Share Subscription Agreement: Definition, Key Clauses, and Template

Key takeaways

• A share subscription agreement (SSA) is a legally binding contract between a company and an investor for the issuance of new shares at an agreed price. An SSA involves fresh equity issuance that increases total share capital. In contrast, a share purchase agreement transfers existing shares between parties without creating new equity.
• Key clauses in an SSA include subscription details (share class, price, and tranche structure), conditions precedent, representations and warranties, covenants, a closing mechanism, and indemnity provisions. Each clause allocates specific rights or obligations between the company and the investor.
• Share issuance under an SSA must comply with both section 42 and section 62(1)(c) of the Companies Act, 2013. Under section 42 of the Companies Act, 2013, the company must allot shares within 60 days of receiving subscription money and file form PAS-3 (return of allotment) with the RoC within 15 days of allotment.
• If the investor is a non-resident, the SSA must also satisfy FEMA and RBI requirements — including pricing floors, allotment timelines, and post-allotment filings. 

What is a share subscription agreement?

A share subscription agreement is a contract under which a company issues new shares to an investor at an agreed price. Companies use an SSA when raising capital through fresh issuance of equity or convertible instruments.

The SSA sits within a broader suite of transaction documents that typically includes a term sheet, the SSA itself, and a Shareholders’ Agreement (SHA). 

The term sheet outlines the key commercial terms on a non-binding basis. The SSA formalizes those terms into a binding contract for the issuance of shares. The SHA governs shareholder rights and governance post-investment.

An SSA is different from a Share Purchase Agreement (SPA). In an SSA, the company issues new shares to the investor, increasing total share capital. In a SPA, an existing shareholder sells their shares to a buyer. No new shares are created.

Key clauses in a share subscription agreement

Subscription details

This clause specifies the core commercial terms of the investment: 

• The number of shares being issued
• The class of shares (equity, compulsorily convertible preference shares, etc.)
• The price per share
• The total subscription amount

It also references the pre-money valuation, post-money valuation, and the resulting cap table after issuance.

For example, if an investor subscribes to 10,000 CCPS at ₹500 per share, the total subscription amount is ₹50,00,000. The clause specifies whether payment happens in a single tranche or multiple tranches.

Conditions precedent

Conditions precedent (CPs) are requirements that must be fulfilled before the transaction can close, often within a specified timeline. They protect both parties by ensuring all necessary approvals, verifications, and legal steps are completed.

Common CPs in Indian startup SSAs include:

• Board and shareholder resolutions approving the issuance
• Amendment of the Articles of Association (AoA) to reflect new share classes or investor rights (if required)
• Regulatory approvals, including FEMA-related approvals for foreign investors
• Completion of due diligence to the investor’s satisfaction
• Execution of ancillary documents such as the SHA, employment agreements, or IP assignment deeds
• Valuation report from a registered valuer (required under Section 62(1)(c) of the Companies Act, 2013) or a SEBI-registered category I merchant banker

Representations and warranties

Representations and warranties (R&Ws) are statements of fact made by the company and sometimes by founders to the investor. If any representation is false, it can trigger indemnity claims or termination of the agreement.

Typical R&Ws from the company include:

• The company is duly incorporated and validly existing under the Companies Act, 2013
• The authorized and paid-up share capital is as disclosed
• There are no pending or threatened litigations that could materially affect the company
• The company owns or has valid licences for its intellectual property
• All statutory filings (MCA, tax, FEMA) are up to date
• The financial statements provided to the investor are accurate and not misleading

Investors may also require personal warranties from founders, particularly around non-compete obligations, undisclosed liabilities, or related-party transactions.

Covenants

Covenants are obligations the company agrees to fulfill between signing and closing, and sometimes for a defined period after closing. They fall into two categories: affirmative and negative.

• Affirmative covenants require the company to perform specific actions. These typically include maintaining the business in its ordinary course, keeping all statutory filings up to date, maintaining adequate insurance, and providing the investor with periodic financial statements or board packs.
• Negative covenants restrict the company from taking certain actions without the investor's prior written consent. Common restrictions cover issuing additional shares or convertible instruments, creating any encumbrance on the company's assets, entering into related-party transactions above a specified threshold, changing the nature of the business, and declaring or paying dividends before closing.

