Warranty and Indemnity Insurance in Indian M&A Transactions

Foreign investors acquiring Indian companies have traditionally managed warranty risk through a combination of seller escrows, holdbacks, deferred consideration, and direct indemnity claims against selling parties. Warranty and indemnity insurance in India is changing that equation, but more slowly than in Western markets, and with regulatory constraints that affect how policies are structured and where they are placed.

The product is not new globally. In mature markets, 33% of private deals in 2024 were structured as true “walk-away” deals with no seller survival on general representations, with W&I insurance absorbing the warranty risk entirely. India is not there yet. But W&I insurance is rapidly emerging as one of the more popular transaction risk products in India, and for cross-border acquisitions above a certain deal size, the conversation about whether to use it is now standard rather than exceptional.

What Problem does W&I Insurance Actually Solve in Indian M&A?

Warranty and indemnity insurance in India addresses the gap between what a seller is willing to stand behind post-closing and what a buyer needs covered to feel adequately protected. In Indian transactions, sellers frequently resist lengthy escrow arrangements and want clean exits, while buyers face significant information asymmetry in a market where accounting practices, regulatory compliance, and corporate governance vary considerably across target companies.

The tension is structural. A private equity seller nearing the end of fund life cannot leave meaningful capital tied up in escrow for three years to cover warranty claims. A foreign strategic buyer acquiring an Indian company for the first time cannot easily assess what it does not know about the target’s historical compliance with GST, labour law, FEMA, and sector-specific regulations. W&I insurance bridges that gap: the seller exits cleanly, the buyer has a direct claim against an insurer for undisclosed liabilities that breach the warranties in the share purchase agreement.

What makes the Indian market specific is the nature of the risks that generate claims. Acquirers in the Indian M&A space have historically relied on a combination of holdbacks, escrows, price adjustments, and direct recourse against sellers for coverage on seller warranties. The shift toward insurance-backed structures is being driven partly by PE exits where sellers want nil recourse, and partly by foreign buyers who find it commercially simpler to insure the warranty risk than to negotiate prolonged seller liability tails with Indian promoters who have limited appetite for post-closing indemnity obligations.

How Does Buy-side Warranty Insurance Work in Practice?

Buy-side warranty insurance, the more common structure in Indian M&A, allows the buyer to claim directly against the insurer for losses arising from warranty breaches in the share purchase agreement. The seller gives the same warranties as in an uninsured deal. The buyer’s recourse for most warranty claims is to the insurer rather than the seller. The seller’s direct liability is typically capped at a nominal amount or limited to fraud.

The mechanics are straightforward. The buyer negotiates warranties with the seller in the SPA as normal. The W&I insurer underwrites the risk of losses arising from breaches of insured warranties up to the agreed policy limit , which is typically expressed as a percentage of enterprise value. The insurer’s premium is paid by the buyer and is non-refundable regardless of whether a claim is made.

The retention, which is the amount the buyer absorbs before the insurer pays, is a negotiated figure. In mature markets, retentions have reduced significantly and may be around 0.2% of enterprise value or lower for well-underwritten operational deals. In the UK and Europe, excess (retention) levels are as low as 0.2% of EV (tipping to nil) for operational deals. India remains less competitive on retention levels than Western markets, with retentions typically running at 0.5% to 1% of enterprise value, reflecting the underwriters’ view of Indian deal risk profiles and due diligence quality.

Premium rates in India run higher than mature market benchmarks. Global rates have fallen considerably, with W&I premium rates falling to as low as 0.4% in the UK, but India-specific policies, particularly those covering FEMA compliance warranties and sector-specific regulatory warranties, attract higher rates reflecting the complexity of the underlying risks. Policies on Indian deals are typically priced at 1% to 3% of the insured amount, depending on the sector, due diligence quality, and the specific warranties being covered.

What Indian M&A Warranties are Typically Covered and What is Excluded?

Standard W&I coverage in Indian transactions covers fundamental warranties (title, capacity, shares), general business warranties (accounts, material contracts, employees, litigation), and compliance warranties (tax, regulatory, corporate). Standard exclusions include known risks identified during due diligence, purchase price adjustments, forward-looking statements, environmental liabilities in some policies, and FEMA compliance in certain insurer mandates.

The FEMA exclusion is the India-specific issue that catches buyers most frequently. A foreign buyer acquiring an Indian company has strong commercial reasons to want FEMA compliance warranted and insured: the history of FC-GPR filings, ODI compliance if the target has overseas subsidiaries, ECB reporting, and prior-period FEMA violations all represent real risk. Some W&I insurers will cover FEMA compliance warranties with appropriate due diligence. Others exclude them entirely or provide limited coverage with a significant sub-limit. The position varies by insurer and by the quality of the FEMA compliance audit conducted during due diligence.

