Can You Promise an Investor a Guaranteed Return or a Buyback? Put Options, Assured Returns and the FEMA Rules That Catch Indian Founders Out

It usually comes up late in a round, often with a family office or a first-time investor. The term sheet is agreed, then a line appears: "The Promoters shall ensure an exit for the Investor within 5 years at a minimum IRR of 15%, failing which the Promoters shall purchase the Investor's shares at such price." Or the simpler version: "If there is no IPO or sale in 6 years, the company will buy back our shares at 2x."

Many founders sign this because it feels like a distant problem and because the investor presents it as standard. It is not standard in venture capital, and it is one of the most expensive clauses a founder can agree to. This article explains what Indian law allows, what it makes unenforceable, and where the risk actually sits: often with the founder personally, not the company.

Why do investors ask for guaranteed returns or buybacks?

Several kinds of investors ask for these terms, for different reasons.

The underlying problem is simple. If the investor gets a fixed return no matter what, they are not taking equity risk. The law then asks: is this really equity, or a loan pretending to be equity?

What does FEMA allow for foreign investors?

For any investor resident outside India, including NRIs investing on a repatriable basis and foreign funds, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 set the boundary. The optionality framework was introduced by the RBI in January 2014 and carried into the 2019 Rules.

So a put option in favour of a foreign investor is legal, but only a fair-value put. The investor can require the promoters or the company to buy the shares, but at what the shares are then worth, not at what was promised. If the company has done badly, fair value will be low, and the put protects the investor's liquidity, not their return.

What happened in NTT Docomo and Tata Sons, and why founders should care

The best-known case is NTT Docomo's investment in Tata Teleservices. Tata Sons had agreed that if performance targets were missed, Docomo could exit at the higher of fair value or 50% of its acquisition price. When Docomo sought to exit, the RBI declined permission to pay the higher amount. Docomo went to arbitration in London and was awarded about $1.17 billion in damages. In April 2017 the Delhi High Court enforced the award, treating it as damages for breach of contract rather than payment for shares at an assured price, and rejected the RBI's attempt to intervene.

Other rulings point the same way. In Cruz City 1 Mauritius v Unitech (Delhi High Court, April 2017), an award arising from a put option was enforced. In a 2020 Delhi High Court matter involving Alpha Tiger, damages in lieu of a put were allowed. The Supreme Court in IDBI Trusteeship v Hubtown (2016) upheld a structured arrangement that critics argued was an assured return in disguise.

Can you give a domestic investor a put option or guaranteed buyback?

For Indian resident investors, FEMA does not apply. The questions become company law and contract law.

Worked example: what a guaranteed IRR actually costs

A family office invests ₹5 Cr for 12.5% of a D2C brand at a ₹40 Cr post-money valuation. The SHA says: if there is no IPO or sale within 6 years, the promoters will buy the investor's shares at a price giving a 15% IRR.

The clause pays out only in the scenarios where the founders are least able to pay. In the struggling case, the founders must find ₹11.57 Cr personally to buy shares worth ₹2.5 Cr, a loss of about ₹9 Cr. The investor has taken almost no equity risk, but priced the deal as if they had.

If an investor needs a fixed return, the honest answer is a loan or a structured instrument priced as debt, where the risk sits with the company and is disclosed as such. See Bridge Round, Extension or Venture Debt?.

What to offer instead of a guarantee

Most investors asking for a guarantee are really asking for one of three things: a path to liquidity, protection if the business fails, or protection if the founders misbehave. Each has a better tool.

How to handle the request in a live negotiation

1. Ask what problem the clause solves. Liquidity, downside or founder behaviour. Offer the matching alternative from the table above.
2. Refuse any fixed IRR, multiple or floor price. For foreign investors, point out that FEMA does not allow it; for domestic investors, point out that it makes the investment debt in substance.
3. If a put is unavoidable, make it fair value only. Set the valuation method (a named category of valuer, an internationally accepted method), with no floor.
4. Make the company, not the founders, the obligor where possible, and limit it to what Section 68 allows. If founders must be parties, cap their liability at the value of their own shares, with no personal assets beyond that.
5. Push the trigger date out. Seven to eight years, not three to five, and only if there has been no qualified exit offer the investor refused.
6. Carve out investor-caused failures. No put if the investor blocked a sale or a follow-on round.
7. Check how the next investor will read it. A Series A lead will ask for any guarantee to be removed, because it ranks the old investor ahead of them.

What diligence lawyers check

• Any clause in SSAs, SHAs, side letters or email agreements promising an exit, return or buyback at a fixed price.
• Whether foreign investors hold instruments with assured returns, which is a FEMA contravention that may need compounding.
• Whether optionally convertible instruments were issued to non-residents without ECB compliance.
• Personal guarantees by founders to investors, which they will ask to be released at the new round.
• Whether any "guaranteed return" was received as money that could be treated as a deposit under Section 73. See Loans From Friends, Family or Directors.

Related: Participating vs Non-Participating Liquidation Preference and Family Office, VC or Strategic Investor?. Been asked for a guaranteed exit? Talk to us before you sign it.