1

India Corporate Playbook

A Guide to M&A in India

Dec 2016

DisclaimerThis Playbook is focused on highlighting the key differences and common pitfalls in acquiring a

company in the technology industry in India and sharing key learnings and best practices in engaging in

transactions in India

This Playbook is not intended to be a comprehensive guide on M&A or meant to constitute legal advice.

Please consult a legal professional.

Executive Summary | Huge potential in India

M & A Process

Similar to other cross-border M&A,

except longer time to close, lower

deal value

Regulation

Regulatory framework aligned w/ common law; however, local

advisory support recommended

Landscape

2nd largest internet

economy ($150B 2018F), growing rapidly

3rd in global tech investment

destination list (E&Y)

Visible benefits when target is US / Singapore entity

Constant trade-off between time &

legal conservatism

2ndLARGEST INTERNET

MARKET

$13.5BVC/PE INVESTMENT

SINCE 2014

309M&A DEALS SINCE 2014

Funding, M&A numbers as of 2016Q3

Indian Startup Landscape| Strong ecosystem in India to support bustling startup activity

Robust VC/PE Investments

Unicorns in multiple sectors including e-commerce, consumer

internet, digital marketing & enterprise SW

6K2015 est

20K(2020F)

Active product startups in India

Supported by 2.5K+ VCs/angels120+ incubators

$801M

$1.02B

$4.88B

$6.25B

2012 2013 2014 2015

$2.42B

2016

Source: Signal Hill - iSPIRT Product Monitor Report (Nov 2016)Note: Funding, M&A numbers are Q1-Q3 2016 only

$13.5B invested across 729 deals since 2014

Uptick in M&A Deals However, valuations lag US

10.5x 2.0x

Avg. M&A Deal Size

M&A Landscape in India| Strong uptick in activity but valuations lag

$8.4M$80.7M

$205M$308M

$792M

$1.35B

2012

2013

2014

2015

$1.34B

2016

M&A : VC/PE Ratio

309 deals worth $3.48B since 2014

Tech & Talent deals very popular; process for team to move to the US on a visa is well understoodMarket entry less commonHigh user base but low financial traction

TYPE OF DEALS

TIME TO CLOSE40-50% longer than US acquisitionsVisible benefits when the target is a US/Singapore entity (vs. Indian entity)

VALUE OF ACQUISITIONCan expect a 30-40% discount on India-based acquisitions vs equivalent US acquisitions

Indian M&A Process | Similar to other cross-border M&As, with some key differences

Regulatory Framework | Aligned with common law, but local advisory support recommended

Common law country, like most states in the US, but far more aligned to the English legal system

Important to engage a well-versed lawyer early on in the process to manage nuances

Foreign Investment being liberalized, but continues to be regulatedLitigation in India runs in yearsClosing down companies takes time, so prefer full stock purchase

Constant tradeoff between TIME and LEVEL OF LEGAL CONSERVATISM that needs to be managed

1. Indian Technology Landscape Overview

20K product startups (2020F)

India is a hotbed for tech product startups

India-for-India Startups

B2C Consumer & Internet

Often domiciled in India/Singapore

India-for-Global startups

B2B startups with global customers

Often domiciled in US

Bangalore

Mumbai

NCR

HyderabadPune

Kolkata

Chennai

5%

40%

10%

5%13%

12%

25%

Source: Lit search, iSPIRT Product Industry Monitor

Healthy funding ecosystem in India $13.5B funds invested in Indian startups since 2014

Crunch in VC/PE Investments after strong 2014-15

Costs are lower in India, so startups raise a lower absolute amount vs equivalent rounds

in the USIncu

bators

Angel & Seed

Series A

Series B+

Investments upto $100KInvest in ideas / biz plans

Investments $100k - $1MBeta version of productMentorship, guidance

Investments $2-10M with follow-on participation

Investments $15M+ with follow-on participation

$801M

$1.02B

$4.88B

$6.25B

2012 2013 2014 2015

$2.42B

2016

147 123 176 330 223Deal Vol.

$13.5B invested across 729 deals since 2014

Strong uptick in deal value & volume since 2014 However, long-tail distribution of deals,

driven by acqui-hires and restructuring

$205M$308M

$792M

$1.35B

2012

2013

2014

2015

$1.34B

2016

309 deals since 2014 worth $3.48B

M&A Deal Value and Volume Trends

43 39 59 137 113Deal Vol.

