INDIA Law and Practice Contributed by: Lalit Kumar, JSA Advocates and Solicitors
• requirement of regulatory approval; • presence of existing investors in the com - pany; • the transaction structure, including tax aspects; and • the way negotiations are conducted. Having said that, venture capital transactions are mostly fast-paced, and all parties expect the work to close quickly, and funding is completed. Typically, it could be around three to four months to complete a transaction. The investment is made by executing certain standard agreements which govern the relation - ship of parties/investors. Typically, the agree - ments are: • share subscription agreement (for primary investment); • share sale and purchase agreement (for sec - ondary investment); and • shareholders’ agreement (governing rights, obligations and governance matters among the parties) (together referred to as “transac- tion documents” ). Generally, investors get the following rights: • board seat/observer seat; • quorum right; • pre-emptive right; • anti-dilution right; • tag-along and drag-along rights; • right of first offer (ROFO)/right of first refusal (ROFR) with respect to share transfers; • affirmative voting rights; • lock-in and transfer restrictions on the found - ers of the investee company; • information and inspection rights; • non-compete obligations on the founders;
• no more favourable terms to be offered to other investors; • exit/liquidation rights; and • termination on breach of an agreement. When there are large numbers of investors in an investment, while some rights are given to all investors – such as information and inspection rights, ROFO/ROFR, pre-emptive rights, anti- dilution rights – there are a few rights that can exercised by investors collectively. For example, drag-along rights could be agreed to be exer - cised when at least two-thirds agree to drag. The transaction documents are well negotiated and at times could take days and several rounds of discussions/negotiation between the parties. Generally, each party to a transaction has its own counsel and adviser. Sometimes, when there is more than one investor, they engage the same counsel and adviser as the interests sought to Besides equity shares, most VC funding is through compulsorily convertible preference shares (CCPS). In some transactions, compul - sorily convertible debentures are seen but the most accepted instrument for investment is CCPS. CCPS are preference shares until con - version and, since the feature is of compulso - ry conversion, CCPS are never redeemed but compulsorily converted into equity shares within the maximum statutory conversion period of 20 years. Preference shares have priority over com - mon stock in the payment of dividend and in the liquidation of companies. Although they have preference in the payment of dividend, in most VC deals the coupon rate is very minimal. There - fore, from this point of view, CCPS are not dif - ferent from common stock. Rather, CCPS offer be protected are the same. 3.3 Investment Structure
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