Private Equity

Introduction

This webinar gave foreign investors and their advisors an overview of a typical private equity deal cycle in India—from entry frameworks and structuring through regulatory approvals, due diligence, documentation, minority investor rights and exit routes.

The session was moderated by Kapish Mandhyan, Partner, Corporate & Commercial Practice Group, and led by Aashutosh Sampat, Partner, Corporate & Commercial Practice Group.

Set out below is a summary of the key points discussed during the webinar. The views expressed are those of the individual panel members and not those of Khaitan & Co, and are subject to the disclaimer set out in the webinar recording.

The recording can be viewed here: Private Equity | Investing in India

The India PE Opportunity

India offers a structural growth story that is hard to replicate in other major economies. With GDP growth of 7.6% in FY 2025–26, a population of 1.4 billion and a median age of 29, it combines scale, a demographic dividend and consumption-driven growth, making it an increasingly important allocation for global institutional investors.

India’s private capital market has grown significantly. According to the EY-IVCA 2026 Trend Book, PE/VC investments reached USD 60.7 billion across 1,475 transactions in 2025, with exits of USD 32.9 billion—reflecting both deep capital deployment and maturing exit markets.

Entry Framework – Foreign Direct Investment (FDI)

FDI into India is permitted through two routes:

• Automatic route: no prior government approval is required; and
• Government approval route: prior approval is required before investment.

India has progressively liberalised its FDI regime and now permits up to 100% FDI under the automatic route in most sectors, although certain sectors remain restricted or conditional:

• Prohibited sectors: e.g., gambling and lotteries;
• Sectors with caps and/or conditions: e.g., multi-brand retail (capped at 51% with conditions).

Press Note 3 (PN3)

Prior government approval is required for any FDI where (a) the investing entity is from, or (b) its beneficial owner is situated in or is a citizen of, a country sharing a land border with India, even in sectors otherwise under the automatic route. This regime, introduced by Press Note 3 in 2020, was recalibrated by Press Note 2 of 2026.

For PE funds, PN3 requires a look-through analysis of GP/investment manager control and LP ownership to identify any beneficial ownership nexus with a land-bordering country—adding complexity, particularly for global funds with diverse LP bases.

Pricing

Investments by non-residents in India must be made at not less than fair market value, and exits by non-residents to Indian residents must be at not more than fair market value.

Deferred Consideration

Deferred consideration is permitted subject to two conditions: (a) the deferred component must not exceed 25% of the total purchase consideration; and (b) it must be paid within 18 months of execution of the definitive transaction documents.

Entry Framework – Foreign Venture Capital Investor (FVCI)

Alternatively, investors may register as an FVCI with the Securities and Exchange Board of India (SEBI). Registration can be time-consuming but offers significant advantages in specified sectors.

The FVCI route is limited to specified sectors, including information technology, biotechnology, nanotechnology, infrastructure and other sectors notified by the Government from time to time.

The key advantages of the FVCI route are:

• Pricing flexibility: FVCI investments are exempt from FEMA pricing guidelines, providing greater flexibility in negotiating entry and exit valuations;
• No pre-IPO lock-in: FVCIs are exempt from the SEBI ICDR lock-in requirements, allowing earlier post-IPO exits; and
• QIB status: FVCIs qualify as Qualified Institutional Buyers, enabling participation in anchor investor allocations and book-built IPOs.

How Are Investments Structured

PE investments into Indian companies are typically made through one or more of the following instruments:

• Plain equity shares: the simplest form, providing proportionate economic and governance rights.
• Compulsorily convertible preference shares (CCPS): these allow preferred economics and are convertible into equity shares at a future date.
• Compulsorily convertible debentures (CCDs): these are quasi-debt instruments that provide greater flexibility in structuring returns and are mandatorily convertible into equity.
• Warrants: these allow staged participation, locking in a price at entry while deferring capital commitment.

Instrument choice is driven by tax, jurisdiction choice for exit efficiency, and the need to balance entry and exit economics under both exchange-control and tax frameworks. Recent Indian judicial precedents emphasise commercial substance, so form-over-substance arrangements may be scrutinised.

Regulatory Approvals

Depending on the sector, deal size and the target’s business, PE transactions in India may trigger regulatory approval requirements.

Competition Commission of India (CCI)

Acquisitions that meet certain notification thresholds must be notified to the CCI prior to closing.

PE investors must also consider portfolio overlaps—the CCI will examine whether any of the acquirer’s portfolio companies operate in the same or adjacent markets as the target.

Foreign Exchange Approvals

Certain sectors require prior Government approval for FDI, including brownfield investments in pharmaceutical companies above 74% and any investment requiring PN3 clearance. These approvals are processed through the relevant administrative ministry.

