What is Share Purchase Agreement (SPA)? Complete Execution Guide

The Share Purchase Agreement (SPA) is the binding legal contract that transfers ownership of unlisted shares from seller to buyer.

Unlike Form SH-4 which is a standardised Companies Act form for recording the transfer, the SPA is a customised agreement that establishes the purchase price, payment terms, representations and warranties from both parties, conditions precedent to closing, indemnification obligations, and dispute resolution mechanisms.

A properly drafted SPA protects both parties: the buyer gets assurance the seller actually owns the shares and has authority to sell them, while the seller gets guaranteed payment and limited liability post-closing.

What does an SPA do?

Think of the SPA as the "deal bible." It documents:

• What's being sold: Exact number of shares, certificate numbers, class (equity/preference)
• At what price: Per-share price, total consideration, payment structure (lump sum vs installments)
• Under what conditions: Board approval required? Existing shareholders waived ROFO? Tax clearances obtained?
• With what protections: Who pays if undisclosed liabilities surface? What if seller didn't own the shares?
• And what happens if things go wrong: Arbitration? Court jurisdiction? Penalty for breach?

What is the difference between SPA and Form SH-4?

The relevance of both: SPA protects your interests (warranties, indemnities, payment terms) while Form SH-4 makes the transfer legally effective under Companies Act (without SH-4, you're not a shareholder).

The 8 Essential Clauses in Every Share Purchase Agreement (SPA)

1. Parties and Recitals

What it states: Legal names, addresses, and context.

Why it matters: Establishes who's bound to the transaction. If "Rajesh Kumar" signs but shares are in "Rajesh Kumar HUF," the transfer may be void.

Example:

This Share Purchase Agreement dated February 20, 2026 is between:

SELLER: Rajesh Kumar, S/o Late Shyam Kumar, residing at...
  (PAN: ABCDE1234F) ("Seller")

BUYER: Sequoia Capital India Investments IV, 
  a company incorporated under Companies Act, 2013...
  (CIN: U74999DL2015PTC...) ("Buyer")

WHEREAS the Seller holds 50,000 equity shares of face value ₹10 each
in ABC Technologies Private Limited ("Company");

AND WHEREAS the Buyer desires to purchase said shares...

2. Sale and Purchase Clause

What it states: Exact shares being sold, purchase price, payment terms.

Example:

2.1 Sale of Shares
The Seller hereby agrees to sell, and the Buyer hereby agrees to 
purchase, 50,000 equity shares of ₹10 face value each in the Company,
constituting 5% of the Company's issued share capital, bearing 
Certificate Nos. 145-148, Distinctive Nos. 4,50,001 to 5,00,000
(the "Sale Shares").

2.2 Purchase Price
The purchase price shall be ₹1,000 (Rupees One Thousand only) per 
share, aggregating to ₹5,00,00,000 (Rupees Five Crores only)
(the "Purchase Price").

2.3 Payment Terms
The Buyer shall pay the Purchase Price within 5 business days of:
(a) Board approval of the transfer; and
(b) Seller providing the Buyer with a duly stamped and executed 
    Form SH-4

Critical details required in the sale and purchase clause:

• Certificate numbers: Proves seller owns specific shares
• Distinctive numbers: Exact share identification (from share certificate)
• Percentage of company: Establishes ownership stake
• Payment trigger: Buyer doesn't pay until conditions met

Common dispute: Buyer pays, then board rejects transfer. Without clear payment-after-approval clause, buyer has paid for shares they don't own.

3. Representations and Warranties

What it states: Promises each party makes about facts.

Seller typically warrants:

3.1 The Seller is the sole legal and beneficial owner of the Sale Shares.

3.2 The Sale Shares are free from all liens, charges, encumbrances, 
    and claims.

3.3 There are no pending or threatened legal proceedings affecting 
    the Sale Shares.

3.4 The Seller has full authority to enter this Agreement and 
    consummate the sale.

3.5 [If material seller] To the best of Seller's knowledge, 
    the Company's financials fairly present its financial position
    as of the last audited date.