70%volume

Small deals

(<$5M)

Large deals

(>100M)

71.5%value 2.2%

vol

2.7% vol

Beginning of M&A/IPO uptick

2-5 years to see the fruits of the 2014 & 2015 funding boom play out in M&A and

IPO activity

Early signs are positive with both 2015 & 2016 being record years for

India Technology Product M&A

Startups back-to-basics

Mature management and great execution is

required at companies which have taken in

substantial amounts of capital during the 2014 &

2015 funding boom

Current private funding environment is likely to

persist with focus on unit economics, cash burn and

path to profitability

VC/PE boom has provided strong impetus

Indian Tech Product future is bright

Recent VC/PE funding boom has filled up the

tanks of many companies and created

several unicorns

India on the map of global tech product

investors

Continued innovation and strong macro

tailwinds will further enhance India’s

attraction

2. Mechanics of an M&A: Key differences

Tech Due Diligence

Valuation/ Termsheet

Legal / Financial

DDSPA

1-8 Weeks

Tech & Talent deals popular; process for team integration well understood

Market-Entry opportunities require detailed analysis – high user, but low financial, traction

1-2 Weeks

Valuations at 30-40% discount

Common to have 45-60 days of exclusivity/ no-show in the termsheet

~2 months

Visible time benefits when target is US (Delaware C Corp) or Singapore entity

Increasingly common

1-2 months

Indian law requires ALL owners on the cap-table to physically sign the SPA agreement

1-2 Months

Team pedigree important factor

Key differences in M&A by StagesTimelines for transactions can be ~50% longer (3-5 mos)

Discovery

Discovery Deals for TECH and TALENT very popular; process well understood

Talent (Acqui-hire)

Strong mobile, back-end, systems expertise among Indian engineers

Acquired team is first integrated into Indian arm of US company, and moves to the US (if necessary) at a later stage

High number of ex-Google/Yahoo engineers as founders/CXOs

Hot areas: iOS, Android, Machine learning & Data Science

Market/Customer

Companies with sizeable India market penetration

Require detailed analysis; common to see high users but lower financial traction

India market success can be rapidly replicated in other emerging markets (Indonesia, Brazil, Africa etc)

Technology

High quality Tech & IP across multiple domains including:

● Mobile & Consumer Internet

● Big Data/Analytics● SaaS & Cloud SW● SW Infrastructure● Digital Marketing

Process for team to move to the US on a visa is well understood

iSPIRT M&A Connect Program is a good resource to help in discovery.

Pedigree important, pre-screened for by VCs

Top Engg. Colleges: IITs (all cities), BITS (Pilani), IIIT (Hyderabad), Institute of Tech (Varanasi), Vellore Institute of Tech (Vellore)

Top MBA programs: IIMs, ISB

Consider non-CS majors from T1 schoolsBe cautious of undocumented colleges

Team PedigreeIndian education strong in

back-end/systems; limited focus on UI/UX & product

management

Look out for heavy use of open-source code

Product Technology

Star engineers quickly become managers / team

leads

Common to see large teams with good engineers but

few product designers

Technical Skills OtherInterview all employees; Leadership team not always representative of 2nd tier employees

Candidates’ geographical exposure is a good indicator of cultural fit, adaptability

Tech Due DiligenceCriteria to evaluate Indian teams & product should range from source code to team pedigree

Valuation & TermsheetValuations commonly at 30-40% discount vs. US counterparts, all else equal

CashInvestor payout + Founder Payout + Employee bonus

[Paid out on Day 0]

Retention Pkg (Cash+ Stock)

Usually vested over 3-4 years, same as regular options/RSUs

Not based on Cap Table

Salary

StockUsually mirrors vesting schedule in Silicon Valley companies

Industry

Startup

Entry level $10K $6-8K

Experienced

$20-30K

$12-15K

I. Acquisition II. Employee Salary & Stock

NOTE: Strong preference in India for cash over equity: Cultural preference of stable income over uncertain future

Indian job market

High attrition in talent because of large and aggressively hiring Indian Unicorns and

global MNCs

Structure deals with emphasis on the

retention/earnout package to retain

employees

Group decision-making

Indians make decisions

communally, ‘by committee’.

Investors, BoD, etc often play a very

active role in valuations

Actively manage CEO-Investor

relationship; should be more of an

‘informing rather than advising relationship

Salary Conversations

Salary is openly discussed; expect

everyone knows what everyone else makes

in India

Have clear conversations about

job titles and hierarchy/ relevance in

the new company.

