ESOP

This page explains mergers, acquisitions, joint ventures and investment deals in plain terms: the law, the forum, the documents and the usual steps. Legals365 is the legal platform of Advocate B.K. Singh and associates, based in Delhi NCR.

In short. A business can be acquired by buying its shares, buying its assets or undertaking, or merging it into another company through an NCLT-sanctioned scheme under ss.230 to 232 of the Companies Act. Each needs due diligence, a negotiated agreement and, depending on size and parties, approvals from the CCI, SEBI, the RBI under FEMA, lenders and licensing authorities.

Deals look simple on a term sheet: a price, a percentage and a closing date. The work lies underneath. Who actually owns the shares and assets, which contracts and licences fall away on a change of control, what the tax and stamp duty cost will be, which regulator has to say yes, what the seller is promising and how those promises will be enforced, and how the parties will get out if the relationship fails. A deal that ignores these questions often closes on time and then spends years in arbitration.

This page explains the main ways to acquire or combine businesses in India, how due diligence works, what the transaction documents do, how mergers are approved by the NCLT or the Regional Director, when the Competition Commission and SEBI come in, how foreign buyers and investors fit under FEMA, how joint ventures are structured, how investment rounds and ESOPs are documented, and what usually goes wrong after closing. It also explains how land and property in a target are handled, and how compulsory land acquisition by the government differs from a commercial acquisition.

Law

Companies Act 2013 (ss.42, 62, 230 to 236), Competition Act 2002 (ss.5, 6, 43A), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, FEMA Non-debt Instruments Rules 2019, Indian Contract Act 1872, Indian Stamp Act and state stamp laws, income-tax law

Forums and regulators

NCLT for schemes; Regional Director for fast-track mergers; CCI for combinations above thresholds; SEBI and stock exchanges for listed companies; RBI through AD banks for foreign investment

Typical timelines

Share or asset deal: weeks to a few months; NCLT merger: commonly six months to a year or more; CCI review: 30 days for a prima facie view and up to 150 days overall

Approval thresholds

Scheme: majority in number representing three-fourths in value of members or creditors voting; fast-track merger: 90% of shareholders and nine-tenths in value of creditors

Key documents

Term sheet, NDA, due diligence report, share purchase or subscription agreement, shareholders' agreement, business transfer agreement, disclosure letter, scheme of arrangement, ESOP scheme

Common costs

Stamp duty on share transfers, conveyances and scheme orders; valuation and audit reports; regulatory filing fees; capital gains and other taxes

The main ways to acquire or combine a business

There are four basic routes. In a share purchase, the buyer acquires the shares of the company that owns the business; the company, its contracts, licences, employees and liabilities stay as they are, and only the owner changes. In an asset purchase or business transfer, the buyer takes specific assets, or the whole undertaking as a going concern (a slump sale), and leaves the company and its unwanted liabilities behind. In a merger or amalgamation, one company is absorbed into another by a scheme sanctioned by the NCLT or, for eligible companies, approved by the Regional Director. In a demerger, part of a business is split into a separate company by a similar scheme.

Investment deals and joint ventures sit alongside these. An investor subscribes to new shares and receives rights through a shareholders' agreement. A joint venture brings two businesses together, either through a new company they both own or under a contract without a new entity.

The right route depends on what is being bought, what liabilities the buyer is willing to take, how much stamp duty and tax each route costs, whether licences and contracts can be transferred, and how much time the parties have. A share deal is usually faster but carries all the target's history. An asset deal is cleaner but needs every contract, licence and property transferred one by one.

Deal structures compared

The laws that shape a deal

Term sheet, confidentiality and exclusivity

A deal usually starts with a non-disclosure agreement and a term sheet or letter of intent. The term sheet records the price or valuation, structure, key conditions, investor rights, timelines and exclusivity. Most of it is expressed as non-binding, but confidentiality, exclusivity, costs, governing law and dispute resolution are usually binding. Read the term sheet as carefully as the final agreement, because the binding parts can be enforced and the non-binding parts set expectations that are hard to move later.

Exclusivity (no-shop) periods give the buyer time for diligence, but a seller should keep them short and tied to progress. Break fees and cost reimbursement clauses are less common in Indian private deals but are sometimes agreed. Confidentiality should cover employees and advisers on both sides, and the NDA should state what happens to documents if the deal fails.