Buyer typically warrants:

3.6 The Buyer has the financial capacity to pay the Purchase Price.

3.7 The Buyer is acquiring shares for investment purposes 
    [not for immediate resale].

3.8 The Buyer understands the shares are illiquid and not listed 
    on any stock exchange.

Why warranties matter: If seller doesn't own the shares (they were already pledged to a bank), buyer can sue for breach of warranty and recover damages.

Qualification of warranties: Sellers often add "to the best of Seller's knowledge" to limit liability for things they genuinely didn't know.

4. Conditions Precedent to Closing

What it states: Things that must happen before the deal closes.

Standard conditions:

4.1 This Agreement is conditional upon:

(a) Approval of the Board of Directors of the Company for the 
    transfer of Sale Shares to the Buyer;

(b) Existing shareholders of the Company waiving their rights 
    under ROFO/ROFR provisions in the Shareholders Agreement;

(c) Seller providing Form SH-4 duly executed and stamped;

(d) No material adverse change in the Company's business or 
    financial condition;

(e) Seller obtaining spouse consent (if shares are jointly held 
    or acquired during marriage);

(f) [For large transactions] Regulatory approvals, if any 
    (e.g., CCI clearance for competition law).

Consequence of non-fulfillment: If any condition fails, either party can walk away without penalty.

Example: Board rejects the transfer (exercising discretion under Articles of Association). Buyer doesn't have to pay. Seller doesn't have to sell. SPA terminates.

5. Tax Allocation

What it states: Who pays which taxes.

Standard allocation:

5.1 Capital Gains Tax
Any capital gains tax arising on the sale of Sale Shares shall be 
borne exclusively by the Seller and paid by the Seller directly to 
tax authorities. The Buyer shall have no liability.

5.2 TDS (if applicable)
If the Seller is a Non-Resident or if Section 194-IA applies, 
the Buyer shall deduct tax at source as required by law and deposit 
with the Income Tax Department. Such deducted amount shall be 
adjusted against the Purchase Price payable to the Seller.

5.3 Stamp Duty
Stamp duty on the transfer deed (Form SH-4 and this Agreement, if 
applicable) shall be borne by the Buyer.

5.4 Angel Tax (Section 56)
Any tax liability arising to the Company under Section 56(2)(viib) 
due to the purchase price exceeding fair market value shall be borne 
by the Buyer [or negotiated split].

Why explicit allocation matters: Without this clause, parties argue post-closing about who owes the ₹15 lakh stamp duty bill.

6. Indemnification

What it states: Who compensates whom if something goes wrong.

Seller typically indemnifies buyer for:

6.1 Breach of any representation or warranty made by Seller.

6.2 Any undisclosed liabilities related to the Sale Shares existing 
    as of Closing Date.

6.3 Any claims by third parties asserting ownership or security 
    interest in the Sale Shares.

Buyer typically indemnifies seller for:

6.4 Breach of Buyer's representations or warranties.

6.5 Any obligations arising post-Closing related to the Sale Shares
    (e.g., future calls on partly-paid shares, if any).

Caps on indemnity (common in small transactions):

6.6 Maximum Liability
Seller's aggregate indemnification liability shall not exceed 
the Purchase Price.

6.7 Survival Period
Claims under this indemnity must be raised within 24 months from 
Closing Date [or 6 years for tax claims].

Why indemnity matters: Seller represented "shares are unencumbered," but buyer later discovers they were pledged to HDFC Bank. Buyer can claim indemnity and recover the ₹5 crore purchase price (or more, if losses exceed that).

7. Closing Mechanics

What it states: Sequence of events on closing day.

