What Is an LOI and What Should It Contain in an Indian Deal?

The letter of intent is the document that converts a conversation into a transaction. It fixes price, sets structure, buys you exclusivity, and starts the diligence clock. Get it wrong and you spend three months on a deal that was never really yours.

In short: an LOI in India is mostly non-binding — courts treat it as an intention to contract, not a contract — except for specific clauses (exclusivity, confidentiality, costs, governing law) that both parties agree upfront will bind them. Most first-time buyers copy an American template, delete the references to SBA financing, and send it. That produces a document which is either unenforceable where it matters or accidentally binding where it should not be.

Here is what an LOI actually does under Indian law, and what yours needs to contain.

What an LOI Is

A letter of intent records the principal terms of a proposed acquisition before anybody drafts definitive agreements. You will see the same instrument called a memorandum of understanding, heads of terms, or a term sheet. The label carries no legal weight, which is a point worth holding on to.

It performs three jobs. It confirms both sides agree on price and structure before either spends money on advisors. It grants you a period where the seller stops talking to other buyers. And it sets out what must be true at closing, which is your protection when diligence turns up something ugly.

Is an LOI Legally Binding in India?

Mostly no, and that is deliberate. But the answer has an important carve-out.

Indian law treats an agreement to enter into an agreement as unenforceable, conferring no rights on either party. A letter of intent indicates a party's intention to contract in future and is not intended to bind either side to ultimately enter into any contract. The Supreme Court took this position in Bindal Agro Chem Ltd. v. K.G. Khosla Compressors Ltd., holding that a letter of intent is only a prelude to a purchase order and not the purchase order itself, and that such letters were merely a step leading to the eventual contract.

The principle was restated recently in State of Himachal Pradesh v. OASYS Cybernetics Pvt. Ltd. (2025), where the Court described an LOI as a "promise in embryo," creating no vested right until it passes the threshold of final and unconditional acceptance.

Now the carve-out, which is where your protection actually lives. A non-binding letter of intent can take a hybrid form, where the parties agree to be bound by specific identified provisions such as confidentiality, exclusivity, costs and expenses, and governing law or jurisdiction. That hybrid structure is standard practice, and it is what you want. The commercial terms stay open because diligence may change them. The protective terms bind, because they are worthless otherwise.

Two practical warnings follow.

The title does not determine the legal nature. Calling a document a letter of intent is not enough to establish what it is. Courts read the whole document, and a non-binding clause only carries meaning in the context of everything around it. Language matters: avoid strong terms that make preliminary commitments read as enforceable obligations.

Exclusivity binds the seller for its full term. Sellers should think carefully about exclusivity, because even where discussions appear to have stalled, they may remain prevented from exploring alternatives. As a buyer, this is precisely why you want it. As a matter of good faith, do not ask for 120 days when you need 60.

The Fourteen Things Your LOI Should Contain

1. Parties and target identification

Full legal name of the target with its CIN, the selling shareholders individually with their shareholding percentages, and your acquisition entity. In Indian family businesses, shares often sit with a spouse, brother, or HUF who is not in the room. Identify every holder now, because discovering a 12% holder in month three who never agreed to anything is a common way for deals to die.

2. Transaction structure

State plainly whether you are buying shares, buying assets, or acquiring a business undertaking as a slump sale. The tax and liability consequences diverge sharply and the seller's net proceeds depend on it. Leaving this vague guarantees renegotiation later.

3. Price and its basis

Not just a number. State the enterprise value, the multiple and the earnings figure it applies to, and whether the basis is cash-free and debt-free. "₹8 crore, being 4.0x FY25 EBITDA of ₹2 crore, on a cash-free debt-free basis" cannot be argued about. "₹8 crore" can.

4. Payment mechanics

Break the consideration into cash at closing, any seller note with tenor and interest, earnout with the metric and measurement period, and amounts held in escrow or retained against indemnity claims. Given how little acquisition debt exists in India, seller financing is often your cheapest capital, so negotiate it here rather than hoping it appears later.

5. Treatment of debt, cash and promoter loans

Indian SME balance sheets routinely carry unsecured loans from the promoter and his family, personal guarantees on working capital lines, and cash the promoter regards as his own. Say what happens to each. Also state that all charges registered with the Registrar of Companies will be satisfied or assumed on agreed terms.

6. Working capital adjustment

Set a normalised working capital peg and the mechanism for adjusting at closing. In businesses with lumpy receivables, which describes most Indian manufacturing, an unpegged deal lets the seller collect aggressively and leave you short of operating cash on day one.

