Share Sale: A Direct Change of Stewardship
This transaction focuses solely on the shares of the target company. The buyer acquires these shares, instantly stepping into the role of the new principal owner. This model is often chosen for its simplicity and the straightforward exit it grants the seller, but it carries a substantial transfer of inherent operational and financial risk to the buyer, necessitating robust contractual safeguards to secure the investment.
We detail the mechanics, tax implications, and necessary risk mitigation strategies for this popular M&A transaction:
The Mechanism: Speed and Continuity
Parties to the Deal: The sale is concluded directly between the existing shareholders and the Buyer.
Corporate Integrity: The target company’s legal status remains intact. The business is the same entity i.e. its established contracts, existing debt, employment agreements, and PAN identity all remain bound to the corporate shell. Only the ownership is updated.
Tax Liability for the Shareholder
Taxation applies to the capital gain realized by the individual shareholder from selling their shares. The rate is determined by the stock’s classification (market-listed or private) and the duration of ownership.
Type of Gain | Holding Period | Listed Shares (Market-Traded) | Unlisted Shares (Private Co.) |
Short-Term Capital Gain | Less than 12 (for listed shares[1]) or 24 months (for unlisted shares) | 20% | Personal Income Tax Slab Rate (Up to 39%) |
Long-Term Capital Gain | More than 12 (for listed shares) or 24 months (for unlisted shares) | 12.50% | 12.50% |
¹ Listed shares refer to shares listed on a recognised stock exchange in India.
This structure is generally preferential for the seller, offering a low-friction tax outcome and direct receipt of consideration in shareholder’s hands.
Buyer’s Core Risk: Transfer of Legacy Issues
The central caveat for the buyer is assumption of Company’s liabilities:
Assumption of the Past: By purchasing the corporate entity, the buyer acquires the company with all its history. This instantly transfers all contingent, known, and unknown liabilities i.e. the firm’s “legacy operational baggage.”
Examples of Legacy Issues: These liabilities often include unresolved tax disputes, prior litigation exposure, undisclosed regulatory fines, or past employee claims associated with the company’s history.
Mitigation Tools: To secure the investment, a comprehensive, Due Diligence is mandatory. Buyers must mandate robust Indemnity and Warranty Clauses within the Sale Purchase Agreement, serving as the financial promise from the seller to cover costs if these legacy issues materialize after the acquisition closes. In some cases, escrow arrangements or adjustment in purchase price may also become necessary. A powerful tool is obtaining a Section 281 Certificate from the tax authorities or a Chartered Accountant. This certificate confirms that no tax arrears are outstanding against the target company’s assets, providing the buyer with a crucial layer of protection against subsequent tax demands for liabilities incurred by the seller.
Next Steps and Expert Guidance
The simplicity and speed of a Share Sale present complex risks and opportunities for both parties. Our role is to ensure your transaction is strategically optimized, regardless of your position.
Our Specialized M&A Team provides:
- For the Buyer: Forensic Due Diligence and robust Indemnity Clause drafting to transform high-risk exposure into a secure, protected investment.
- For the Seller: Tax Cost Optimization, strategic suggestions to reduce tax impact, and comprehensive assistance with Due Diligence Readiness and reviewing indemnity clauses.
Ensure your transaction is de-risked from day one. Contact us today to schedule a confidential risk analysis of your target company.