Typical closing sequence:

7.1 On Closing Date, the following shall occur simultaneously:

(a) Seller delivers:
    - Duly executed and stamped Form SH-4
    - Original share certificates (or indemnity for lost certificates)
    - No-objection letter from any pledgee/lender (if applicable)
    - Resignation from directorship (if Seller is a director)

(b) Buyer delivers:
    - Purchase Price via RTGS/NEFT to Seller's bank account
    - If TDS applicable, deposit challan and TDS certificate

(c) Jointly:
    - Submit Form SH-4 + SPA to Company Secretary
    - Request board meeting within 7 days

"Simultaneously" matters: Prevents seller from taking payment and disappearing before delivering documents.

8. Dispute Resolution

What it states: How fights get resolved.

Option A: Arbitration (faster, private)

8.1 Any dispute arising out of this Agreement shall be referred to 
arbitration by a sole arbitrator appointed by mutual consent, or 
failing agreement, appointed by the Chairman of the Bangalore 
International Arbitration Centre.

8.2 Arbitration shall be conducted in accordance with the Arbitration 
and Conciliation Act, 1996.

8.3 Seat of arbitration: Bangalore.

8.4 The arbitration award shall be final and binding on both parties.

Option B: Courts (public, slower)

8.5 Courts at Bangalore shall have exclusive jurisdiction over 
any disputes arising from this Agreement.

Why this matters: If SPA says "Bangalore courts" and buyer is in Mumbai, buyer must travel to Bangalore for litigation. Arbitration is often preferred for cross-city/cross-border deals.

Negotiation Points: Where Deals Get Stuck

Point 1: Warranty Scope (Seller Wants Narrow, Buyer Wants Broad)

Buyer's ideal:

Seller warrants that the Company has no undisclosed liabilities, 
pending litigation, or tax disputes.

Seller's counter:

To the best of Seller's knowledge based on information available as 
of date, the Company has disclosed all material liabilities in the 
financial statements dated [X].

Why seller resists: As a minority shareholder (5-10% stake), seller may not have access to full company information. Seller doesn't want to warrant things they can't verify.

Compromise: "To the best of Seller's knowledge, having made reasonable inquiries" + cap indemnity at purchase price.

Point 2: Payment Terms (Buyer Wants Escrow, Seller Wants Immediate)

Seller's ideal:

Buyer pays 100% of Purchase Price on signing of this Agreement.

Buyer's counter:

Buyer pays 100% of Purchase Price only after:
- Board approval obtained
- Shares transferred in Company's records
- New share certificate issued

Why buyer resists: Paying upfront risks losing money if board rejects transfer or seller can't deliver shares.

Compromise:

- 10% paid on signing (as earnest money, non-refundable if Seller 
  defaults)
- 90% paid within 5 days of board approval

Or use escrow:

- 100% deposited in escrow account (held by company's law firm)
- Released to Seller upon share certificate issuance

Point 3: Tag-Along Rights (Existing Shareholders May Demand)

What is tag-along: If Seller sells to Buyer, other shareholders have right to also sell their shares to Buyer at same price.

Why it appears in SPA:

10.1 Seller warrants that no other shareholder has exercised or 
will exercise tag-along rights in respect of this transaction.

OR

10.2 Seller has obtained written waivers from all shareholders 
having tag-along rights under the Shareholders Agreement.

Why buyer cares: Buyer agreed to buy 50,000 shares (5% stake). If tag-along triggers, buyer may be forced to buy 2,00,000 shares (20% stake) at same price, requiring 4x the capital outlay.

Solution: Seller must get tag-along waivers before SPA execution.

Point 4: Lock-In (Buyer Wants Seller to Stay, Seller Wants to Exit Clean)

Buyer's request (for key employee sellers):

11.1 Seller agrees to remain employed with the Company for a minimum 
period of 24 months from Closing Date.

11.2 If Seller resigns or is terminated for cause within 24 months, 
Buyer has the right to buy back the Sale Shares from Seller at the 
lower of:
(a) Purchase Price; or
(b) Fair Market Value at time of buyback

Seller's counter:

Seller's employment is not contingent on this transaction. 
This is a clean exit sale.