Indians are title conscious and it’s

much easier to talk salary when new hires

understand their title/level at the new

company

Valuation & TermsheetOther important comments

Other

Lower value placed on stock if acquiring

company is not public

Common to have 45-60 days of exclusivity/

no-show in the termsheet

In case of an acquihire, important

to have team member names in the

Termsheet

Lead Counsels Family-owned businessesIndemnification

Common for Investors to seek indemnification from the target co. and promoters for breach of

the SPA

Effective enforcement of indemnity remains a

challenge given the restriction on deferred

consideration

Cross-border M&A can have 2 counsels on

each side (i.e. Indian/US counsel each

for buyer/seller)

Language differences, legal nuances etc can

result in a lot of miscommunication

Identify lead counsel for the entire process

early on

Match the lead counsel with the buyer i.e. if it’s

a US buyer, the lead counsel should be US

for both buyer and seller

Inter-company or related party

transactions are common in family-owned businesses.

Although not a common structure for product startups, worth being

aware that these require additional

scrutiny

Tax Clearance CertificateFinancial Diligence

Startup companies often are not most organized in record

keeping; expect delay in financial diligence

Takes away risk of ownership of shares.

Usually done for property deals in India,

not share deals, but becoming increasingly

common to avoid liability on the shares

Takes 2-3 weeks

Legal & Financial DD

Specific assets of company (eg. Tech/IP, team etc)Acquihire: common to acquire team, license IP perpetually, & shut down product

Share Purchase AgreementShare Purchase Asset Purchase

All shares of startup

Shell company remains which owns non-acquired assetsEventually shuts down

Ceases to exist

Need to analyze the tax efficiency of transferring assets piecemeal v. slump sale

Min. 2 members/ stockholders

required

WATCHOUT: Shutting down a company in India is time consuming and slow; hence, most startups prefer a full stock purchase

IT - Income Tax; CA - Chartered Accountants; HNWI - High Net Worth Individuals

Acquirer buys

Differences from US

Startups of Startup

Transfer of Funds● Shares transferred to the acquirer only post

the receipt of funds in the Indian bank● Funds will come in tranches but in India can’t

pay partial shares – have to buy in one shot shareholder’s bank to RBI; only then transfer shares

Relocation of team● L1 visas are commonly used to ‘move’ a

team to the US post acquisition● Employees need to meet the “One year in

last 3 years” rule for eligibility● Asset purchases reset the L1 visa clock: ie

employee will need to be at the acquirer for 1 year post-acquisition for L1 eligibility. hence, share purchase is strongly recommended

SPA Key Terms

Share Purchase Agreements

Contract forms are similar to UK style documents

Holdbacks and Escrows

Once money has been transferred into India, it cannot be repatriated back without lots of paperwork. This is an issue with Escrow

Representations and Warranties

Usual for Investors to seek extensive representations and warranties from the target co. and promotersBreach of representations and warranties can be treated as a ground for rescission of contract

General Covenants

List of covenants are relatively shorter than those found in US form contractsEnforceability of certain covenants (e.g. – non-compete restrictions on Promoters) is uncertain though but it is commonplace to include them for deterrent effect.

Conditions Precedent (CO)

List of CPs are similar to those found in US form contracts

ESOPs Employee stock option scheme of a company must be approved by shareholders by passing a special resolution (i.e. <75% consent)ESOPs are not transferable and must have a min. vesting period of 1 year. Unvested ESOPs must compulsorily vest upon death or permanent incapacitation of employee.Prohibited Recipients: (i) promoters (ii) independent directors (iii) directors with more than 10% shareholdingAn Indian company may provide ESOPs to its own employees and to employees or its JV or WOS abroad*. Pricing of shares issued under such ESOPs is separately regulated by the exchange control laws.

Liquidation preferences

Separate ‘liquidation preference’ into 2 strands: one what happens in case of winding up under Indian Company Law (‘liquidation’) and the other in case of an exit event (‘liquidity’)

WATCHOUT: Multiple documents at various stages will need to be physically signed by potentially geographically-dispersed investors

RECOMMENDATION: Allow for time to get signatures. Ensure shares are dematerialized (not in physical format) or ask to have them converted

3. Indian Statutory and Regulatory Framework

Cultural differencesCommunal decision-making (with family members, investors etc.).

