Understanding Term Sheets

1. Introduction :

1.1 Open a newspaper and you would read about some or the other Private Equity (PE) funding or venture capital investment. PE funding is no longer restricted to unlisted or start-up companies, but even listed, well-established companies get funded by large PEs (e.g., the recent investment in Nagarjuna Construction) or even taken over by PEs (e.g., the acquisition of Gokaldas Exports by Blackstone Fund). The starting point of all such PE fundings, whether large or small, is a Term Sheet.

1.2 A ‘Term Sheet’ records the understanding arrived at between the Company, the Promoters and the PE, on the key decision areas for PE making the investment. A Term Sheet summarises the principal terms and conditions for proposed investment in the Company. It is subject to applicable regulatory requirements, satisfactory completion of due diligence and definitive documentation, and is not intended to be and is not an exhaustive description of the agreement, arrangement or understanding between the parties relating to the matters set out herein. It is succeeded by a due diligence (operational, legal and financial) and then by a Shareholders’ and/or Share Subscription Agreement. Ultimately, the provisions of the Shareholders’ Agreement are incorporated in the Articles of Association of the Company.

1.3 This Article analyses a standard Private Equity ‘Term Sheet’. However, it is clarified that this Term Sheet is by no means exhaustive and there can be several other clauses.