Private Equity Investor rights: Except in the case of 100% buyouts, private equity investors usually construct their

controlling interest in the company through contractual arrangements with the promoter. This is usually built through a shareholders agreement creating a pooling arrangement between the parties. Clauses relating to Investors rights and protection: Liquidity preference- On occurrence of a liquidity event, investors get preference in any of the following agreed manner: capital protection, double dip, receive the higher of the amount of capital invested with a return at an agreed rate or their pro-rata entitlement based on their shareholding Anti-Dilution Protection- For the investors who are investing in companys equity: it protects them from any dilution of their investment at the time of further investment by other investees or further issue of shares by the company at a higher price than the price at which the shares were issued to the investors. Right to maintain capital ratio- a right to maintain pattern and percentage in the share capital if the company comes with a new issue Drag-Along Rights- A right to drag along the other shareholders when investors initiate a sale of their shares in the company and are generally exercisable when the company and its management do not give the investor a viable exit option Tag-Along Rights- A right that enables the investor to participate in a sale of shares by the majority shareholder on the same terms as available for the majority Right of first refusal a right that provides to the investor a right to first refuse any shares that the promoter/founders of the company wish to transfer on the same terms as are agreed to between the promoters and any third party buyer. A typical situation in which investors evoke this right is when the company is looking for next round of funding (Controversial as hampers the free transferability of shares and in violation of section 111A) Strategic Sale rights/ Put option- An option to the investor to sell its shares, the performance of which is to be done in future on happening of certain event. All such contracts are governed by SCRA. Information rights- a right to allow the investor to inspect the books and records of the company as and when required and to be provided with periodical financial statements from time to time. Exit Right- It is seen in every PE agreement. Depending on case to case basis, the exit right may be availed in any of the following event as agreed upon between the parties:

 listing of the securities, Sale of securities held by the investors Commitment of company to buy-back the securities held by the investor, Commitment by the promoters/other majority shareholders to buy-back the securities held by the investor negotiating put option on the promoters/majority shareholders if other exits are not provided In the case of listed companies, the transfers may be completed by way of an on-market transaction through a sale on the floor of the exchange, or to an identified buyer through the block trade window (subject to the relevant conditions being satisfied) Maintenance of voting stake To ensure that voting stake is not disturbed by issue of capital, or by issue of any other contingent capital instrument Maintenance of control in Board and General Meetings Some Investors seek Board representation without any more rights. Some Investors like to see a balanced board structure having either an independent director or a representation of the investor on the Board Power to restrict the Board- In respect of: (a)Sale of substantial properties of the company, (b)Borrowing money exceeding the net worth, etc., (c) Loans to directors, related parties in case of public companies (sec 295) (d)Contracts in which directors are interested, applicable both to public and private companies (sec 297), (e) Inter-corporate loans and investments (sec 372A), (f)Provisions related to Company governance, (g) Dispute resolution and arbitration clause and (h)Managerial remuneration (subject to CG sanction) Clauses relating to Operations: (a) voting in elections of the directors of the board of directors, filling of vacancies on the board of directors and compensation of directors; (b) Provisions relating to quorum, notice of meetings, length of notice of meetings, circular resolutions, appointment of alternate directors, veto rights etc. (c) appointment and compensation of officers; (d) Particular responsibilities working shareholders/directors will fulfil, authorization for execution of contracts and other documents binding the corporation; (e) Changing the corporations business and/or investment policy; (f) circumstances in which the approval of shareholders will be required and the degree of approval required (e.g. unanimous or majority approval), such circumstances include: (i) declaration and payment of dividends, (ii) issuance of shares by the corporation or the redemption or purchase by the corporation of issued shares,

(iii) borrowing, (iv) making amendments to Articles or by-laws of the corporation, (v) providing financial assistance to shareholders or related parties, and (vi) making of business decisions outside the normal course of business such as the making of significant capital expenditures, commencing a new business or disposing all or substantially all of the corporations assets; and (g) matters relating to operation and financing of the corporation, including: (i) books and records of the corporation, (ii) accountants of the corporation, (iii) banking arrangements, (iv) obligations of shareholders to provide funds to the corporation, and (v) provision of bank guarantees by shareholders for corporate borrowings. (h)Business plan needs to be agreed upon. (i)Budget approvals in the beginning of the quarter (j) Any deviation from plans/ budgets need approval (k)Provisions relating to hiring and firing senior executives and large acquisitions or divestments Repatriation of the sale proceeds is generally freely permitted, though in certain circumstances, the RBI's approval might be required.

Overriding effect of Articles of Association (AOA): In case of any conflict between the AOA and the PE Agreement, the former will always prevail Hence, in order to bind the company with the restrictive clauses of PE Agreement, the articles must be amended or drafted with reference to the PE Agreement May also be registered in terms of section 192 by registering the agreement with ROC in e-form 23 Note: There is still some doubt as to whether transfer restrictions such as the right of first refusal and rights to tag/drag are enforceable with respect to shares of public companies in light of Section 111A of the Companies Act 1956, which mandates that shares of a public company must be freely transferable. The enforceability of put/call options of shares of a listed company is also not free from doubt owing to a notification from the SEBI in March 2000 stating that, except for certain kinds of spot delivery contracts, contracts for the sale of securities would be void.