Compromise: No employment lock-in, but Seller agrees to 90-day transition assistance.

Red Flags in Share Purchase Agreements

Red Flag 1: Vague Share Description

Bad:

Seller agrees to sell "approximately 5% equity shares" in the Company.

Why bad: What's "approximately"? 4.8%? 5.2%? Leads to disputes.

Good:

Seller agrees to sell 50,000 equity shares of ₹10 face value, 
bearing Certificate Nos. 145-148.

Red Flag 2: No Board Approval Condition

Bad:

Sale is unconditional and shall complete within 30 days.

Why bad: What if board rejects? Seller can't deliver shares, but SPA says sale "shall complete."

Good:

This Agreement is subject to approval by the Board of Directors 
of the Company. If approval is not obtained within 45 days, 
either party may terminate.

Red Flag 3: Unlimited Seller Indemnity

Bad:

Seller shall indemnify Buyer for any and all losses arising from 
this transaction, without limit.

Why bad: Seller sells shares for ₹50 lakh. Five years later, company faces ₹10 crore tax demand. Buyer claims Seller must indemnify (Seller warranted "no tax disputes"). Seller bankrupt.

Good:

Seller's maximum indemnity liability shall not exceed the Purchase 
Price (₹50 lakh). Claims must be raised within 24 months of Closing.

Red Flag 4: Missing Tax Allocation

Bad: SPA is silent on who pays stamp duty, capital gains tax, TDS.

Why bad: After closing, ₹25,000 stamp duty bill arrives. Both parties claim the other should pay. Dispute.

Good: Explicit tax allocation clause (Clause 5 above).

SPA Execution Process: Step-by-Step

Step 1: Negotiate and Draft SPA (Week 1-2)

Parties exchange:

• Term sheet or Letter of Intent (LOI)
• Due diligence findings
• Draft SPA (usually buyer's lawyers prepare first draft)

Seller reviews, redlines (marks changes), and sends back.

Iterate 2-3 times until both sides agree on all terms.

Step 2: Execute SPA (Day 0)

Parties sign the final SPA.

Methods:

• Physical signatures (2 copies, each party keeps one)
• Digital signatures (both parties use DSC)

Date of SPA: This is the "Effective Date" referenced throughout the agreement.

Payment (if any upfront earnest money): Buyer transfers to Seller or escrow.

Step 3: Execute Form SH-4 (Day 1-3)

After SPA is signed, prepare Form SH-4.

Key inputs from SPA:

• Transferor name (Seller)
• Transferee name (Buyer)
• Number of shares
• Consideration (purchase price)

Stamping: Pay stamp duty on SH-4 (0.10%-0.50% depending on state).

Signatures: Both parties + company's authorized signatory.

Step 4: Submit to Company (Day 3-7)

Submit package:

• Executed and stamped Form SH-4
• Copy of SPA (for company's records)
• Original share certificate(s) from Seller
• If ROFO/ROFR applicable: Waivers from other shareholders

Company secretary reviews for completeness.

Step 5: Board Approval (Day 7-30)

Company convenes board meeting.

Board reviews:

• SPA and SH-4
• Compliance with Articles of Association
• ROFO/ROFR compliance
• Any other shareholder rights

Board passes resolution:

RESOLVED THAT the transfer of 50,000 equity shares from 
Rajesh Kumar to Sequoia Capital India Investments IV as per 
Form SH-4 dated [X] be and is hereby approved.

If rejected: Buyer doesn't pay (if payment is conditioned on approval). Deal dies.

Step 6: Payment (Day 30-35)

Once board approves, buyer pays per SPA terms (typically within 5 business days).

Seller provides:

• Bank details (IFSC, account number)
• PAN for tax purposes

Buyer transfers via NEFT/RTGS.