Non-punctual culture often can result in delays; be explicit and open about timelines, disclosures etc

Grooming, personal appearances low priority

Cultural sensitivitiesFamily (immediate, extended, in-laws) is important, decisions made given their consent

Religion/spirituality is very important to the older generation

Men and women tend to socialize independently

Large English speaking marketEnglish commonly spoken,

almost everyone is multilingual

Technical talent is abundant, relatively inexpensive;

Large middle class huge internal

market for Indian startups

Unreliable infrastructureWeak, unreliable infrastructure

(electricity, roads) cause delays; budget extra time

Internet connectivity can be poorTest bandwidth before day of

conversation, schedule calls around times of reduced bandwidth demands

(early am, late pm)

India landscape| Huge opportunity but must account for key differences

WEF’s Global Competitiveness Index - 39th position out of 138 nations

Biggest leap in ranking for any country in 2015

Developing market – regulators playing ‘catch up’ like in most countries, especially with disruptive business models

Government and regulators committed to facilitating innovation and disruption - Startup India Action Plan, Niti Ayog, RBI’s Payment Bank LicencesCommon law country with rule of law like the US – Contract law principles same as in the US– Nationality blind enforcement by Judiciary

Like in most countries, must know ‘how to do business’ in India for India strategy to be effective

Doing Business in India|Huge opportunity but must account for key differences

Key Legal Frameworks & Differences vs. US

Companies Act, 2013

Regulates the way a company is structured and sets out the rules regarding ownership

Uniform law across all statesProhibition on issuing convertible notes

Foreign Exchange Regulations

Regulates the rules regarding payments in, and repatriation of, foreign currencies, which is very regulatedForeign investment into India is primarily regulated by (i) industrial policy (ii) regulations issued by RBI (iii) FEMA (iv) FDI Policy

In & out-flow of foreign exchange not as heavily regulated

Competitions Act, 2002

Provisions relating to anticompetitive agreements and abuse of dominant position

Similar to US- prohibition on horizontal, vertical combinations, dominant use of position

Income Tax Act, 1961

Tax compliance requirements for an Indian company Similar to US - Indian companies taxable in India on their worldwide income

Employment Laws

Legal framework that governs and Indian employer’s relationship with it’s employees

The construct of employment at will is not recognized

IP Laws Legal protection available to IP created in India, incl. copyright, patent, trademark, design, trade secret

Software programs are not patentable in India’ protection is available by way of copyright

Other Stamp Duty - all agreements must be stampedDispute Resolution - In-court litigation can run into several yearsClosing down a Pvt. Ltd. Co. - Time consuming and expensive

No equivalent duty in USDisputes resolved more easilyNot difficult at all

Key call outs vs . US

India Companies Act, 2013

Ownership & Mgmt

Ownership represented by shares:Equity share: ~common stockPreference shares: preferential right for dividend and redemption but reduced voting rights

Board of DirectorsManage day to day affairs; one resident director in India mandatory (182 days/year)

Directors fall under the purview of “officer in default” - liable for contravention of the provisions of law even if did not even participate in the concerned meetings of the Board

Access to capital

Access to capital is regulated

Convertible notes cannot be used as a mode of investment under the extant RBI regulations.

Companies are not allowed to secure loans or collect deposits from any person other than an institutional lender, who is not a director or a shareholder

Venture debt in India is currently regulated under the stringent regime applicable to non-banking financial companies.

Structure

Typically organized as “Private Limited Companies” due to ease of operation and fewer disclosure requirements

Other business entity structures:Sole Proprietorship: No business registration requiredPartnerships: Regulated under Partnership ActLtd. Liability Partnership: Hybrid between a LLCo. and Partnership

Step-down Subsidiary: A company cannot have more than two layers of subsidiary entities that engage solely in investment activities

New Companies Act to tighten regulatory framework post certain corporate scandals (Satyam etc) – is work in progress

List of Company DocumentsAmendments:Alteration to the Memorandum requires a prior approval from either the Govt. or Company Law Board depending upon which clause requires alteration

Articles may be altered by a special resolution passed by the members of the company

Watchouts: Stringent compliance requirements particularly in relation to registers, record keeping and filings including penal sanctions for some non-compliances

Memorandum of AssociationProvides the characteristics (name, division of shares etc) and objects (activities) of the Company; the company cannot engage in business that falls outside the scope of these objectsMust be filed with the Registrar of Companies

Articles of AssociationProvides for the manner in which the Company is managed

Register of Members (CapTable)Lists the current shareholders of the Company

Register of loans, guarantee, securityShows the debt owed by a Company

Register of related parties contractsList the contracts with related parties and entities in which directors are interested

Register of directors & key managerial personnelProvides a list of the persons in charge of the overall operation of the company

Foreign Exchange Regulations: FEMA

Investment RoutesA non-resident entity (NR) can acquire shares of an Indian company through (a) a primary issue (b) a secondary sale of shares by a resident, NR or NRI shareholder. NR can also acquire ownership interests in LLPs for which separate guidelines are set out.Non-cash consideration such as share swap are also permitted.