Due diligence: what a buyer or investor should check

Legal due diligence answers one question: is the business what the seller says it is, and what could go wrong after closing? It covers corporate records (incorporation, share capital history, allotments, transfers, ROC filings, charges), material contracts and their change of control and assignment clauses, licences and approvals, title to property and leases, litigation and notices, employees and labour compliance, intellectual property, data protection, foreign exchange history, and tax. A financial and tax diligence usually runs alongside.

Property is often where the surprises are. Owned property needs a title search and encumbrance check; leasehold industrial plots need the lease deed, payment status and the authority's rules. Several industrial development authorities, including those in Noida, Greater Noida and the Yamuna Expressway area, treat a change in the controlling shareholding of an allottee company as a transfer that needs their permission and attracts charges; check the lease and the authority's current policy before signing. See property due diligence and title verification.

When Advocate B.K. Singh's team runs diligence on a target, the first documents asked for are the register of members, every share allotment with its board resolution and filing, and the FEMA reporting for any foreign shareholder. Gaps in share capital history are common in family-run companies and must be fixed before the buyer can be sure it is buying good title to the shares.

How an acquisition usually runs, from term sheet to closing

1. Agree the term sheet and NDA

   Fix structure, price mechanism, key conditions and exclusivity. Identify early which approvals (CCI, SEBI, FEMA, lenders, licensing authorities) may be needed, because they drive the timeline.

2. Run due diligence

   The seller opens a data room; the buyer's advisers review documents, ask questions and meet management. The report classifies issues as deal-breakers, price adjusters, conditions precedent or indemnity items.

3. Negotiate the agreements

   Draft and negotiate the share purchase or business transfer agreement, the shareholders' agreement if the seller keeps a stake, and the disclosure letter against the warranties. Settle the indemnity caps, time limits and escrow.

4. Satisfy conditions precedent

   Obtain approvals and consents, regularise compliance gaps found in diligence, get lender no-objections and release of charges if required, and complete any internal restructuring.

5. Close

   On the closing date, the price is paid, shares are transferred or assets conveyed, resignations and appointments of directors take effect, and stamp duty is paid. Closing deliverables are checked against a list agreed in advance.

6. Complete post-closing filings

   File ROC forms for changes in directors and shareholding, FEMA reports such as FC-TRS within 60 days, notices to authorities and counterparties, and update licences, bank mandates and statutory registers.

For a merger by scheme, steps 4 to 6 are replaced by the NCLT or Regional Director process described below, which usually takes longer but transfers everything in one order.

Transaction documents and the clauses that matter

The share purchase agreement or business transfer agreement sets out what is sold, the price and any adjustment, the conditions to closing, the representations and warranties, the indemnities, and what happens if closing does not take place by the long stop date. The disclosure letter qualifies the warranties: the seller lists known issues, and the buyer cannot later claim for what was fairly disclosed. Buyers want specific indemnities for known problems found in diligence, such as a pending tax demand or a defective allotment, rather than relying on general warranties.

Price protection comes from escrow, holdbacks, deferred consideration and earn-outs. Where the seller or buyer is a non-resident, FEMA limits deferred consideration to 25% of the price for up to 18 months. Material adverse change clauses let a buyer walk away if the business deteriorates badly before closing, but they are drafted narrowly and are hard to invoke in practice.

Indemnity clauses need caps, baskets, time limits and a clear claims procedure, and the dispute clause must work. Most deals choose arbitration seated in India or abroad; see arbitration: appointment, interim relief and challenges to awards. For other commercial contracts that support the deal, such as transition services and supply agreements, see commercial contracts.

Mergers and demergers before the NCLT

A merger, amalgamation or demerger between Indian companies is done through a scheme of arrangement under ss.230 to 232. The board approves the scheme with a valuation report and, where shares are exchanged, a share exchange ratio. The companies apply to the NCLT bench having jurisdiction over their registered offices, which directs meetings of members and creditors or dispenses with them where consents are obtained by affidavit from holders of at least 90% in value. Approval needs a majority in number representing three-fourths in value of those voting.

Notice goes under s.230(5) to the Central Government through the Regional Director, the income-tax department, the ROC, the official liquidator where relevant, and the RBI, SEBI, the stock exchanges and the CCI where applicable, who have 30 days to make representations. Only shareholders holding at least 10% or creditors holding at least 5% of total outstanding debt can object to a scheme (s.230(4)). The NCLT then hears the petition and, if satisfied, sanctions the scheme. The order is filed with the ROC and the transferor company is dissolved without winding up.

