Information rights for investors in India: what to ask for

Few early investors get a board seat. Information rights are what you get instead, but only if you ask for them before you sign.

Here's the uncomfortable part. Once your money's in, Indian company law gives a minority shareholder surprisingly little to read. A year can pass between one set of accounts and the next. You did careful work evaluating the startup before you invested, so why stop at the wire? Information rights keep that work going, on paper, on a schedule you agreed while you still held the one thing a founder wants: an unsigned cheque.

Why are board seats rare for early-stage investors in India?

Board seats are rare in early Indian rounds because private company boards are small and founders guard them, and they're right to. The Companies Act requires only two directors for a private company, so a seed board is often just the founders, plus perhaps the lead investor. Everyone else in the round, probably you, is a shareholder. Not a director.

The rule sits in section 149 of the Companies Act, 2013: at least 2 directors for a private company, and at most 15 unless shareholders pass a special resolution. Investors fight for seats. In a survey of 885 venture capitalists by Gompers, Gornall, Kaplan and Strebulaev, board control ranked among the terms they'd least give up, and 60% said they talk to a typical portfolio company at least once a week in the first six months. Those respondents were mostly American. India has no published equivalent. The pattern still tells you who'll end up in the room: the lead, and it won't be you.

Should you even want a seat? Think hard. It's a job, not a perk. A director votes, signs the accounts and carries legal duties under the Act, and plenty of angels holding a dozen small stakes would rather take the reports and skip the liability.

What does the Companies Act give a shareholder without a board seat?

Without a board seat, a shareholder in an Indian private company gets the annual financial statements and the auditor's report before each general meeting. The right to inspect the books of account belongs to directors. Anything more frequent than once a year has to come from a contract you signed.

Two sections make the gap plain. Section 136 says the company must send every member the financial statements, with the auditor's report, not less than 21 days before the general meeting. Section 128(3) opens the books of account for inspection by any director. Any director. Not any member. So the monthly cash position, the stalled pipeline and the senior hire who quit in week 3 all sit with the board, and you'll hear about them when the founder decides you should.

Boards meet far more often than you'll hear from them. Section 173 sets at least 4 board meetings a year, with no more than 120 days between two, though it lets the Central Government relax that for some classes of company by notification. Ask the founder which rule they follow. Then count: 4 board packs a year, and you see none of them.

The law sends a minority shareholder one set of accounts a year. Everything else, you have to ask for in writing.

Which information rights should an investor ask for?

Ask for a short, specific list: what you'll get, how often, by which day. Vague clauses like "reasonable information on request" give a founder nothing to deliver and you nothing to enforce. Tie each right to a document the company already produces, so reporting costs the founder an email, not a week.

1. Monthly management accounts: cash, burn, revenue and collections, in the format from how to read a startup MIS report, within 10 days of month-end.
2. Quarterly financials: profit and loss, balance sheet, and a note on variance against plan.
3. Annual pack: audited accounts and next year's budget, before the board signs off.
4. Cap table changes: every allotment, transfer, ESOP grant or new convertible, with the PAS-3 return filed at the Registrar of Companies.
5. Event notices: litigation, a notice from the GST department or the Reserve Bank of India, a key customer lost, a founder leaving.
6. Inspection: a right to inspect the books on reasonable notice, through your own chartered accountant if you prefer.
7. Compliance: a yearly confirmation that the AOC-4 and MGT-7 filings at the Ministry of Corporate Affairs, the GST returns and the TDS returns to the Income Tax Department are all current.

The monthly item is easier to agree when you hand over a format. Our investor update email template is one you can send with the term sheet.

Seat, observer or neither

If you're the lead, a seat may be worth your time. Section 161(3) lets a board appoint a director nominated under an agreement, subject to the Articles. If you aren't? Ask for an observer seat. You'd get board papers and a chair in the room, but no vote, and the role exists only because the shareholders' agreement creates it, so spell out which papers you'll receive and how many days before each meeting.

Put it in the Articles too

A right written only into the shareholders' agreement can be harder to enforce against the company than one the Articles of Association also carry. Ask your lawyer to mirror the information rights in the Articles alongside the round's other amendments. One clause. That's all it costs. While you're there, check the term sheet clauses Indian angels should read in the same pass.

What should you do before your next term sheet?

Before your next term sheet, copy the 7 rights above into your notes and mark the ones you won't sign without. Then ask the founder for one monthly report before closing. It's the cheapest test you'll ever run.

Questions

What are information rights for investors?

Information rights are contractual promises, usually in the shareholders' agreement, that the company will send an investor specific reports on a schedule: monthly management accounts, quarterly financials, the annual budget, cap table changes and notice of major events. They give a minority investor visibility a board seat would otherwise provide.

Does a shareholder in an Indian private company have a right to see the books?

Under section 128 of the Companies Act, 2013, the books of account are open for inspection by any director. A shareholder who isn't a director gets copies of the financial statements before the general meeting under section 136, but no general statutory right to inspect the books. That gap is what information rights fill.

What is the difference between a board seat and a board observer seat?

A director votes at board meetings and carries the duties of a director under the Companies Act. An observer attends and receives board papers but doesn't vote; the role exists only because the shareholders' agreement creates it. An observer seat gives you the information without the legal responsibility.

When should an investor ask for information rights?

At the term sheet stage, before any money moves. Founders accept reporting terms more easily while the round is open, and the rights then flow into the shareholders' agreement and the Articles of Association. Asking after the cheque clears depends entirely on goodwill.

Sources: Companies Act, 2013 (text as enacted), sections 128, 136, 149, 161 and 173, copy hosted by PRS Legislative Research · Gompers, Gornall, Kaplan and Strebulaev, How Do Venture Capitalists Make Decisions?, NBER Working Paper 22587, 2016 (Journal of Financial Economics, 2020)

For more on how startup funding works in India, read the MyStartupValley blog or visit mystartupvalley.com.