Breaching a negative covenant can give the investor grounds to exit the deal entirely. For example, if the company issues shares to another investor between signing and closing without consent, the investor may have the right to terminate the SSA or trigger an indemnity claim.

Founders should review each covenant carefully and negotiate materiality thresholds or carve-outs where the restrictions could limit normal business operations.

Closing mechanism

This clause specifies the steps to be completed on the closing date: the investor transfers the subscription amount to the company's designated bank account, and the company allots the shares. It sets the timeline within which the company must complete the allotment, specifies the form of issuance (physical certificate or demat credit), and outlines the statutory filings to be made post-allotment.

Under Section 42(6) of the Companies Act, 2013, the company must allot shares within 60 days of receiving the subscription money. If it fails to do so, it must refund the money within 15 days after the expiry of the 60-day period. 

As the number of rounds and stakeholders grows, manually reconciling ownership after each allotment increases the risk of filing incorrect data with the RoC. Equity management platforms like EquityList allow companies to record each allotment and instantly reflect the updated ownership structure, fully diluted percentages, and investor-wise breakdowns across rounds.

Indemnity

The indemnity clause allocates risk between the parties. It typically requires the company (and sometimes the founders) to compensate the investor for losses arising from a breach of representations, warranties, or covenants. The clause usually specifies caps on liability, time limits for claims (survival period), and carve-outs for fraud.

Termination

Termination clauses define each party's exit rights before closing, and understanding them is important because triggering the wrong one can have financial consequences. The SSA can be terminated in the following circumstances:

• By mutual written consent of both parties
• By the investor, if the company fails to satisfy conditions precedent by the long-stop date
• By the company, if the investor fails to transfer the subscription amount on the closing date
• By either party, if a material adverse change occurs before closing

Confidentiality

Both parties agree to keep the terms of the SSA confidential and not disclose them to third parties without written consent, except as required by law or regulatory authorities.

Dispute resolution and governing law

Most SSAs in Indian startup transactions specify Indian law as the governing law. Disputes are usually resolved through arbitration under the Arbitration and Conciliation Act, 1996, with the seat of arbitration in a major Indian city such as Mumbai, Delhi, or Bengaluru.

Regulatory and compliance framework for SSAs in India

Issuing shares under an SSA in India requires compliance with multiple statutes. The specific requirements depend on whether the investor is a resident or a non-resident, and whether the company is listed or unlisted.

Companies Act, 2013

The issuance of shares to investors through an SSA is governed primarily by two provisions of the Companies Act, 2013:

• Section 42 (private placement): Any offer of securities to a select group of persons (not exceeding 200 persons in a financial year, excluding QIBs and employees under ESOP schemes per Section 62(1)(b)) is treated as a private placement. The company must issue Form PAS-4 (private placement offer letter), maintain records in Form PAS-5 (the company's internal record of private placement offers and allottees), allot securities within 60 days of receiving subscription money, and file the return of allotment in Form PAS-3 within 15 days of allotment if issued through private placement. The company must receive all subscription money through banking channels (not cash) and keep it in a separate bank account until allotment or refund.
• Section 62(1)(c) (preferential allotment): When shares are issued on a preferential basis to identified persons, the company must pass a special resolution authorising the issuance. The price must be determined based on a valuation report from a registered valuer. Securities must be fully paid up at the time of allotment, and the allotment must be completed within 12 months of passing the special resolution. If the company fails to allot within this period, a fresh special resolution is required.

An SSA-based share issuance to investors in an unlisted private company must comply with both Section 42 and Section 62(1)(c), along with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Section 39 (return of allotment): After allotting shares, the company must file Form PAS-3 with the Registrar of Companies (RoC) within 30 days (Section 39(4)) or 15 days if issued through private placement (Section 42(8)). This filing must include a complete list of allottees with their names, addresses, PAN, and the number and class of securities allotted.