ApprovalsGenerally, transfer of shares from R to NR and NR to NR, is permitted without prior approval from RBI for all sectors where automatic FDI is allowed.Compulsory RBI approval for (i) transfer of shares by way of gift; (ii) transfer of shares from NRI to NR.In some sectors such as multi-brand retail and defence, specific foreign investment restrictions and pre-approvals apply; FDI in e-commerce is prohibited [See slide on FDI for further details]

PricingShare transfer to NR is subject to pricing guidelines, that must be complied with.

ReportingThe primary obligation of reporting transfer of shares to NR is on the investee company or the transferee resident in India. The investor is required to submit its KYC details.Indian entities have to file FCTRS/other documents during an M&A process for foreign exchange compliance

SELECT DOCUMENTSKYC: Know-Your-Customer information to be sent from banks

FIRC: For foreign funds to Indian accounts – each person needs a certificate from bank with purpose specified - eg. purchase of equity

FC-TRS: Declaration regarding transfer of shares; to be filed by banks after original FIRC filed by each

FEMA: Foreign Exchange Management Act 199, NR: Non-resident entity, NRI: Non-resident Indian, R: Resident entity, RBI: Reserve Bank of India, KYC: Know Your Customer; FIRC: Foreign Inward Remittance Certificate, a document that acts as a testimonial for all the inward remittances entering India

Foreign Exchange Regulations: FEMA

INDEMNITY PAYMENTSSimilar to deferred consideration, payment of indemnity amounts in relation to M&A transactions between residents and non-residents is not permitted without the prior approval of the RBI

REPATRIATIONRemittance of sale proceeds of securities by a NR seller is permitted (i) when securities are held on repatriation basis (ii) sale is made in accordance with prescribed guidelines and (iii) NOC is obtained from Income Tax dept.However, repatriation of foreign exchange from India requires a lot of paperwork!

EscrowCreation of non-interest-bearing escrow accounts for the purposes of keeping shares or purchase or subscription money/consideration in an escrow is allowed for a maximum period of 6 months (vs. 3 years in global M&A escrow arrangements)Additionally, the funds in the escrow account may not be used by the bank-escrow agent for providing any form of financing to a third party, nor for providing any non-fund based facilities such as letters of credits or guarantees against the balances in the escrow account

Deferred ConsiderationFEMA does not permit payment of ‘deferred consideration’ by foreign investors/acquirers (staggered payments structured usually as ‘earn-outs’ based on milestones achieved) unless RBI approval is obtainedForeign acquirers are forced to stagger their acquisition over a period of a few years

Price of each tranche to be determined in accordance with the existing pricing guidelines at the time of completion of the relevant trancheIn cases of a staggered acquisition by a foreign investor / acquirer, seller promoters have, typically, insisted on a floor price or a base valuation for the next tranche of the acquisition to shield them from factors that could affect the valuation of their shares

Foreign Exchange Regulations: FDIIndian Commerce Ministry’s directives about foreign ownership of Indian companyAUTOMATIC ROUTE

The “software product” sector falls under the automatic route for purpose of FDI.

Foreign investment is prohibited in e-commerce but permitted in marketplace-models that facilitate e-commerce

KEY INDIAN STAKEHOLDERS

● Dept. of Industrial Policy & Promotion (DIPP)

● Foreign Investment Promotion Board (FIPB)

Entry Routes and Sectoral caps for FDI

Automatic Route - Government approval is not required for certain sectors for FDI upto 100%. Foreign investors in such activities only need to adhere to certain post-FDI reporting requirements to RBI.

