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Mechanics of exit


The manner in which an investor can invoke the exit process depends on the triggering event.


In case of a failure to IPO by an outer date specified under the agreement, typically SHAs permit investors to serve a notice to exit the company informing the company that they wish to invoke their right to exit under the SHA and the exit method they propose. Often, investors have the freedom to choose any or all the applicable exit methods.


In case of occurrence of an event of default, the company usually has an opportunity to remedy the consequences of any breach once it is notified of the breach by the investor within a specified ‘cure period’ (say, 90 days). Failure to remedy the breach within the cure period will allow the investor to invoke exit rights.


Usually, an investor can invoke either any one or multiple exit mechanisms simultaneously. Investors may exercise any of their exit rights partially, to sell off their shares successively in phases (with each phase called a ‘tranche’).


What about requirement of obtaining regulatory approvals (if any)? Who has the responsibility to obtain such approvals? For example, if exit by an investor from a company operating in the financial services sector requires FIPB or RBI approval, who has the responsibility to obtain it?


As per typical wording of the clauses in an SHA, if any regulatory approvals are required for the exit, founders are required to co-operate with the investor in obtaining such approvals.


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