Exiting a business marks a pivotal chapter in a founder’s journey, representing both the culmination of years of effort and the beginning of new opportunities. Whether the decision stems from succession planning, acquisition offers, financial considerations, or the pursuit of fresh ventures, a well-structured exit plan is crucial to preserve value and maintain operational continuity.

 In India, such transitions are layered with legal, tax, and regulatory complexities that require strategic foresight and meticulous execution. From choosing the right time to ensuring compliance with multiple laws, founders must approach exit planning with clarity and precision. 

In this article, CA Manish Mishra talks about Exit Planning for Founders: Timing, Strategy & Compliance.

Exit Planning and Why It Matters

Exit planning is the strategic process by which business owners prepare to transfer ownership of their company, either through a sale, merger, public offering, succession, or other means. A successful exit plan involves not only maximizing the company’s value but also ensuring tax efficiency, regulatory compliance, and minimal disruption to operations. In India, where family-owned and founder-led startups dominate, exit planning is particularly vital to preserve stakeholder confidence and business legacy.

Choosing the Right Time for Exit

Timing plays a crucial role in determining the success of an exit. Founders must evaluate factors such as market conditions, business valuation, growth trajectory, personal financial goals, and investor readiness before initiating an exit. Exiting during a period of business stability, strong revenue growth, and favorable industry sentiment can result in better valuation and smoother negotiations. Moreover, timing should align with regulatory requirements such as lock-in periods for equity shares in case of IPOs under SEBI (ICDR) Regulations, 2018 or restrictions on promoter exit under shareholders’ agreements with venture capitalists or private equity investors.

Exit Strategies Available to Founders

Founders in India can consider multiple exit routes depending on the nature of their business, ownership structure, and market dynamics:

• Sale of Shares (Secondary Exit): The founder sells their equity stake to another individual, investor, or strategic buyer. This route is common in private companies and must comply with the Companies Act, 2013, Shareholders’ Agreement, and FEMA regulations if the buyer is a foreign national.

• Initial Public Offering (IPO): A public listing allows founders to gradually exit through secondary market transactions. Founders must comply with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, which include disclosure requirements, promoter lock-ins, and minimum public shareholding norms under SEBI (LODR) Regulations, 2015.

• Merger or Acquisition (M&A): Founders may exit through a merger or acquisition, governed by Sections 230-232 of the Companies Act, 2013. The scheme requires approval from the NCLT, creditors, shareholders, and may also trigger antitrust review under the Competition Act, 2002 if thresholds are crossed.

• Management Buyout (MBO) or Employee Buyout (EBO): These involve the founder transferring ownership to existing management or employees. While strategically smooth, these require structuring under Section 62 and Section 230 of the Companies Act, and may involve ESOPs or trust mechanisms for funding the buyout.

• Buyback of Shares: Under Section 68 of the Companies Act, 2013, a company may buy back the founder’s shares subject to limits (25% of paid-up capital and free reserves), compliance with debt-equity ratio, and filing of SH-9 (Declaration of Solvency) and SH-8 (Buyback Offer Document).

• Voluntary Liquidation: In case the business is no longer viable or aligned with the founder’s vision, exit through voluntary liquidation is an option under Section 59 of the Insolvency and Bankruptcy Code (IBC), 2016.

Legal Compliance for a Founder’s Exit

Every exit strategy must ensure full legal and financial compliance. Key areas include:

• Companies Act, 2013:

  • Section 42 (Private placement) and Section 62 (Preferential allotment) govern new investments if founders sell their stake to new investors.

  • Section 110 and Section 179/180 govern board and shareholder approvals for major decisions.

  • ROC filings like MGT-7, SH-4, DIR-12, and PAS-3 may be triggered based on the type of transaction.

• SEBI Regulations:
  In case of listed companies, exits must comply with:

  • SEBI SAST Regulations, 2011 for triggering open offers if control shifts;

  • SEBI PIT Regulations, 2015 regarding trading window and UPSI for promoters;

  • SEBI LODR Regulations, 2015 for disclosure of key management exits.

• FEMA Regulations (if foreign investors are involved):

  • The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 requires pricing compliance and reporting under FC-TRS form.

  • Sectoral caps and approval requirements must be checked for sectors like retail, defense, or media.

• Income Tax Act, 1961:

  • Sale of shares attracts capital gains tax under Section 45, with rates depending on holding period and type of shares (listed/unlisted).