● 100% FDI allowed in ‘marketplace’ models – B2C or B2B● FDI not permitted in inventory-based e-commerce models

Approval Route - Approval of Government is required and proposals are considered by FIPB

Sectoral Caps - FDI in a company is permitted up till the sector-specific percentage of the total capital

● Extent of FDI depend on activity engaged● In most activities, FDI permitted upto 100% - includes most tech

startups● Prohibited Sectors – Lottery, Gambling, Chit funds, Trading in

Transferable Development Rights, Real Estate Business etc

Competition Act, 2002 regulates:

● Anti-competitive Agreements

○ Horizontal Agreements(eg. cartels)

○ Vertical Agreements (eg. tie-in/bundling agreements)

● Abuse of Dominant Position

○ Eg. predatory pricing, denying market access, limiting or restricting production of goods

● Combinations○ Mergers & Acquisitions○ Amalgamations

Competitions Act, 2002

* Ref: Section 5 & 6 of the Competition Act, 2002

Combination Regulations, 2011

All ‘Combinations’ falling within certain thresholds*, require prior approval of the Competition Commission of India (CCI)

Acquisition of Control / Merger and Amalgamation Competition Commission is required to be notified within 30 days of (a) the execution of any agreement or other binding document for acquiring control, shares, voting rights or assets; or (b) in the case of a merger and amalgamation, the board of directors’ approval of the proposed merger or amalgamation

Public Financial Institution, Foreign Institutional Investor, Bank or Venture Capital Fund Whilst merger control provisions under the Competition Act do not apply to investments, financing facilities or any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, the Competition Commission is, nevertheless, required to be notified of details of the transaction within 7 days from the date of the investment, financing or acquisition

Transactions found to have an “appreciable adverse effect” on competition in India will be rendered void in accordance with the Combination Regulations

Income Tax Act, 1961

Income Tax● Indian companies are taxable in India on their worldwide

income, irrespective of source and origin● Before any share transaction, must get IT clearance,

without which, govt can ‘void’ the transaction; HNWIs also need clearance

● Recently, the Government has mandated that barring a few exceptions, private limited companies must now include premium they receive from resident investors who subscribe to their shares as ‘Income from Other Sources,’ and pay tax on such investment at the applicable rates.

Tax Treaties: Agreements for Avoidance of Double Taxation signed by India with various countries provide a favourable alternative mode for determining taxable business profits; the treaties also provide specifically the mode of taxability of incomes in the nature of dividends, interest, royalty and fees for technical services

WATCHOUT!

Situation: US Acquirer X buys Indian Startup Y and begins to use Y’s IP as it’s own

Watchout: Acquirer will have to pay Indian taxes on the Indian IP being used

Recommendation: Value the IP from a merchant banker (eg. Morgan Stanley, EY, PWC), sell the IP to the US Acquirer X, pay taxes on the sale to the Indian govt. and then use the IP wherever

Excise Duty

Customs

Duty

Sales Tax

Central Excise Rules, 1944

Requires all manufacturers of

excisable goods to register

themselves. Registration valid

for as long as production activity

continues; no renewals needed.

Customs Act, 1962 & Customs Tariff Act, 1975

Tax levied on all goods which are

freely importable.

Central or the State Sales Tax

Acts

Tax levied on sale of a commodity (not services or

exports) which is manufactured or

imported, and sold for the first

time.

Service Tax

GST

Finance Act

Tax levied by Central

Government of India on certain

“covered services” that is collected from the service

recipient

Proposed

Comprehensive single national-

level tax on goods and services

Other Taxes

Employment Laws Indian Contracts ActLays down the general principles relating to the formation and enforceability of contracts.

Agreements in restraint of trade are void Agreements restraining an employee from carrying on the activities similar to that of his/her employer upon the termination of such employment would be void and unenforceable, as opposed to agreements that impose a restraint during the course of employment

Concessions for tech focusSpecial concessions offered by various state governments to IT-enabled enterprises and employers situated in special economic zones (SEZs), tech parks etc

Employers have to follow certain

procedures / restrictions before separating

employees

Separate terms for female workers

No non-discrimination / diversity laws

No “Employment at will”

E.g. prohibition of work during night hours, protection against

sexual harassment etc.

No specific laws that enforce diversity, non-harassment and non-

discrimination.

OverviewCentral legislations govern employer-employee relationships. However each state has the power to make changes to the same in so far as it concerns employees in their state.

Broadly, key labour legislations in India can be grouped under select Acts including Indian Contracts Act, Factories Act, Industrial Disputes Act, Payment of Gratuities Act, Indian Contracts Act, State laws

Primary employment benefits are Provident Fund (PF) (payable after 20 employees threshold) and gratuity (applicable after 10+ employees). These are structured as defined contribution schemes.

