Subscription agreement deep-dive: clauses that bite GPs later

The subscription agreement (or sub-doc) is the contract under which the LP commits capital to the fund. It is the operational counterpart to the LPA: the LPA governs the fund's internal mechanics, while the sub-doc binds the specific LP to the LPA and to the LP's specific commitment terms.

Most of the sub-doc is boilerplate. Standard representations, standard transfer restrictions, standard tax provisions. The five or six clauses that matter are buried in the middle of a 40-page document and they are the ones we read carefully when reviewing sub-docs for funds we advise.

This article walks through the clauses that bite later. The framing is from the GP's perspective — what should the GP make sure is in the sub-doc, and what should the GP be ready to negotiate when an LP pushes back.

The call-down default clause

When the GP issues a capital call, the LP has to fund within the call notice period (typically 10 to 15 business days). If the LP does not fund, the LP is in default. The sub-doc specifies what happens next.

Standard remedies:

1. Interest on the unpaid amount. Typically the higher of 12% or SBI base rate plus 3%, compounded daily until paid.

2. Forfeiture of a portion of the LP's already-funded commitment. The standard formulation is 50% of the LP's funded capital, with the forfeited amount allocated pro-rata to the non-defaulting LPs.

3. Forced sale of the LP's units. The GP can offer the defaulting LP's interest to the other LPs (or to third parties) at a discount, typically 20-30% to the most recent NAV.

4. Suspension of voting rights and distribution rights until the default is cured.

First-time GPs sometimes soften these remedies in the sub-doc because they feel harsh. The remedies are harsh by design. The threat of the default clause is what makes LP commitments enforceable. If the remedies are diluted, the GP loses the practical ability to enforce calls, and a few defaults early in the fund's life create a cascading collection problem.

Tax-related obligations

The sub-doc binds the LP to the fund's tax treatment. For Cat I and Cat II funds (pass-through under Section 115UB), this includes the LP's obligation to:

1. Pay tax on the LP's pass-through income at the LP's applicable rate.

2. Reimburse the fund for any tax withholding or tax payment made by the fund on the LP's behalf.

3. Provide the fund with current and accurate information about the LP's tax residency, FATCA/CRS status, and tax characterisation.

4. Indemnify the fund for any tax liability arising from the LP's incorrect or stale information.

The clause that bites later: the indemnity for stale FATCA/CRS information. LPs change tax residency over a 10-year fund life. An NRI LP returns to India and becomes a resident; a resident LP moves abroad. If the LP does not update the fund and the fund's tax reporting is wrong as a result, the fund's liability for the misstatement is recoverable from the LP through the sub-doc indemnity. This needs to be explicit in the sub-doc.

Representations on accredited investor status

The LP represents in the sub-doc that the LP meets the SEBI accreditation threshold (₹2 crore net worth, ₹1 crore in financial assets, for individual LPs). The representation is at the time of signing and is renewed at each subscription.

If the representation is false, the LP's subscription is voidable. The fund can rescind the subscription, return the LP's funded capital (typically without the pro-rata share of fund gains), and treat the LP's investment as if it had never happened.

This sounds extreme. It is also necessary. SEBI's enforcement scrutiny on AIF eligibility has tightened, and a fund that has accepted commitments from non-accredited LPs faces direct regulatory exposure. The sub-doc representation is the fund's protection.

The clause to negotiate: the LP's right to cure a representation that becomes inaccurate during the fund's life (typically because the LP's net worth fluctuates). The standard formulation: the LP must notify the fund promptly if the LP's accreditation lapses, and the LP and the fund will work in good faith to resolve the position (typically by accelerating the LP's commitment or arranging a transfer).

Transfer restrictions

LPs cannot freely transfer their fund interests. The sub-doc specifies the transfer process: typically a right of first refusal in favour of the fund and the other LPs, followed by the GP's consent (which can be withheld in the GP's discretion).

The clause to watch: the GP's right to refuse a transfer 'in its sole and absolute discretion'. This is the standard formulation and it gives the GP wide latitude. LPs sometimes push for a 'reasonable consent' standard, which would create a meaningful litigation risk if the GP refuses a transfer. We recommend the GP defend the absolute-discretion formulation.

The exception: transfers to affiliates of the LP (family members for individual LPs, related entities for corporate LPs). These are typically pre-approved in the sub-doc, subject only to confirmation that the transferee is itself an accredited investor and that the transfer does not trigger adverse tax or regulatory consequences for the fund.

GP indemnification scope

The sub-doc indemnifies the GP and the IC members against liabilities arising from the fund's investments, except for cases of gross negligence, wilful misconduct, or fraud. The scope of the indemnity is one of the most negotiated clauses in any fund.

What the GP wants: broad indemnification covering all decisions, all communications, all actions, with a high bar for the indemnity to be excluded (gross negligence and wilful misconduct).

What the LP wants: narrower indemnification with a lower bar for exclusion (negligence rather than gross negligence) and explicit carve-outs for breaches of the LPA, breaches of fiduciary duty, and breaches of SEBI regulations.

We typically recommend that the GP defend the broad indemnification with the high bar, but accept the LP carve-outs for fiduciary duty breaches and SEBI regulation breaches. Those carve-outs are difficult to litigate around anyway, so the indemnity scope on them is largely symbolic.

The clauses LPs typically ask to add

Most Favored Nation (MFN). Discussed in the side letter article. Better in the side letter than the sub-doc, but some LPs push for MFN in the sub-doc directly.

Excuse rights. The LP can excuse itself from specific investments. Better in the side letter where it can be negotiated against the LP's specific concerns. Avoid in the sub-doc where it becomes a generic right.

Reporting expansion. The LP gets specific reports in specific formats. Better in the side letter.

Key person clauses. The LP can pause commitments if named persons leave. Some LPs want this in the sub-doc; we typically push it to the side letter.

The five questions the GP's counsel should ask

1. Does the default clause have meaningful teeth? (50% forfeiture, forced sale, 12%+ interest)

2. Is the tax indemnity broad enough to cover stale information? (FATCA/CRS, residency changes)

3. Is the accreditation representation explicit and the cure mechanism workable?

4. Is the transfer restriction at 'sole and absolute discretion'?

5. Is the GP indemnification at the gross-negligence-and-wilful-misconduct bar?

If the answer to any of these is no, the sub-doc has a structural weakness that will surface during the fund's life. The fix is to negotiate before the LP signs, not after.

One document, many years of exposure

The sub-doc is signed once and lives with the fund for the full ten-year life. The clauses that look standard at signing become the operative provisions when something goes wrong — when an LP defaults on a call, when a tax position needs to be clarified, when an LP wants to transfer interests, when a deal goes badly and the indemnity question arises. Every one of these eventualities is governed by the sub-doc, and the GP's negotiating leverage is highest at signing, not three years later. The five clauses above are where the leverage matters.