ABSTRACT
Private equity investors in India use contractual safeguards to reduce the risk of losing their money especially when investors own only a share of a company. These safeguards include liquidation preferences, anti‑dilution rights, veto rights for decisions the right to appoint directors and exit rights such as put options and drag‑along rights. Even though these rights come from agreements the company’s directors must still follow the legal duties set out in the Companies Act 2013. The main issue is where an investor’s contractual rights end and a director’s legal responsibilities begin. Indian law has set rules for enforcing investor rights. These rules require looking at the company’s articles of association foreign investment rules under FEMA and other company law requirements. However, the role of a nominee director remains a concern. A nominee director is chosen to represent the investor’s interests. The nominee director must also carry out the duties that all directors owe under Section 166 of the Companies Act 2013. This can lead to conflicts especially when the investor’s interests do not match the company’s interests. The problem gets worse when a company is in trouble. Investor veto rights can then slow decisions and raise questions about possible liability under the Insolvency and Bankruptcy Code 2016. Indian cases, like the Tata–Mistry litigation along with approaches from Delaware and the United Kingdom can show possible solutions. These solutions include rules on conflicts that involve nominee directors, better alignment between shareholders’ agreements and the articles of association, procedures that let directors’ step back from conflicted decisions safeguards that control access to confidential information and clearer drafting of investor veto rights and exceptions when a company is, in distress.
Keywords: Private equity, downside protections, nominee directors, directors’ duties, shareholders’ agreement, investor veto rights, liquidation preference, board conflicts, Insolvency and Bankruptcy Code, FEMA.
- INTRODUCTION
Private equity is now a way for Indian businesses to get growth capital. Of buying a whole company, a fund usually takes a small part of the company using equity shares or mandatory convertible preference shares or convertible debentures. Then the fund puts money into a business that is managed by the people who started it hoping that the business will grow. Foreign investors need to follow Indias rules about money moving out of the country including the Foreign Exchange Management (Non-debt Instruments) Rules from 2019 as amended. Investment funds from within the country that collect money from people can work as Alternative Investment Funds, called AIFs under the SEBI (Alternative Investment Funds) Regulations, from 2012 as amended. Recent data highlights the scale of this market. Bain & Company’s India Private Equity Report 2026 estimates that India’s PE-VC investments fell by about 17% to US$36 billion in 2025, although deal volume increased by around 10%. [1] Also, the EY-IVCA report recorded US$20.5 billion in PE-VC investments across 604 deals in the first half of 2026, a 36% fall in investment value compared with the first half of 2025.[2] These figures show why the private equity market remains important to Indian businesses and why its legal framework deserves careful study.
A minority investor writes a large cheque but holds little day-to-day control. That mismatch explains why investors negotiate so hard. Before investing they run due diligence, and after investing they rely on contracts: liquidation preferences for the downside, anti-dilution protection against later cheap issues, veto rights over important decisions, board seats, and exit rights such as put options and drag-along clauses.[3]These terms are not peculiar to India. Empirical work on venture capital contracts shows the same pattern of staged financing, control rights and exit protections across markets.
[1]Bain & Co. & Indian Venture & Alternate Cap. Ass’n, India Private Equity Report 2026 (2026).
[2]EY & Indian Venture & Alternate Cap. Ass’n, PE/VC Investments in India Reach US$20.5 Billion Across 604 Deals in 1H2026 (July 31, 2026).
[3] Steven N Kaplan and Per Strömberg, ‘Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts’ (2003) 70 Review of Economic Studies 281.