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VI.Representations, warranties and indemnities
In the Introduction to Raising Investments, there was some discussion on the different stages and mechanics of an investment transaction, such as conditions precedent, completion actions, representations and warranties, indemnities and insurance. We will now explore representations and warranties in greater detail – although they may appear to be boilerplate provisions on first look, these are very heavily negotiated.

Representations and warranties must be provided by the investee and its promoters. The exact nature of these may vary depending on the transaction and the sector in which the company operates. For example, a software company operating from a small office will have to give minimal warranties, as compared to a company with manufacturing plant, offices in several locations and a huge employee headcount. The warranties may also depend on the issues or ‘action points’ indicated in the due diligence conducted by the investor’s legal advisors on the investee.

A representation or a warranty basically is a statement of fact on the affairs of the company which is expressed to be true (usually at a particular point in time). For example, a warranty from the company and promoters could state that the company is duly organized and has obtained all authorizations to enter into an investment transaction. It could also state that as of the date of signing the shareholders agreement, there are no pending legal claims against the company exceeding an amount of INR 100,000. As per the shareholders agreement, such warranties are ‘repeated’ by the company and promoters – that is, they are stated on the date of signing and expressed to be true on the date of ‘closing’. This is because there is usually a significant gap between signing and closing (which could even span a few months for some transactions). It is possible for circumstances to change from what they were as on the date of signing. Therefore, representations and warranties are repeated as on the date of closing. 

Warranties may be qualified by a disclosure schedule, which essentially carves out exceptions for each representation or warranty. This may especially be the case in a transaction where extremely limited or no diligence is undertaken by the investor.

It is important to understand the consequences of breach of warranties. In case of breach of warranty, the company (or promoters) may be required to ‘indemnify’ the company to the tune of any loss suffered by the investor. In practical scenarios, indemnity clauses are largely provided for comfort – indemnity claims are infrequently made by investors and payment of indemnity to foreigners requires approval of the RBI under exchange control regulations.

Exit rights may also be triggered in case of breach of warranties (for further details, refer to the chapter on Exit Rights).



Negotiation points related to warranties and indemnities
  1. Founders can include a ‘knowledge qualifier’ to warranties – for example, a warranty stating that ‘there is no pending litigation against the company’ would be altered to state that there is no pending litigation ‘there is no pending litigation against the company to the best knowledge of the promoters’.
  2. Investors impose an obligation on the company as well as on the founders to indemnify them in the event of a breach of warranty. This imposes an obligation on founders to personally indemnify the investor, which can impose a risk on the personal assets of the founders. Since the investment is being made for the benefit of the company, founders should be able to restrict the indemnity to be applicable to the company only (and not the promoters).
  3. Indemnity payments to foreigners require the approval of the RBI, as per the Foreign Exchange Management Act.  


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