A buyer and seller agree that $30% of consideration should be deferred and paid out over twenty-four months based upon revenue milestones. Both parties negotiate the revenue milestones, sign the term sheet, and operate under the impression that it is binding.
It is not agreed. Two regulators who were never in the room decide most of what this earn-out can actually do, and the term sheet usually gets to them last.
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The 18/25 rule caps the earn-out before the term sheet is signed
Rule 9(6) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 also permits deferred consideration in cases where either party to a share transfer is a non-resident subject to certain limits: no more than 25% may be deferred and must be paid within eighteen months of execution of the transfer agreement. The cap covers earn-outs, holdbacks and escrow-based post-closing adjustments alike, and the final amount paid must still satisfy FEMA pricing guidelines.
This is a materially different regime from the jurisdictions most cross-border term sheets are drafted against. Measurement periods of three to four years and deferred slices of 30 to 40% are unremarkable in Delaware; two to three years is standard in the United Kingdom. An Indian cross-border deal cannot replicate either structure through an earn-out clause, whatever the commercial logic for doing so.
The consequence for drafting is specific rather than general. A term sheet promising a five-year earn-out on a cross-border transfer of equity instruments is not aggressive, it is unworkable, and the fix has to be structural rather than a redraft of the milestone language: a domestic special purpose vehicle, a deferred employment-linked bonus running outside the transfer agreement, or an indemnity holdback kept separate from the earn-out consideration and priced accordingly.
Deal value now includes the earn-out at the CCI’s door
The Competition (Amendment) Act, 2023 introduced a deal-value threshold with effect from 10 September 2024: a transaction exceeding ₹2,000 crore in deal value, where the target has substantial business operations in India, requires notification to the Competition Commission of India regardless of whether the conventional asset and turnover thresholds are met.
Deal value for this purpose is not the closing payment. It includes the maximum potential earn-out. A transaction with a ₹850 crore closing payment and a ₹1,200 crore maximum contingent earn-out carries a deal value of ₹2,050 crore, and crosses the threshold even though the closing payment alone would not.
Parties who size their notification analysis against the cash paid at closing, and treat the earn-out as a contractual mechanic sitting outside the competition assessment, are working from the wrong number. The earn-out’s maximum value belongs in that calculation from the first term sheet draft, not from the point counsel is asked to confirm whether a filing is required.
The standstill runs whether the earn-out is later achieved or not
Once a transaction is notified, the Competition Act’s standstill obligation applies regardless of what happens to the earn-out afterwards. Following the 2023 amendment, the Competition Commission of India must form a prima facie view within 30 calendar days, and the overall review period is capped at 150 calendar days, down from the earlier 210. Where the Commission opens a Phase II investigation, or issues requests for information that stop the clock, that period can run for months before closing occurs at all.
For an earn-out deal this creates a timing problem that has nothing to do with the target’s performance. If the milestone measurement period is drafted to begin on the date of the definitive agreement, a regulatory delay of four or five months before closing eats directly into the seller’s window to hit the milestone, for reasons entirely outside the business’s control. If it is drafted to begin on closing instead, the parties need to decide what happens to the business, and who controls it, during the interval the standstill obligation itself restricts.
That second point matters more than it looks. The same standstill obligation that delays closing also prevents the buyer from exercising influence over the target before clearance is obtained, on pain of gun-jumping exposure. A buyer who wants to start integration steps, or approve the target’s budget, ahead of closing to protect a milestone the seller is meant to be chasing runs directly into that restriction. The earn-out clause and the competition clearance timetable are pulling in opposite directions, and most milestone drafting does not acknowledge that either exists.
Milestone definitions decide who bears the delay
Two drafting failures recur, and both trace back to treating the earn-out as a commercial mechanic independent of the regulatory timetable.
The first is pegging the measurement period to signing rather than closing, so that regulatory delay is charged silently against the seller’s earn-out window. The second is silence on the buyer’s obligations during the earn-out period itself. Indian courts do not readily imply a “best efforts” or good faith obligation on a party to pursue an earn-out milestone in the absence of express contractual language; a seller who has sold control and is relying on the buyer to run the business in a way that permits the milestone to be met has no independent remedy if the clause does not say so.
Both failures are fixable at the drafting stage, and neither is fixable afterwards.
The milestone provisions should therefore be tied to a properly drawn commercial contract rather than stand alone as a payment formula. The underlying contract should specify who is entitled to what during the earn-out period.
What careful drafting does differently
Four adjustments address most of this exposure.
- Test the earn-out against the 18/25 rule prior to negotiation. When one party is a non-resident, structure everything over 25% of consideration or eighteen months as a separate instrument and not as a term inside the earn-out clause.
- Compute deal value incorporating the maximum contingent consideration in order to determine whether the transaction is below the Rs. 2,000 Crore threshold, and recompute if the milestone structure changes during the course of negotiation.
- Peg the measurement period to the actual closing date, with an express extension mechanism if closing is delayed beyond an agreed outside date for reasons connected to regulatory clearance.
- Draft express operating covenants for the earn-out period, specifying minimum budget commitments, restrictions on diverting customers or product lines away from the target, and a defined mechanism for resolving disagreements over whether a milestone has been certified.
None of this changes what the parties are trying to achieve commercially. It changes whether the clause they sign can survive contact with the two regulators who will, in practice, decide when the deal closes and how much of the earn-out period survives to be measured.
Getting the structure right at signing
Earn-outs are negotiated as a commercial bridge between what a buyer will pay today and what a seller believes the business is worth tomorrow. In an Indian cross-border transaction, that bridge is built inside a regulatory frame the parties did not design and cannot contract around, and the drafting that ignores it produces a clause that looks complete at signing and fails the first time a filing is required or a milestone date arrives during a clearance delay.
We advise buyers and sellers on structuring earn-outs, escrows and deferred consideration in Indian acquisitions, including the FEMA and competition analysis that determines what structure is available before the milestone clause is drafted. If you are negotiating a transaction with a deferred consideration component, we would be glad to assist.
Frequently Asked Questions
An earn-out is a portion of the consideration given by the buyer which is deferred and is subject to adjustment based on certain milestones achieved by the target post deal closing. Such milestones could relate to achievable revenue, EBITDA, customer growth and other parameters. The deal documentation needs to clearly specify how the parties would measure and evaluate each of these milestones.
Where a non-resident is involved in the flow of transfers of equity instruments, the application of FEMA rules would be relevant which limits arrangements for deferred consideration to 25% of total consideration, payable within 18 months of the date of allotment. The structure of such a transaction requires due care and attention before the parties decide the earn-out arrangement.
Yes, the maximum potential contingent consideration can exceed the CCI’s deal-value threshold. This means that the parties should consider the maximum earn out amount as the deal value for the purpose of determining whether the CCI’s deal value framework applies. Therefore, the amount payable at closing may not be sufficient for this purpose.
Linking the measurement period to a closing date (rather than to the signing date) would provide more protection to the buyer in view of possible regulatory delays. On the other hand, if it is the delay in obtaining CCI approval or any other regulatory approval that causes the postponing of closing, measuring progress from the signing date would not be appropriate.