Other key points:

Act Description Duration Registration

The Copyright Act, 1957

Protects specific creative expression of an idea (eg: articles, sketches, code).Recognizes and protects computer programs, tables and compilations including computer databases as ‘literary works’ under the Copyright Act. Employer is first owner of copyright of the work created by an employee or contractor during course of employment or term of service unless decided otherwise by the parties. (S.17 of the Copyright Act, 1957)

Term of protection extends to 60 years

OPTIONAL (to prove time and identity of author) – copyright vests in the author automatically upon creation

The Trademarks Act, 1999

Protects any symbol, word or slogan indicating origin of goods/ services or distinguishing it from another good/service

Distinctive marks/ slogans have 10 years trademark protection subject to renewal, which may go on indefinitely.

REQUIRED by filing trademark application in order to obtain trademark rights

The Patents Act, 1970

Protects functional expression of an idea (eg: machine, method/process, business strategy)Provides protection for computer- implemented inventions; however, prohibits patentability of “computer programs per se”

Novel, nonobvious and useful ideas have patent protection for 20 years in India, if they are patentable under Indian law

REQUIRED

Trade Secrets

No legislation – Agreements under Section 27, Indian Contract Act, 1956Protects any information (usually technical), that is secret and is of economic value and advantageous to the business because of its secrecy (eg: business strategy, algorithm)

No registration for trade secrets in India; Protection through confidentiality agreements

Intellectual Property Laws|Indian IP laws are largely TRIPS compliant

Other

Dispute Resolution

● Federal court system similar to US that allows multiple appeals

● In-court litigation is time consuming and can run into several years

● Arbitration and Mediation are effective alternate resolution mechanisms that afford secrecy and provide greater procedural control to the disputing parties

● Arbitral/Mediation awards are open to review by the courts in certain circumstances

Closing Down a Private Co.

● Time consuming, expensive and difficult process

● By shareholders’ consent

● Involves seeking approval from various government departments

Stamp Duty[No equivalent In US]

● A government levy that is charged on instruments executed in India or that are brought to India for enforcement

● Determined by a central law (Indian Stamp Act) but most states have specific rules which override the central law

● Charged on all written instruments (including electronic records), contracts etc.

● Non-payment makes a document unenforceable

● Non-payment or underpayment may be a rectifiable defect, subject to discretionary approval of the relevant regulator and payment of penalties

● Note: SPAs, SHAs, Employment and IP assignment agreements must be stamped

This document has been prepared by iSPIRT in consultation with several partners including Mani Chengappa and Mathur (‘MCM’), Nishith Desai Associates for discussion purposes only. The information contained in this document is intended for information purposes only. They are derived from public and private sources which we believe to be reliable and accurate but which, without further investigation cannot be warranted as to their accuracy, completeness or correctness. This information does not in any manner constitute, and should not be construed to be, legal advice or a legal opinion. Note that any information you provide during the course of this presentation will not be subject to legal privilege. This information is supplied on the condition that iSPIRT, MCM and any partner, employee or affiliate are not liable for any error or inaccuracy contained herein, whether negligently caused or otherwise, or for loss or damage suffered by any person due to such error, omission or inaccuracy as a result of such a supply. iSPIRT, MCM and its affiliates are also not liable for any loss or damage howsoever caused by relying on the information provided in this document.

For any legal advice you require, please seek advice from a qualified lawyer in the relevant jurisdiction.

M. Thiyagarajan (Rajan)Fellow, M&A Connect, iSPIRTrajan@ispirt.in

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iSPIRT Foundation is an industry think-tank founded by key participants and proponents of the Indian software product industry. iSPIRT enables a strong ecosystem, connects and guides software product entrepreneurs and helps catalyse business growth. It encourages buyers to improve performance by leveraging software products effectively. iSPIRT advises policymakers on interventions that can set the industry on a higher growth trajectory.

Mani Chengappa & Mathur is a Bangalore-based boutique law firm that is driven by the belief that information technology is the profoundest change agent of our times. Our lawyers specialize in advising domestic and international businesses of all sizes on technology and outsourcing transactions, early stage capital, corporate, privacy and data protection, employment law, intellectual property protection and commercialisation, and dispute resolution. With years of experience advising stakeholders ranging from the board of directors and executive management through corporate development, sales, human resources, research and development to the CIO organisation, we make legal advice accessible and useable.