FEMA and RBI regulations (for foreign investors)

When the investor is a person or entity resident outside India, the SSA must also comply with the Foreign Exchange Management Act, 1999 (FEMA) and the RBI’s Master Directions on Foreign Investment in India. The key requirements include:

• FDI route: The investment must be permissible under the automatic route or the government approval route, depending on the sector. For most technology startups, 100% FDI is permitted under the automatic route.
• Pricing norms: For unlisted companies, shares issued to non-residents must be priced at or above fair market value, determined using any internationally accepted pricing methodology on an arm's length basis (such as DCF), as required under Rule 21(1) of the FEM (Non-Debt Instruments) Rules, 2019. The valuation must be certified by a SEBI-registered merchant banker or a chartered accountant. Where the DCF method is used for income-tax purposes, a SEBI-registered Category I merchant banker is required.
• Allotment timeline: Shares must be allotted within 60 days of receiving the foreign investment. If the company fails to allot within this window, the funds must be returned to the investor within 15 days.
• FC-GPR filing: After allotment, the company must file Form FC-GPR through its authorised dealer (AD Category-I) bank on the RBI’s FIRMS portal within 30 days of allotment.
• FLA return: Companies that have received foreign investment must file the annual FLA return with the RBI by July 15 each year.

Non-compliance with FEMA reporting timelines can result in penalties and compounding proceedings under Section 13 of FEMA, 1999.

Execution and stamp duty

An SSA must be executed on non-judicial stamp paper of the value prescribed by the stamp law of the state where it is signed. The applicable rate depends on the state's stamp schedule. Companies should confirm the applicable rate with their legal counsel before execution.

Separately, stamp duty also applies on the issuance of shares. Under Sections 9A and 9B of the Indian Stamp Act, 1899 (inserted by the Finance Act, 2019, effective 1 July 2020), a uniform stamp duty of 0.005% applies on issuance of securities other than debentures per Article 56A of Schedule I to the Indian Stamp Act, 1899. The depository collects this duty on behalf of the State Government for demat issuances; for physical issuances, duty is payable under Section 9B.

The SSA is signed by authorized company representatives (typically directors per board resolution) and the investor. When the investor is a foreign entity, the SSA may need to be notarised and apostilled in the investor's home jurisdiction before it is treated as validly executed under Indian law. This is particularly relevant when the SSA is being used as a supporting document for FEMA filings or regulatory submissions.

Share subscription agreement template

This share subscription agreement template is for illustrative purposes only. Parties should adapt it to their specific jurisdiction, transaction complexity, and any restrictions imposed by the company's governing documents.

Difference between share subscription agreement and shareholders’ agreement

The SSA and the SHA are both executed during a fundraising round, but they serve fundamentally different purposes. The table below breaks down how they differ.

In some transactions, particularly at earlier stages, the SSA and SHA are combined into a single document or an investment agreement. While this simplifies execution, maintaining separate documents is generally recommended for clarity, especially as the number of investors and complexity of terms increases.

FAQs on share subscription agreement

Is a share subscription agreement legally mandatory in India?

No. There is no provision in the Companies Act, 2013 that mandates the execution of an SSA. The statute governs the process of issuing and allotting shares, but the contractual arrangement between the company and investor is a matter of private agreement. It protects both parties by documenting the investment terms, conditions precedent, warranties, and closing mechanism. Without an SSA, disputes around pricing, allotment timelines, or breach of representations would be difficult to resolve.

What happens if the company fails to allot shares within 60 days of receiving the subscription money?

Under Section 42(6) of the Companies Act, 2013, if the company does not allot securities within 60 days of receiving the application money, it must refund the entire amount within 15 days after the expiry of the 60-day period (i.e., by day 75 from receipt of subscription money). If the company fails to refund within this window, it becomes liable to pay interest at 12% per annum from the expiry of the 60th day until the date of actual refund.

Additionally, non-compliance can attract penalties on the company, its promoters, and directors under Section 42(10). The penalty may extend to the amount raised through the private placement or Rs 2 crore, whichever is lower.