Cross-Border Indian M&A Indemnities Have FEMA Limits | Doing Business in India | Episode 34

Negotiate a 75% indemnity cap in an Indian deal and you may still only be able to recover 25% of it. In this episode of the Veyrah Law series, Ajay Joseph (Partner) explains why India's exchange control framework, not the transaction document, sets the real limits on cross-border M&A indemnities. Indian deals typically build an elaborate indemnity architecture: unlimited exposure on fundamental warranties such as title and authority to transact, caps of 25% to 75% of deal value on general warranties, and a further layer of de minimis thresholds, baskets and survival periods borrowed largely from international practice.

Under India's exchange control law, four hard restrictions apply to every share transfer between a resident and a non-resident: the price paid to an Indian seller cannot be below fair market value, any holdback from the consideration cannot exceed 25%, that holdback cannot be retained for more than 18 months from the transfer agreement, and the final indemnity payout is capped at 25% of consideration for 18 months where entire payment is made upfront.

For a foreign investor exiting to an Indian buyer, the fair market value rule flips into a ceiling rather than a floor. Very few Indian deals are actually structured to these limits, which leaves the carefully negotiated indemnity clause exposed the moment someone tries to enforce it.

This episode sets out how both buyers and sellers can build indemnity protection that actually survives enforcement, from pricing risk into the purchase price and using the escrow window correctly, to warranty and indemnity insurance, deferred consideration structures, and disciplined disclosure on the sell side.