7. Due diligence scope and timeline

List the workstreams: financial, tax, legal, statutory compliance, labour, property, and customer concentration. Give a date by which the seller provides the data room. Sellers who cannot produce three years of GST returns and audited financials within two weeks are telling you something.

8. Exclusivity, expressly binding

Forty-five to ninety days is normal for an Indian SME deal. Include the seller's undertaking not to solicit or negotiate with anyone else, and a duty to notify you of any approach received.

9. Confidentiality, expressly binding

Covering both the existence of discussions and any information exchanged. Promoters worry intensely about staff, customers, and bankers learning that the business is in play, and this clause is often what earns their trust.

10. Conditions to closing

Where you protect yourself in an Indian context specifically. Clean statutory filings with the RoC, no outstanding GST or TDS demands, provident fund and ESI contributions current, clear property title or a valid registered lease, lender consents where change of control triggers acceleration, landlord consent, and consents from customers whose contracts carry change-of-control clauses. Provident fund arrears in particular have a habit of surfacing late and being larger than anyone expected.

11. Promoter transition and non-compete

Specify the handover period, whether it is paid, and the promoter's role during it. On non-compete, note a genuinely Indian point: the Indian Contract Act renders agreements in restraint of trade void as a general rule, with a recognised exception permitting reasonable restraints on a seller of goodwill. Tie your non-compete to the sale of goodwill, keep the duration and geography reasonable, and take advice on drafting.

12. Employees

State your intention on continuity of employment, retention of key people, and whether any employee will be offered equity or a retention bonus. For most Indian promoters this is not a minor clause. It is frequently the thing they care about most, and treating it seriously improves everything else in the negotiation.

13. Costs, governing law, jurisdiction and dispute resolution

Each party bears its own costs unless agreed otherwise. Name the governing law, the seat, and the forum. These clauses should be binding.

14. The binding and non-binding statement

The single most important paragraph. Name the sections that bind and state that everything else is a summary of proposed terms subject to definitive documentation. Something in the shape of:

"This Letter of Intent is non-binding and constitutes a summary of proposed terms only, save for Clauses 8 (Exclusivity), 9 (Confidentiality), 13 (Costs, Governing Law and Dispute Resolution), which are intended to be legally binding and enforceable in accordance with their terms."

Write it plainly, put it near the signature block, and do not bury it.

Practical Points for Indian Deals

Watch your language throughout. Use "proposes to," "intends to," and "subject to" in the commercial clauses. Reserve "shall" for the binding sections. This is the cheapest protection available and costs you nothing but attention.

Get every shareholder to sign. Not just the promoter. A letter signed by one of four holders buys you exclusivity from one of four holders.

Ask about stamp duty before signing anything with binding obligations. Treatment varies by state and by what the document actually does. Confirm with counsel rather than assuming a preliminary document is outside the net.

Do not skip the LOI because the seller is a friend of a friend. Warm relationships produce the vaguest deals, and vagueness surfaces at exactly the wrong moment.

Set the exclusivity clock to your actual capability. If your funding is not committed, ninety days of exclusivity you cannot use is worse than sixty you can, because it burns seller goodwill you will need later.

Have it reviewed by an Indian lawyer. This article is general information, not legal advice. Every deal has facts that change the answer.

The Bottom Line

An LOI is a negotiation tool disguised as a legal document. Its commercial terms are deliberately soft, so diligence can still change price and structure without either side breaching anything. Its protective terms, exclusivity, confidentiality, costs and jurisdiction, need to be deliberately hard, because those are the only parts a court will actually enforce if things go wrong. Get that split right, put every real shareholder's signature on it, and you have bought yourself the time and certainty to run diligence properly instead of racing a seller who is still quietly talking to someone else.

Once your LOI is signed, the next constraint is usually capital. See our guide to finding acquisition capital in India and, before you get to price, our guide to negotiating a business acquisition price in India. When the data room opens, our due diligence checklist for Indian acquisitions covers what to verify before you commit to definitive agreements.

If you're preparing to send your first LOI on an Indian SME deal, talk to Kautilya PE about structuring exclusivity and conditions to closing that actually hold up.

Disclaimer: This article is general information about Indian contract law as applied to letters of intent and is not legal advice. Consult a lawyer qualified in the relevant Indian jurisdiction before drafting, signing, or relying on any LOI.