The FEMA Problem With Liquidation Preferences | Doing Business in India | Episode 32

Liquidation preference is perhaps the single most important financial protection for a venture capital investor. But in India, it is considerably harder to enforce than most investors realise.

In this episode of the Veyrah Law series, Ajay Joseph (Partner at Veyrah Law) breaks down why a standard 1x non-participating liquidation preference runs into two fundamental legal problems under Indian law, and what investors should do instead.

Indian exchange control law does not permit guaranteed or assured returns for foreign equity investors. A structure that guarantees return of capital regardless of outcome looks more like debt than equity. Separately, foreign investors cannot receive a price above fair market value; which is often exactly the constraint that becomes fatal in a distress scenario.

This episode breaks down how liquidation preference can be made to work in practice in India: hold on to the clause in the term sheet as a bargaining chip and deterrent, build in the right to readjust the conversion price of CCPS or CCD instruments with sufficient headroom at issuance, and in a real enforcement scenario, convert and take control rather than pursuing a cash claim through years of litigation.

For any foreign investor relying on a liquidation preference to protect their India investment, this episode is essential viewing on what actually holds up under Indian law.