Krishivik Agri's investors hold convertible preference shares with a put against the promoters at cost plus 10% a year simple. In year six the company is worth Rs 90 crore. Compare the put with the converted stake, and set out what Indian pricing and foreign investment rules do to such a promise.

The put is worth Rs 96 crore and the converted stake Rs 27 crore, so the put is 3.6 times the equity. The promoters' own 70% is worth Rs 63 crore, so they cannot pay Rs 96 crore, and if the fund is a foreign investor India's exchange control framework restricts exits at an assured return above fair value. The put reads like a bond and behaves like an unsecured claim on two individuals; the committee should mark it nearer Rs 27 crore and confirm the current rules.

A friend lends you Rs 10 lakh for a shop and makes you promise, personally, to pay back Rs 16 lakh in six years whatever the shop does. If the shop is worth Rs 15 lakh, the promise is bigger than the shop. The put works the same way: Rs 60 crore plus 10% simple interest for six years is Rs 96 crore, a return of 8.1% a year, and it does not move with the company. Converting the CCPSCompulsorily convertible preference shares: preference shares that must convert into equity by a set date or event, the standard instrument for venture rounds in India. gives 30% of Rs 90 crore, Rs 27 crore, a return of -12.5% a year. The company is worth 55% less than the fund paid for it.

The put would be worth less than the stake only if the company were worth more than Rs 320 crore, 3.6 times today's value. Below that, the fund wants the put, and the promoters are the ones who must pay. Their shares are worth Rs 63 crore, so even selling everything they own in the company leaves them Rs 33 crore short. A put against individuals is only as good as their balance sheet; a put this far out of the money is a claim the promoters cannot meet, and the practical outcome is a negotiation, a transfer of some of their shares, or a court case that takes longer than the fund's life.

Two separate sets of rules bear on this, and the reader should confirm the current text of each. First, where the investor is non-resident, the exchange control framework under FEMA and the Reserve Bank's rules on non-debt instruments permits optionality clauses on equity and compulsorily convertible instruments, but on conditions: a minimum lock-in, and an exit price that must not exceed the fair value at the time of exit, with no assured return. Under that framework a foreign investor's put at cost plus 10% a year is not an exit it can take as written; the most it can expect is fair value, about Rs 27 crore here. Second, for any investor, the enforceability of put options in private company shares has a history in India under the securities contract rules, and later clarifications allowed such contracts for unlisted shares subject to conditions. The pricing cap and the company law limits on a company buying its own shares at a premium are why the put was drafted against the promoters rather than the company.

Mark the position at or near the converted value, Rs 27 crore, not the put. Then use the put as leverage rather than as a payment claim: the promoters know a claim exists, and a settlement that transfers part of their 70% to the fund, or sets a fixed share of any future sale, is worth more than six years of litigation against people who cannot pay. A term that promises more than the company is worth is a negotiating position, not an asset, and the fund's own documents should have priced it that way from the start.

The limitation is that this treats the Rs 90 crore valuation as settled. If the promoters disagree, the fair-value exercise itself becomes the fight, and the drafting of who appoints the valuer matters more than the interest rate. The lesson for the next term sheet is to protect downside with instruments that are enforceable in India: a liquidation preference, a drag-along at a set floor, and an anti-dilution clause, rather than a personal promise of a return.