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private equity firms india: PE funds opting for a locked-box mechanism for high-value transactions


Private equity firms in India are increasingly adopting the “locked box” mechanism, particularly in high-value purchases, to protect the value within the businesses they are targeting while negotiations are ongoing.

Under this mechanism, both the fund and the target company agree on the final purchase price using the target’s most recent audited financial statements, and there are no post-completion adjustments.

This mechanism helps investors safeguard the value of the target company during the period between the locked box date and the date of completion of the deal, by including an obligation in the share purchase agreement for the seller to indemnify the buyer for any undue leakage or extraction of value from the business that takes place during the locked box period.

According to a recent study by law firm Khaitan & Co, one-fifth (about 18%) of the deals it advised on in the last 18 months had a “locked-box” clause.

“Just four-to-five years ago, such mechanisms were not routinely seen among Indian PE deals,” said Haigreve Khaitan, a senior partner at Khaitan & Co. “We have seen this in transactions involving credible companies and promoters, and even investee companies are appreciating this since it brings more certainty for them.”

The study is based on 175 PE and VC transactions that the firm has advised on during the last 18 months. About 14% of these transactions were for a majority stake and the rest for minority stake dilutions. While more than 22% of the deals were valued at over $1 billion each, 29% were under $100 million.

“Just five or seven years ago, such a study would have thrown completely different results, but now from ‘locked box’ to terms such as non-compete and non-solicit are negotiated with more details,” said Aakash Choubey, a partner at Khaitan & Co. “Also, the investors are now increasingly seeking specific warranties and indemnity coverage for ABAC (anti-bribery and anti-corruption) and AML (anti-money laundering), which was not the case a few years ago.”As per a report based on the study, sectors including energy, renewables, technology, automotive & auto components, healthcare, financial services and real estate witnessed most of the deals. Other sectors with a high volume of deals included industrial goods, retail, media, and telecom.


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