The fast-track route under s.233 allows mergers between small companies, between a holding company and its wholly owned subsidiary, between start-ups, and in further classes the rules have added since 2024, to be approved by the Regional Director without an NCLT hearing, with 90% shareholder approval and creditors holding nine-tenths in value. If the ROC, official liquidator or Regional Director objects, the matter can be referred to the NCLT. For contested NCLT matters, see NCLT and NCLAT company matters.

Competition Commission approval

An acquisition, merger or amalgamation that crosses the thresholds in s.5 of the Competition Act needs prior approval from the Competition Commission of India, and cannot be closed until approved. The thresholds are based on the combined assets or turnover of the parties or their groups in India and worldwide, and since September 2024 there is also a deal value threshold of ₹2,000 crore where the target has substantial business operations in India. The thresholds and the de minimis exemption for small targets are revised by notification, so check the current figures for each deal.

The CCI must form a prima facie opinion within 30 days and decide within 150 days overall, though the clock stops when it asks for information. Many deals go through the green channel, where the parties self-certify that there is no overlap, and are deemed approved on filing. Minority investments with only ordinary investor protection rights may be exempt. For a detailed look at competition issues, see competition law and antitrust.

Acquiring a listed company

Acquisitions of listed companies follow the SEBI Takeover Regulations. Crossing 25% of the voting rights, acquiring more than 5% in a financial year while holding between 25% and 75%, or acquiring control in any form triggers a mandatory open offer to the public shareholders for at least 26% of the shares at a price worked out under the regulations. The acquirer must appoint a merchant banker, make public announcements and deposit money in escrow.

Listed company deals also bring in the SEBI insider trading rules (no dealing while in possession of unpublished price sensitive information, structured digital database, trading window closures), disclosure obligations under the listing regulations, and stock exchange approval for schemes before they go to the NCLT. A listed target's due diligence has to be run with care so that information shared with the buyer does not breach these rules.

Foreign buyers, foreign investors and FEMA

When the buyer or investor is a non-resident, FEMA applies on top of company law. The sector must be open to foreign investment at the proposed percentage, investors from countries sharing a land border with India need government approval under Press Note 3 of 2020, and the price for shares bought from residents cannot be less than fair value, while shares sold by non-residents to residents cannot be priced above it. Transfers are reported in Form FC-TRS within 60 days, and fresh allotments in FC-GPR within 30 days.

Optionality clauses in joint ventures and investment agreements, such as put options in favour of the foreign party, are valid only if there is a minimum lock-in of one year and the exit is at fair value without any assured return. Cross-border mergers under s.234 must comply with the FEMA Cross Border Merger Regulations 2018. For the foreign exchange detail, see FDI, FEMA and foreign exchange compliance.

Joint ventures: structure and the clauses that prevent deadlock

A joint venture can be contractual, where two businesses cooperate under an agreement without forming a new entity, or equity-based, where they form a JV company or LLP and hold shares or contributions in agreed proportions. Contractual JVs suit single projects and consortium bids; equity JVs suit long-term businesses that need their own licences, employees and financing.

The joint venture agreement or shareholders' agreement decides how the venture is run: board composition, reserved matters that need both partners' consent, funding obligations and what happens if a partner does not fund, transfer restrictions (lock-in, right of first refusal or offer, tag-along and drag-along), non-compete and non-solicit, IP ownership and licences, and exit. Deadlock clauses are the most important and the most neglected. Escalation to senior management, mediation, a casting vote, a buy-sell (shotgun) clause or a put and call at fair value are the common tools.

Key rights must also be written into the JV company's articles, because a company is bound by its articles, and a clause in a private agreement that is not reflected there may not be enforceable against the company. If a JV partner abuses its majority, the minority may have a remedy for oppression and mismanagement before the NCLT under s.241, alongside any arbitration under the agreement.

Investment deals: funding rounds and investor rights

Most private company fundraises are done by a private placement under s.42 or a preferential allotment under s.62(1)(c). The company passes a special resolution, obtains a registered valuer's report, issues a private placement offer letter (PAS-4) to identified investors, receives the money only through banking channels into a separate bank account, allots within 60 days of receipt (or refunds within 15 days after that), and files the return of allotment (PAS-3) within 15 days of allotment. Shares issued to foreign investors also need FEMA pricing and reporting.