If TDS applicable: Buyer deducts TDS, deposits with IT Department, provides TDS certificate to Seller.

Step 7: Share Certificate Issuance (Day 35-50)

Company:

• Updates Register of Members (MGT-1)
• Cancels old share certificate (in Seller's name)
• Issues new share certificate (in Buyer's name)
• Files Form PAS-3 with MCA (within 30 days of board approval)

Buyer receives new share certificate and is now legally a shareholder.

When You Don't Need an SPA (Rare)

Scenario 1: Gift Between Family Members

If: Father gifts shares to daughter, no consideration.

May skip SPA: Just execute Form SH-4 + Gift Deed.

Why: No commercial terms to negotiate (no price, warranties unnecessary within family).

But: Even here, many families do a simple 2-page SPA for documentation.

Scenario 2: Court-Ordered Transfer

If: Shares transferred pursuant to court decree (divorce settlement, insolvency).

No SPA needed: Court order itself is the binding document.

Just execute: Form SH-4 + attach court order.

Scenario 3: Transmission (Inheritance)

If: Shareholder dies, shares transmitted to legal heir.

No SPA: Transmission is by operation of law, not contract.

Process: Legal heir submits death certificate, succession certificate/will, Form SH-4.

Frequently Asked Questions

Can I use a template SPA from the internet for my ₹2 crore transaction?

Not recommended. Generic templates miss deal-specific nuances (ROFO waivers, tag-along, specific tax allocations, employment lock-ins). A ₹2 crore deal justifies ₹50,000-₹1,00,000 for a lawyer to draft/review. The cost of getting it wrong (disputes, litigation) far exceeds lawyer fees.

What if the seller refuses to give any warranties?

"As-is, where-is" sales happen but are risky for buyers. Seller might say "I'm selling my 2% stake, I have no visibility into company operations, I won't warrant anything about the company." Buyer's options: (a) Accept the risk and price it in (pay less), (b) Do extensive due diligence yourself, (c) Walk away. For small stake purchases from ex-employees, limited warranties are common.

Is the SPA legally binding even before board approves the transfer?

Yes. The SPA is a binding contract between buyer and seller. If board rejects and SPA didn't make approval a condition precedent, seller may be in breach (failed to deliver shares). Seller could be liable for damages. This is why "subject to board approval" is critical.

Can we close the transaction without an SPA, just using Form SH-4?

Legally possible but commercially insane for transactions >₹10 lakh. SH-4 is a one-page form with no space for warranties, indemnities, tax allocation, payment terms, dispute resolution. If seller takes your ₹50 lakh and doesn't deliver shares (or delivers disputed shares), you have no contractual remedy—just SH-4 which doesn't establish obligations.

What if seller signed SPA but then refuses to sign Form SH-4?

Seller is in breach of SPA. Buyer can sue for specific performance (court orders seller to sign SH-4) or damages (refund of any money paid + compensation). This is why SPA must clearly state "Seller shall execute Form SH-4" as a covenant.

Do I need a lawyer to draft an SPA or can the company's legal team do it?

Company's legal team works for the company, not you. They may draft SPA as a facilitation, but it will be neutral (not advocating for buyer or seller). For large transactions (>₹1 crore), engage your own lawyer to review/negotiate on your behalf. For small transactions (<₹25 lakh), company's template may suffice if you understand the terms.

Key Takeaway

The SPA is the deal blueprint. It defines what you're buying, at what price, with what protections, and what happens if things go wrong. Form SH-4 is just the administrative form that makes the transfer legal under Companies Act.

For any unlisted share transaction above ₹10 lakh, a well-drafted SPA is non-negotiable. It should include: exact share details, purchase price and payment terms, seller warranties, board approval as condition precedent, clear tax allocation, indemnity caps, and dispute resolution.

Spend money on legal review upfront. The ₹50,000-₹1,00,000 you invest in proper SPA drafting can save you ₹50 lakh in disputes later.