Why Many Anti-Dilution Clauses May Fail | Doing Business in India | Episode 31

Is the anti-dilution clause in your VC term sheet actually enforceable in an Indian down round?

In this episode of the Veyrah Law series, Ajay Joseph (Partner at Veyrah Law) breaks down why a standard anti-dilution mechanism can run into serious legal walls in India, and how to structure it so it actually works.

Indian company law does not permit shares to be issued below face value, and exchange control regulations do not permit shares to be issued to a foreign investor below fair market value. Any anti-dilution mechanism built on issuing free or nominal-value shares simply cannot be implemented. Most Indian VC structures use compulsorily convertible preference shares (CCPS), which convert into equity at a fixed ratio; if the CCPS face value only just covers the equity face value, there is no headroom to issue additional shares once that ratio is adjusted for a down round.

The episode also explains why the fair market value floor for foreign investors applies at conversion, not just issuance, so a mechanism that looks valid on paper can become impossible to implement without breaching exchange control law in a genuine down round. The episode further sets out a three-part strategy for structuring anti-dilution correctly: build sufficient face value headroom into your CCPS or CCD at issuance, obtain a properly documented fair market value certificate, and retain a veto right over any down round.

For any founder or investor relying on a standard anti-dilution clause to protect their India cap table, this episode is essential viewing on what actually works under Indian law.