Why the value of an investment is not determined only at the time of investment
When an investor invests in a company, considerable attention is generally given to the entry valuation — the price at which the investment is made, the percentage of equity acquired, the instrument through which the investment is structured and the expected future value of the business.
However, valuation at the time of investment is only the starting point.
The value that an investor ultimately realises can be significantly influenced by what happens after the investment is made. Subsequent issuances of shares, dilution, changes in control, related-party transactions, excessive promoter remuneration, lack of financial information, restrictions on transfer and the absence of a credible exit mechanism can all affect the economic value of an investment.
This is where a carefully structured Shareholders’ Agreement (SHA) assumes significance.
On 1 August 2026, I had the opportunity to conduct a professional knowledge-sharing session for the Association of Valuation Professionals on the topic “Protecting the Valuation of Investment Through a Shareholders’ Agreement.”
The objective of the session was to examine the connection between investment valuation and the contractual, governance and exit protections negotiated between shareholders.
1. Why Does Valuation Protection Matter?
An investor's risk does not end once the investment has been completed.
A company may perform differently from the expectations prevailing at the time of investment. More importantly, even where the underlying business continues to perform well, certain corporate actions or shareholder decisions can affect the investor's economic interest.
Some of the key risks include:
Dilution Risk
A company may raise further capital after the investor's entry. If additional shares or securities are issued, the investor's percentage holding and corresponding economic rights may reduce.
A future funding round at a lower valuation can create an even greater concern for an existing investor.
Governance Risk
An investor, particularly a minority investor, may not have sufficient control over important business decisions. Founders or controlling shareholders may otherwise take significant decisions without adequate investor participation.
Value Leakage
The value of a business can be affected where profits or assets are transferred, directly or indirectly, through related-party transactions, excessive promoter remuneration or other arrangements that are not appropriately controlled.
Exit Risk
An investment may have substantial value on paper but still become difficult to realise if there is no practical route for the investor to exit.
An investor therefore needs to consider not merely “What is my investment worth today?”, but also “How will I protect and ultimately realise that value?”
Information Risk
An investor cannot effectively protect an investment without adequate information.
Financial statements, MIS, budgets, business plans, compliance information and information regarding material litigation or defaults enable an investor to identify issues before they materially affect value.
Enforceability Risk
Another important consideration is whether the rights negotiated under an SHA can actually be enforced against the company and persons who are not parties to the agreement.
This brings us to the relationship between the Companies Act, 2013, Articles of Association and the Shareholders’ Agreement.
2. SHA, AOA and the Companies Act, 2013 — Why the Distinction Matters
A Shareholders’ Agreement is essentially a private contractual arrangement between its parties. The Articles of Association, on the other hand, constitute the company's constitution, while the Companies Act, 2013 provides the statutory framework governing the company.
Each therefore serves a different purpose.
The Companies Act establishes the statutory framework for matters such as share capital, issuance of securities, director responsibilities and related-party transactions.
The Articles of Association govern the company's internal constitution and can incorporate provisions concerning matters such as transfer restrictions, voting, board structure and rights attached to shares.
The SHA allows shareholders to negotiate detailed commercial and contractual protections, including reserved matters, anti-dilution rights, information rights and exit mechanisms.
A practical issue arises when a right is contained only in the SHA but is not appropriately reflected in the Articles.
The SHA may bind the shareholders who have executed it, but the company and shareholders who are not parties to the SHA may not necessarily be bound in the same manner.
Therefore, a key principle while drafting transaction documents is:
Key rights intended to operate at the company level should be appropriately mirrored in the Articles of Association, subject always to the Companies Act and applicable law.
The SHA and AOA should therefore not be viewed as isolated documents. They should work together to provide the intended governance and investment protection framework.
3. Reserved Matters — Protecting Value Through Governance
For a minority investor, ownership percentage alone may not provide adequate protection.
A well-drafted SHA can identify certain Reserved Matters for which investor consent is required before the company proceeds with the proposed action.
Depending upon the transaction, these may include:
Issue of new shares or securities;
Alteration of share capital;
Mergers, acquisitions or significant disposals;
Borrowings above an agreed threshold;
Entry into new business lines;
Significant related-party transactions;
Approval of annual budgets;
Amendment of the Articles of Association; and
Declaration of dividends.