Investors commonly take compulsorily convertible preference shares with anti-dilution protection, liquidation preference, board seats or observer rights, information rights, reserved matters, pre-emptive rights and exit rights. Founders give warranties and accept vesting and lock-in on their own shares. The tax charge on share premium received by unlisted companies from residents (angel tax) was abolished from the 2024-25 financial year, but valuation still matters for company law, FEMA and the investors' own tax position.

The documents for a typical round are the term sheet, the share subscription agreement, the shareholders' agreement, the restated articles, the board and shareholder resolutions, and the disclosure letter. For ROC filings around allotments, see company and LLP compliance; for setting up the investee company, see company, LLP and business registration.

ESOPs and other equity incentives

An unlisted company issues employee stock options under s.62(1)(b) and rule 12 of the Companies (Share Capital and Debentures) Rules 2014. The scheme needs a special resolution, must have a minimum vesting period of one year, and must set out eligibility, the exercise price or formula, the vesting schedule, the exercise period and what happens on leaving. Promoters and directors holding more than 10% cannot be given options, except in a DPIIT-recognised start-up for ten years from incorporation. Listed companies follow the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations 2021.

Options are taxed twice: as a salary perquisite on exercise, on the difference between fair market value and exercise price, and as capital gains when the shares are sold. Employees of eligible start-ups can defer the tax on exercise under the income-tax law until the earliest of a set period, leaving the company or sale of the shares. Since employees often cannot sell unlisted shares, the scheme should plan for liquidity through buybacks or secondary sales.

Phantom stock and stock appreciation rights give cash rewards linked to share value without issuing shares, and suit companies whose founders do not want to dilute. Whatever the form, the ESOP pool should be agreed with investors at the term sheet stage, because a pool created after a round dilutes everyone differently.

Employees, tax, stamp duty and land in deals

In a share deal employees stay with the same employer, but in an asset or business transfer they move to a new employer. The Industrial Relations Code 2020 carries forward the rule that workers on a transfer of undertaking are entitled to compensation as if retrenched unless their service is continuous, their terms are no less favourable and the new employer recognises past service. Gratuity, provident fund and leave liabilities should be dealt with expressly in the agreement; see labour and employment law.

Tax drives structure. A merger that meets the conditions of the income-tax law is tax-neutral for the companies and shareholders, a slump sale is taxed as a capital gain on the net worth of the undertaking, and a share sale is taxed in the seller's hands with withholding obligations on a buyer who pays a non-resident. Carry forward of losses after a merger or a change in shareholding is restricted. Take tax advice on the actual numbers; see income tax notices, returns and ITAT appeals.

Stamp duty on share transfers is charged at the uniform rates introduced by the 2020 amendments to the Indian Stamp Act. Conveyances of land in asset deals carry full state stamp duty on market value. Many states charge stamp duty on the order sanctioning a scheme as an instrument of transfer, particularly where immovable property passes, so schemes are often structured with that cost in mind. Mutation in revenue and municipal records must follow in every case.

Before you sign a term sheet or SPA

• Decide the structure (shares, assets, merger, JV) with a rough tax and stamp duty comparison.
• Check whether CCI, SEBI, FEMA, sectoral regulator, lender or landlord approvals are needed.
• Ask for the register of members, allotment records and ROC filings before price is fixed.
• List material contracts and licences with change of control or assignment clauses.
• Check property title and, for leasehold plots, the authority's rules on change in control.
• Agree the ESOP pool, founder vesting and investor rights at term sheet stage.
• Make sure the dispute clause works and names a seat and institution.
• Fix a realistic long stop date that allows for regulatory approvals.

Common mistakes in deals

• Agreeing price before diligence. Once a number is public, issues found later are hard to translate into price adjustments.
• Relying on general warranties for known problems. Known issues need specific indemnities or must be fixed before closing.
• Ignoring change of control clauses. Key customer contracts, bank facilities and leases can terminate on a share sale.
• Closing before CCI approval. Gun jumping attracts penalties even if the combination would have been approved.
• SHA rights not reflected in the articles. The company may not be bound by them.
• No deadlock mechanism in a 50:50 JV. A disagreement then turns into litigation or a winding-up petition.
• Assured returns to foreign investors. They breach FEMA pricing rules and can make the instrument look like debt.

Disputes after closing

Most post-closing disputes are about indemnity claims, earn-out calculations, working capital adjustments, breach of non-compete, or deadlock in a joint venture. The agreement usually sends these to arbitration, and urgent relief such as an injunction against a seller setting up a competing business, or against the transfer of shares in breach of a lock-in, can be sought from the court under s.9 of the Arbitration Act or from the tribunal under s.17.

