Share Subscription Agreement

Once a term sheet is signed and due diligence is done, the deal has to be written up in documents that actually bind. Together these are the definitive agreements, and when the AIF is putting fresh money into a company in exchange for newly issued shares, the principal one is the Share Subscription Agreement.

It is signed between the AIF and the investee company. The workbook describes it as "the main transaction document that is executed in equity financing or investments wherein a new issue of shares by the company is required". Its purpose is to detail the terms on which the AIF invests and to give the AIF "rights superior to those of an ordinary investor under the Companies Act as may be required".

Because only the company signs it, it binds only the company. That gap is what the Shareholders' Agreement exists to fill.

What goes into it. Beyond the price and the securities, the workbook lists provisions on:

• reconstitution of the board by appointment of the AIF's nominees, and vacation of office by existing directors where required;
• other key appointments, including the appointment of a managing director for a renewed term under new terms;
• the procedural steps needed to implement all of the above;
• anything else determined by the term sheet.

Its companion document — the Disclosure Letter. Issued by the investee company to the AIF, it formally qualifies the absolute representations and warranties in the SSA by listing specific exceptions, such as existing litigation or pending tax disputes. Once a fact is disclosed there, the AIF is deemed to have notice and generally cannot later claim a breach of warranty or seek indemnification for it. The workbook calls it a "risk-shifting mechanism" that moves the burden of disclosed liabilities from the promoters to the AIF — which is why it can lead to valuation adjustments or specific indemnities before money goes in.

Where it sits in the sequence.

1. Term sheet executed — due diligence does not commence until it is.
2. Due diligence review (business, financial and legal).
3. Re-negotiation where needed; the final term sheet "becomes the basis for legal documentation".
4. Definitive agreements: SSA (with its Disclosure Letter) and Shareholders' Agreement.
5. The company's articles of association are amended to incorporate the new shareholders' agreement provisions so that they are enforceable.

When it merges with the SHA. Where the promoter owns all the shares or controls the other shareholders, a combined share subscription agreement incorporating the shareholders' agreement provisions may be used.

Illustrative figures. Tapi Growth Fund, a Category II AIF, agrees a term sheet to invest Rs 90 crore in Rann Foods Pvt Ltd for newly issued compulsorily convertible preference shares.

Financial due diligence turns up a disputed GST demand of Rs 6 crore and a pending trademark suit.

The SSA is drafted between the AIF and Rann Foods. It records the subscription, gives the fund two nominee directors, provides for one existing director to vacate office, and reappoints the founder as managing director on revised terms. The warranties say, absolutely, that there is no pending tax dispute and no IP litigation.

Rann Foods then issues its Disclosure Letter, listing the Rs 6 crore GST demand and the trademark suit. From that moment the fund is on notice of both. If the GST demand crystallises in full after closing, the fund cannot claim a warranty breach for it.

So before signing, the fund's counsel negotiates a specific indemnity from the promoters for the GST demand, and the price is trimmed to reflect the trademark risk. Because Rann Foods has three other shareholders who have not signed the SSA, a separate Shareholders' Agreement is also executed, and the articles are amended so that the fund's board and consent rights are enforceable.

Chapter 7 (Investment Process and Governance of Funds) covers the SSA at 7.3 as the first of the definitive agreements, together with the Disclosure Letter and the Shareholders' Agreement, after the term sheet at 7.1.4 and due diligence at 7.2. A sample question at the end of the chapter asks which document is a "definitive agreement" for an AIF investment. Expect questions on the parties (AIF and investee company), its purpose, what the Disclosure Letter does to warranty claims, and why a separate SHA is needed.

• The SSA is between the AIF and the investee company — not between the AIF and its own investors. The investor-facing document is the contribution agreement, which Chapter 9 also calls the subscription (investor contribution) agreement.
• Watch the word "subscription". In the Chapter 7 sample question listing a PPM, a subscription agreement, articles of association and a trust deed, only the subscription agreement is a definitive agreement for an AIF investment — read in that context as the share subscription agreement with the investee company.
• The SSA binds only the company. Obligations on existing shareholders need the Shareholders' Agreement — unless a combined agreement is used because the promoter holds all the shares or controls the others.
• Disclosure shifts risk to the AIF. Once disclosed in the Disclosure Letter, an item generally cannot found a warranty or indemnity claim, unless a specific indemnity is negotiated.
• Due diligence starts only after the term sheet is executed, and the final term sheet — not the first draft — is the basis of the legal documents.
• The articles must be amended for shareholders' agreement provisions to be enforceable against the company.