  • Section 56(2)(x) may apply if shares are transferred below fair market value (FMV).

  • Section 17(2) perquisite tax applies if exit involves ESOPs or sweat equity.

• Contractual Compliance:

  • Founders often have vesting schedules, lock-in periods, or non-compete clauses under shareholders’ agreements or employment contracts.

  • Drag-along or tag-along rights may be invoked, requiring consent or co-sale with investors.

Due Diligence and Valuation Considerations

Exit planning requires robust legal and financial due diligence. Founders should engage advisors to assess:

• Pending litigations or disputes

• Regulatory non-compliances

• ESOP liabilities

• Debt covenants

• Accurate business valuation

Valuation must follow industry practices such as DCF or comparable transaction methods. For tax and FEMA purposes, a merchant banker valuation report may be mandatory to establish FMV.

Succession and Stakeholder Communication

Founder exits should be accompanied by a succession plan that clearly delegates authority and ensures leadership continuity. Transparent communication with stakeholders including employees, customers, and investors is essential to avoid disruption and maintain goodwill. If a family member or internal executive is taking over, succession training and documentation of responsibilities must be formalized.

Recent Regulatory Updates Affecting Founder Exits

• SEBI's 2023 amendments to LODR Regulations mandate earlier disclosure of board and key management changes.

• FEMA updates (2023-24) now require valuation certificates for share transfers involving non-residents to be based on internationally accepted methodologies.

• Budget 2023 clarified tax on capital gains for sale of startup shares, reaffirming indexation and surcharge rules.

• Startups registered under DPIIT continue to enjoy certain ESOP tax deferrals under Section 80-IAC, easing exits linked to employee participation.

Conclusion

Exit planning is not a last-minute decision it’s a strategic imperative that founders must begin well before the actual transition. By carefully evaluating the right timing, available strategies, and ensuring regulatory compliance under the Companies Act, SEBI, FEMA, Income Tax, and IBC, founders can exit in a way that preserves value, reputation, and stakeholder confidence. Engaging experienced legal, financial, and tax advisors is crucial to tailor the exit process based on business type, capital structure, and founder goals. With India’s maturing regulatory environment and increasing investor scrutiny, thoughtful exit planning has become as important as business planning.

Frequently Asked Questions (FAQs)

Q1. What is exit planning for founders?

Ans. Exit planning is a strategic process by which business founders prepare to transfer or sell their ownership in a company, ensuring value realization, legal compliance, and business continuity.

Q2. When is the right time for a founder to exit a business?

Ans. The ideal time is during a phase of stable revenues, strong valuation, and favorable market conditions. Timing should also align with investor goals and regulatory lock-in periods, especially in listed entities.

Q3. What are common exit strategies for founders in India?

Ans. Founders can exit through share sales, IPOs, mergers and acquisitions (M&A), management or employee buyouts (MBO/EBO), buybacks, or voluntary liquidation, depending on the company’s structure and objectives.

Q4. Which laws apply to founder exits in India?

Ans. Major applicable laws include the Companies Act, 2013; SEBI Regulations (SAST, ICDR, LODR, PIT); FEMA Regulations (for foreign investors); and the Income Tax Act, 1961.

Q5. Are there tax implications on founder exits?

Ans. Yes, capital gains tax is applicable on share sales. ESOPs and discounted share transfers may also attract perquisite or deemed income tax under Sections 17(2) and 56(2)(x) of the Income Tax Act.

Q6. Do founders need regulatory approvals to exit?

Ans. Yes, depending on the transaction type. For example, FEMA approval may be required for cross-border deals, and SEBI regulations must be followed for listed company exits or open offers.

Q7. What is the role of valuation in exit planning?

Ans. Proper valuation ensures fair pricing and tax compliance. In cross-border or regulated transactions, valuation reports by registered merchant bankers are often mandatory.

Q8. Can a founder exit via a buyback?

Ans. Yes, under Section 68 of the Companies Act, the company can buy back its shares, subject to conditions on limits, solvency, and board/shareholder approvals.

Q9. What is the significance of shareholders’ agreements in founder exits?

Ans. Shareholders’ agreements often contain clauses like drag-along, tag-along, lock-in, and non-compete, which can impact how and when a founder exits.

Q10. How should a founder handle succession during exit?

Ans. A clear succession plan should be in place to ensure leadership continuity. Communication with investors, employees, and customers is critical for a smooth transition.