The purpose is not necessarily to give an investor control over the day-to-day management of the company.
Rather, the objective is to ensure that decisions capable of having a material impact on the investor's economic interest or the value of the business are not taken without appropriate consideration of the investor's rights.
4. Information Rights — “An Investor Cannot Protect What It Cannot See”
One of the most important, yet sometimes underestimated, protections in an SHA is the investor's right to receive information.
Typical information rights may include access to:
Audited annual financial statements;
Quarterly or monthly MIS;
Annual budgets and business plans;
Compliance certificates;
Information relating to material litigation;
Information regarding defaults or significant business events; and
Company records and access to management and auditors, where appropriate.
These rights allow the investor to monitor the company's performance and identify potential red flags at an early stage.
From a valuation perspective, timely information is particularly important because financial and operational deterioration can often be identified before it becomes irreversible.
Information rights therefore support not only governance but also future funding, enforcement and exit decisions.
5. Anti-Dilution Protection — Protecting Economic Value
One of the most important valuation-related provisions in an investment transaction is the anti-dilution provision.
An investor may subscribe to shares based on an agreed valuation. If the company subsequently raises funds at a lower valuation — commonly referred to as a down round — the investor's economic position may be adversely affected.
An SHA may therefore provide for mechanisms to protect the investor against such dilution.
Common mechanisms include:
Broad-Based Weighted Average
This is generally considered a more balanced mechanism because it takes into account the price and quantum of the subsequent issue while recalculating the investor's economic position.
Full Ratchet
Under a full-ratchet mechanism, the investor's price may be adjusted to the price of the subsequent lower-priced issue.
This is significantly more investor-friendly and correspondingly more demanding from the founders' perspective.
Additional Shares or Conversion Adjustment
Depending upon the instrument used, protection may be structured through issuance of additional shares or adjustment of the conversion ratio.
However, anti-dilution provisions cannot be drafted in isolation. They need to be considered alongside the Companies Act, applicable FEMA pricing requirements and the nature of the investment instrument, particularly where instruments such as CCPS or CCDs are involved.
6. Transfer Restrictions — Controlling Who Becomes a Shareholder
A shareholder's value is also affected by the identity of the other shareholders and the ability to transfer shares.
An SHA may therefore contain appropriate transfer restrictions, including:
Promoter lock-ins;
Board or shareholder consent requirements;
Right of First Refusal (ROFR);
Right of First Offer (ROFO);
Restrictions on transfer to competitors; and
Restrictions on creation of encumbrances over shares.
These provisions help ensure that an investor does not unexpectedly find itself sharing ownership with an undesirable third party.
At the same time, transfer restrictions should be drafted carefully so that they provide appropriate protection without unnecessarily restricting legitimate liquidity opportunities.
7. Tag-Along Rights — Protecting Minority Investors
A minority investor can face a significant risk if the controlling shareholder sells its shares to a third party.
The incoming shareholder may have different objectives, business strategies or expectations from those of the existing investor.
A Tag-Along Right allows a minority investor, subject to the agreed conditions, to participate in the sale initiated by the controlling shareholder on the same terms.
For example:
Promoter sells → Minority investor tags along → Buyer acquires shares from both on agreed terms.
The provision therefore protects the minority investor from being left behind with a new controlling shareholder it did not choose, while also providing an opportunity to realise value alongside the promoter.
8. Drag-Along Rights — Making an Exit Possible
The converse situation is equally important.
A potential buyer may be willing to acquire the entire company but may not want to proceed if one or more minority shareholders refuse to sell.
A Drag-Along Right allows a specified majority of shareholders, subject to agreed conditions, to require the remaining shareholders to participate in the sale.
For example:
Majority shareholders agree to sell 100% → Drag notice issued → Minority shareholders participate → Buyer acquires the company.
A properly structured drag mechanism can therefore make the company more saleable and facilitate a clean exit.
However, the mechanism should incorporate appropriate protections concerning the sale process, consideration, share classes and applicable rights.
9. Exit Rights — Value Must Ultimately Be Realisable
An investment may have an attractive valuation on paper, but value is not truly protected unless there is a credible mechanism through which that value can eventually be realised.
