IP, etc. Courts regard these as enforceable obligations—breach can trigger indemnity—but require careful drafting, survival periods, and caps .
Indemnity	Investors’ protection against losses from breach of reps or CPs. Indian courts uphold indemnity clauses when reasonable in scope and duration, provided they do not violate public policy .
Use of Proceeds	Clearly tracks investor’s expectations on fund deployment, offering protection against misuse under Indian contract principles. Though not expressly mandated by law, it provides recourse in case of misuse .
Anti‑Dilution & Pro‑Rata Rights	Ensures investors can maintain stake through down‑round protection and future issuance rights. These must align with the Companies Act and be consistent with provisions in the Articles of Association (AoA) .
ROFR / ROFO / Tag‑Along / Drag‑Along	Governs share transfer rights. Per precedent like VB Rangaraj, these rights must be incorporated into the AoA to be binding on all shareholders .
Put & Call Options	Investor options to propose share sales back to the company or founder. Must carefully define pricing mechanisms and timelines. Courts (e.g., Banyan Tree v. Axion Cordages) uphold clear put/call rights .
Founder Lock‑In / Vesting	Ensures founders’ early commitment through vesting schedules or escrow. Legally enforceable via call options or escrow trust, subject to clear documentation .
Confidentiality & Exclusivity	Prevent founders from seeking rival funding or sharing sensitive data during SSA period. Courts have enforced such clauses even when inserted in non-binding agreements .
Board & Observer Rights	Investor lands board seat(s) per Section 161 of the Companies Act and nominates director(s) with fiduciary duties under Section 166. Observers have access but no voting power .
Dispute Resolution & Governing Law	Arbitration under the Arbitration & Conciliation Act, 1996 is enforceable—especially with clear seat and rules. Courts uphold international seats when clearly stated (e.g., GMR v. Doosan) .
Termination & Default Events	Defines when either party can step back—e.g., unfulfilled CPs or material breaches. To be valid, terms must be fair and not arbitrary per Sec 23 of the Contract Act .