Private equity firms in India are increasingly adopting the “locked box” mechanism, particularly in high-value purchases, to protect the value within the businesses they are targeting while negotiations are ongoing.
Under this mechanism, both the fund and the target company agree on the final purchase price using the target’s most recent audited financial statements, and there are no post-completion adjustments.
This mechanism helps investors safeguard the value of the target company during the period between the locked box date and the date of completion of the deal, by including an obligation in the share purchase agreement for the seller to indemnify the buyer for any undue leakage or extraction of value from the business that takes place during the locked box period.