Depending upon the transaction, an SHA may address:
IPO-related cooperation;
Strategic sale rights;
Rights to initiate a sale process after a defined period;
Promoter-supported exit mechanisms; and
Other agreed exit arrangements, subject to applicable law.
Exit provisions require particular care in India.
For example, provisions relating to assured returns or put options involving foreign investors need to be examined in the context of FEMA pricing norms and applicable regulatory requirements.
Therefore, exit rights should be commercially meaningful while remaining legally and regulatorily compliant.
10. Other Provisions That Can Influence Investment Value
Valuation protection is not limited to anti-dilution and exit clauses.
Several other SHA provisions can have an indirect but significant impact on the value of an investment.
Related-Party Transactions
Appropriate controls over related-party transactions can help prevent the diversion of profits or assets from the company.
Founders’ Covenants
Founders' obligations relating to confidentiality, non-solicitation, minimum involvement and other agreed commitments can help protect the underlying business and its value.
Dividend and Distribution Protection
An SHA may establish an agreed framework for distribution of profits and prevent situations where value is retained or distributed in a manner inconsistent with the agreed commercial understanding.
Deadlock and Dispute Resolution
Disputes between shareholders can paralyse a business and consequently affect its value.
An effective deadlock mechanism can provide for escalation, negotiation, mediation, arbitration or, where appropriate, an exit mechanism.
FEMA and Foreign Investment Considerations
Where foreign investors are involved, SHA provisions must be considered in the context of FEMA, sectoral requirements, pricing norms and applicable RBI regulations.
A commercially attractive provision is of limited value if it cannot be implemented in compliance with the applicable regulatory framework.
11. The Larger Perspective — Valuation and Transaction Documentation
Valuation professionals generally focus on determining the value of a business or investment based on appropriate methodologies and assumptions.
However, the rights attached to an investment can also influence the economic outcome for the investor.
Two investors holding an identical percentage of shares may not necessarily have identical economic or governance rights.
Their respective investment outcomes can differ depending upon matters such as:
Voting rights;
Reserved matters;
Anti-dilution protection;
Information rights;
Transfer restrictions;
Tag-along and drag-along rights;
Liquidation or preference rights; and
Exit mechanisms.
This makes transaction documentation an important component of the broader investment ecosystem.
The SHA does not replace valuation. Rather, it provides the contractual and governance framework within which the value represented by the investment can be protected and ultimately realised.
12. Key Takeaways
The discussion at the session for the Association of Valuation Professionals brought out five important principles:
1. Entry valuation is only the beginning
The valuation agreed at the time of investment establishes the starting point. The subsequent rights and obligations of the shareholders can materially influence the eventual outcome.
2. Governance protects economic value
Reserved matters, board rights and information rights can prevent decisions that may adversely affect the investor's economic interest.
3. Dilution and transfer provisions matter
Anti-dilution provisions, pre-emption rights and transfer restrictions can help protect an investor's economic position as the company evolves.
4. Value must be realisable
Tag-along, drag-along and other exit provisions are important because an investment's value ultimately needs a credible pathway to realisation.
5. Documentation must work together
The Companies Act, AOA and SHA should be considered together. Key rights intended to have company-level effect should be appropriately reflected in the Articles, while remaining consistent with applicable law.
Conclusion
Valuation is protected in practice, not merely on paper.
An investor may enter a company at a carefully negotiated valuation, but the ultimate value realised from that investment depends on what happens thereafter.
A well-drafted Shareholders’ Agreement can provide a framework for managing the risks of dilution, governance, value leakage, restricted transferability, information asymmetry and lack of exit.
At the same time, SHA drafting should not become an exercise in simply accumulating protective clauses. The provisions must be commercially workable, proportionate to the investment and aligned with the Companies Act, the Articles of Association and other applicable regulatory requirements.
Ultimately, the objective should be to create a balanced framework that protects the legitimate interests of investors while allowing the company and its founders sufficient flexibility to operate and grow the business.
The session for the Association of Valuation Professionals on 1 August 2026 was an opportunity to explore this intersection between valuation, corporate governance and transaction documentation, and to highlight how the rights negotiated at the time of investment can play an important role in protecting the value that an investor seeks to create and ultimately realise.