Minority shareholders who are oppressed after a deal can petition the NCLT under ss.241 and 242, subject to the 10% or 100-member threshold, which the tribunal can waive. Where the target turns out to be insolvent, the buyer may face claims in an insolvency process, and an acquisition through an IBC resolution plan follows its own rules, including eligibility under s.29A; see insolvency under the IBC. In claims that reach Advocate B.K. Singh's office after closing, the weak point is usually the claims notice: buyers miss the contractual time limit or fail to give the detail the indemnity clause requires.

Commercial acquisitions and compulsory land acquisition

A commercial acquisition is a voluntary deal between buyer and seller. Compulsory acquisition of land by the government for a public purpose is a different process under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013, with a social impact assessment in many cases, a notification, an award of compensation by the Collector, and rehabilitation and resettlement entitlements. A landowner who does not accept the compensation can seek a reference to the Land Acquisition, Rehabilitation and Resettlement Authority, with a further appeal to the High Court. If a target's land is under acquisition, or a buyer is acquiring land that may be notified, that has to be checked in diligence and priced in.

If you want the deal papers checked before you sign, the team of Advocate B.K. Singh at Legals365 can review them and tell you the next step. Talk to a lawyer.

Frequently asked questions

What is the difference between a share purchase and an asset purchase?

In a share purchase the buyer acquires the company itself, with all its contracts, licences and liabilities. In an asset purchase the buyer takes only chosen assets or the undertaking, leaving the company and unwanted liabilities with the seller. Asset deals are cleaner but need contracts, licences and property transferred one by one.

How long does a merger take before the NCLT?

A scheme under ss.230 to 232 commonly takes six months to a year or more, depending on the bench's listing, the need for meetings and objections from regulators. A fast-track merger under s.233 for eligible companies is usually quicker because the Regional Director approves it. Regulatory objections add time in either route.

When is CCI approval needed for an acquisition?

When the parties' assets or turnover cross the thresholds in s.5 of the Competition Act, or the deal value exceeds ₹2,000 crore and the target has substantial business operations in India. Small targets may be exempt under the de minimis notification. The deal cannot close until approval.

What is due diligence in an acquisition?

It is a review of the target's legal, financial and tax position before signing: share capital history, contracts, licences, property title, litigation, employees, IP, compliance and tax. The findings shape the price, conditions precedent and indemnities. Skipping it means relying only on warranties.

What should a joint venture agreement contain?

Board composition, reserved matters, funding obligations, transfer restrictions, non-compete, IP ownership, deadlock resolution and exit routes. Key rights must also be written into the JV company's articles. A workable dispute clause is essential.

Who can be given ESOPs in a private company?

Permanent employees and directors (other than independent directors), but not promoters or directors holding more than 10% of the shares. A DPIIT-recognised start-up can give options to promoters and such directors for ten years from incorporation. The scheme needs a special resolution and a minimum one-year vesting period.

How are ESOPs taxed in India?

On exercise, the difference between fair market value and exercise price is taxed as salary. On sale, the gain is taxed as capital gains. Employees of eligible start-ups can defer the tax on exercise for a limited period under the income-tax law.

What is an open offer under SEBI takeover rules?

When an acquirer crosses 25% of a listed company's voting rights, acquires more than 5% in a year while holding 25% to 75%, or acquires control, it must offer to buy at least 26% more from public shareholders. The price follows a formula in the regulations. Money is placed in escrow.

Can a foreign investor have a put option in an Indian company?

Yes, but only with a minimum lock-in of one year, and the exit must be at fair value without any assured return. Clauses guaranteeing a fixed return breach FEMA. The option should be drafted with the pricing rules in mind.

Is stamp duty payable on a merger?

Many states charge stamp duty on the NCLT order sanctioning a scheme as an instrument of transfer, especially where immovable property passes. The rate and method depend on the state law. Share transfers attract the uniform stamp duty rates introduced in 2020.

What is a slump sale?

A slump sale is the transfer of a whole undertaking for a lump sum price without assigning values to individual assets and liabilities. It is taxed as a capital gain on the net worth of the undertaking. A company selling its undertaking needs a special resolution under s.180 of the Companies Act.

What happens to employees when a business is transferred?

In a share deal nothing changes for employees. In an asset or business transfer, workers are entitled to compensation as if retrenched unless their service continues without break, on terms no less favourable, with past service recognised by the new employer. Gratuity and PF should be dealt with in the agreement.