Foreign investors demand tax indemnities for startup investments

Foreign private equity and venture capital funds are increasingly demanding indemnification from Indian startups against tax-related regulatory risks following a slew of direct and indirect tax notices to them, legal experts said.

The indemnity clauses are aimed at protecting investors from the fallout of tax demands on startups by requiring startups to compensate investors for revenue losses because of unanticipated tax notices, the experts said.

Until recently, investment contracts carried a general indemnity clause that applied to any unanticipated development in the company, but now PEs and VCs are insisting on tax-related indemnity, the experts said.

“Tax indemnity provisions are becoming increasingly comprehensive, with rising indemnity cap sizes,” said Abhay Sharma, a partner at Bombay Law Chambers. “Tax insurance is also gaining traction in the Indian market as deal parties aim to ensure robust indemnity provisions while allowing sellers to exit without concerns over future claims.”