Disclosure Letter

A Share Subscription Agreement makes big, absolute promises. The company says, in effect, 'there is no pending litigation' or 'there is no tax dispute.' Real companies are rarely that clean.

The Disclosure Letter is where the company admits the exceptions. It lists the specific facts — an ongoing lawsuit, a tax demand — that qualify those absolute promises. Once something is written in this letter, the AIF is treated as having been told. The AIF generally cannot later say it was misled about that one fact.

This is why the workbook calls it a risk-shifting mechanism. Before the letter, an undisclosed risk sits with the promoters. After disclosure, that same risk sits with the AIF — unless the AIF specifically negotiates protection for it before signing.

Who issues it, and to whom. The investee company issues the Disclosure Letter to the AIF, as a qualifying document to the Share Subscription Agreement (SSA).

What it does. It formally qualifies the absolute representations and warranties (R&Ws) in the SSA, by listing specific exceptions — for example, existing litigation or a pending tax dispute.

The legal effect of disclosure. Once a fact is formally disclosed in the letter, the AIF is deemed to have 'notice' of it. The AIF generally cannot later claim a breach of warranty, or seek indemnification, for that specific disclosed item.

What an AIF does in response. Because disclosure shifts the risk, an AIF that finds a serious item in the Disclosure Letter typically responds before signing — by negotiating a valuation adjustment, or a specific indemnity clause covering just that risk, rather than relying on the general warranties.

Tapi Growth Fund agrees to invest Rs 90 crore in Rann Foods Pvt Ltd. The draft SSA contains an absolute warranty that there is no pending tax dispute and no intellectual-property litigation.

Rann Foods then issues its Disclosure Letter, listing a Rs 6 crore disputed GST demand and a pending trademark suit. From that moment, Tapi Growth Fund is deemed to have notice of both.

If the GST demand later crystallises in full, Tapi cannot claim a breach of warranty for it — the fact was disclosed before signing. So, before closing, Tapi's counsel negotiates a specific indemnity from the promoters for the GST demand, and the agreed price is trimmed by an amount reflecting the trademark risk.

Chapter 7 (Investment Process and Governance of Funds), section 7.3 (Definitive Agreements), introduces the Disclosure Letter as a document issued by the investee company to the AIF alongside the Share Subscription Agreement. Expect a question on what the Disclosure Letter does to a warranty claim, or on which party issues it to which.

• The Disclosure Letter does not remove a risk — it moves it. Once disclosed, the risk sits with the AIF, not the promoters, unless the AIF specifically negotiates otherwise.
• It is issued by the company, to the AIF — not the other way round, and not between the AIF and its own investors.
• It qualifies the SSA's warranties; it does not replace them. The warranties stay absolute for everything that is not listed as an exception.
• A specific indemnity is a separate negotiation, not automatic. Disclosure alone does not compensate the AIF — it only stops a later warranty claim on that fact.