Sector-Specific Approvals

Investments in regulated industries may require approvals from sector-specific regulators. For example:

• RBI: for certain financial services companies (NBFCs, HFCs, payment companies);
• IRDAI: for insurance companies; and

Fit-and-proper tests and track record requirements: applicable in financial services and insurance, requiring the incoming investor to demonstrate financial strength, governance standards, and a clean regulatory record.

Listed Company Acquisitions

Where the target is a listed company, the acquisition of more than 25% of the shares or voting rights, or the acquisition of control, triggers a mandatory open offer obligation under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This has significant implications for deal structuring and pricing.

Diligence – What PE Investors Should Focus On

The guiding principle is “diligence should follow value”: calibrate diligence depth to the areas driving target value and risk. Key areas include:

• Capital structure — verify equity, CCPS, CCD and warrant instruments.
• Approvals and licences — verify required central, state and local permissions.
• Litigation — conduct manual searches where court records are unevenly digitised.
• Land title — confirm ownership and encumbrances for asset-heavy businesses.
• Related-party and promoter dependence — identify dependencies affecting premises, people, IP, procurement or distribution.
• Key contracts — assess customer or vendor concentration and change-of-control provisions.
• Labour — review compliance with applicable central and state requirements.
• Compliance and corruption controls — assess anti-bribery policies and internal controls.

Negotiating the Investment – Allocating Risk

The allocation of risk between buyer and seller is at the heart of PE transaction negotiation. Drawing on data from the Fourth Edition of Khaitan & Co’s “What’s Market in Indian Private Equity Deals”, the webinar addressed the key areas of risk allocation.

Price Adjustment Mechanisms

Indian PE deals typically adopt one of two price adjustment approaches:

• Closing accounts: the purchase price is adjusted post-closing based on a completion accounts exercise. This is the market standard for most PE deals.
• Locked box: the price is fixed by reference to a historical balance sheet date, with leakage protections. This mechanism is more commonly used in auction/competitive processes.

Warranties and Indemnity

The market is moving increasingly toward warranty and indemnity (“W&I”) insurance, particularly in deals involving PE sellers, where the exiting sponsor may be unwilling to provide long-tail indemnity coverage.

Disclosure Standards

A notable feature of the Indian market is that data room disclosure is not typically treated as standard general disclosure against warranties—unlike the position in the UK and US. According to market data, only approximately 10% of Indian PE deals have data room contents as constituting general disclosure.

Deal Certainty and Material Adverse Change (MAC)

MAC clauses are common. Negotiation typically centres on the breadth of carve-outs: broader carve-outs (excluding market-wide events, regulatory changes, pandemics, etc.) narrow the buyer’s ability to walk away.

Minority Rights

Where a PE investor acquires a minority stake, the protection of value and governance participation depends critically on the rights negotiated in the shareholders’ agreement. Some such rights include:

• Board nomination and quorum — permit proportional board representation and require the investor nominee’s presence for a valid meeting.
• Reserved matters — require investor consent for key matters, such as major acquisitions or disposals, new securities, significant debt, related-party transactions and material business changes.
• Anti-dilution —protection for down-round issuances.
• Liquidation preference — gives priority to the investor’s.
• ROFO / ROFR — give the investor the first opportunity to acquire shares offered for sale.
• Tag-along — permits participation in case of a sale by promoter.

Exit

Exit planning should begin at investment, with multiple credible routes because timing and returns cannot be guaranteed. Principal routes include:

• Initial public offering (IPO) may provide a full or partial exit; SEBI ICDR pre-IPO lock-in requirements apply except for FVCIs.
• Secondary sale transfers the investor’s stake to another financial or strategic buyer.
• Strategic sale / sale of 100% allows the PE investor and promoter to sell together to a buyer seeking control.
• Drag-along rights allow the investor to require the promoter’s participation, subject to negotiated safeguards.
• Put option rights are subject to a minimum one-year holding period and fair-market-value pricing, as Indian law does not permit an assured return on equity.

Conclusion

Key takeaways from the webinar include the following:

• Get the entry framework right: understand the automatic and approval routes, PN3 and FVCI options, and pricing requirements.
• Diligence what drives value: focus diligence on the licences, IP, contracts, land or promoter dependencies that underpin value.
• Allocate risk upfront: use conditions precedent, price adjustments, warranties, indemnities, escrow and W&I insurance appropriately.
• Protect value without overreaching: calibrate minority rights to protect value without inadvertently triggering regulatory control.
• Plan the exit from day one: build multiple exit routes into the transaction documents.

The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up, please contact Khaitan & Co at editors@khaitanco.com.