Tax warranty coverage in India requires specific attention. GST compliance warranties, transfer pricing documentation warranties, and income tax assessment warranties are coverable but typically subject to enhanced underwriting requirements. The underwriter will want to see a tax due diligence report from a reputable firm and may require specific tax insurance as a separate policy for identified tax exposures rather than covering them under the general W&I policy.

Indemnity clauses in share purchase agreements for specific known risks, such as an identified pending tax demand, pending regulatory inquiry, or disclosed litigation, are not covered by W&I insurance. These are specific indemnities, not warranty matters, and require either seller retention of liability or a separate contingent risk or litigation insurance policy.

The Regulatory Constraint: Why W&I Placement in India is Structurally Different

Warranty and indemnity insurance in India faces a regulatory constraint that does not exist in most markets: the Insurance Act 1938 and IRDAI regulations require that general insurance risks situated in India be placed with an IRDAI-registered insurer. This means that a global W&I policy written on a London market slip, covering an acquisition of an Indian target, may not be compliant if the risk is characterised as situated in India.

This is where the structural complexity lies. The question of where the risk is “situated” for insurance regulatory purposes determines whether IRDAI registration is required. In practice, most foreign buyers acquiring Indian companies through a foreign holding structure use one of three approaches.

The first approach is placing the W&I policy with an IRDAI-registered Indian insurer that has the capability and appetite to underwrite M&A risk. The market for this remains thin. Most Indian insurers do not have the underwriting expertise for complex M&A warranty risks.

The second approach is placing the policy offshore, with the buyer entity being a foreign company acquiring shares in India. The argument is that the insured buyer is a foreign entity, making the risk situated outside India for regulatory purposes. This approach carries regulatory uncertainty and is not uniformly accepted.

The third approach uses a Lloyd’s cover holder or fronting arrangement where an Indian-licensed entity fronts the policy and a Lloyd’s syndicate underwrites the actual risk. Recent regulatory reforms and proposed liberalisation of the Indian insurance sector may, over time, expand the availability of transactional risk insurance and reinsurance capacity.The regulatory position is unsettled enough that buyers and their brokers take different approaches depending on deal structure, the risk profile of operating without IRDAI-compliant placement, and the specific W&I insurers engaged. Getting this right requires specific insurance regulatory advice alongside the M&A counsel engagement, not afterwards.

Emerging Products Alongside W&I in Indian Transactions

Beyond core warranty and indemnity insurance in India, two adjacent products are gaining traction: PN3 risk insurance for transactions involving acquirers from land-bordering countries, and tax liability insurance for identified tax exposures that fall outside W&I coverage. Both address India-specific risk categories that general W&I policies do not cover.

Press Note 3 (2020) requires Government Route approval for FDI from countries sharing a land border with India, which covers China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan. For a transaction where the target has Chinese shareholders, or where the acquirer’s ultimate ownership structure includes Chinese capital, the PN3 compliance risk is real and quantifiable. PN3 risk insurance covers the financial consequences of a PN3 violation being found post-closing in a transaction where the parties believed the structure was compliant. The product is new and capacity is limited, but it is gaining traction in PE transactions where complex fund structures create PN3 ambiguity.

Tax liability insurance, available as a standalone policy, covers identified tax exposures that are too specific or too large to be absorbed under the general W&I policy sublimits. A target with a pending income tax assessment, an open GST audit, or a transfer pricing dispute under appeal is a situation where bespoke tax insurance is typically more efficient than attempting to cover the exposure through the W&I policy.

When W&I Insurance the right tool, and when is it not?

Warranty and indemnity insurance in India is commercially viable for acquisitions above approximately USD 25 million  in enterprise value. Below that threshold, the premium and transaction cost of obtaining and placing the policy often exceeds the commercial benefit relative to conventional escrow mechanisms. Above that threshold, particularly in competitive auction processes where sellers are demanding nil recourse structures, W&I insurance is increasingly the mechanism that allows a buyer to compete without accepting uninsured warranty risk.

It is not the right tool in every situation. For acquisitions where the buyer has identified specific risk areas that need individual assessment, bespoke indemnities negotiated with the seller may provide more targeted protection than a W&I policy with standard exclusions. For acquisitions of targets with poor financial records, thin due diligence coverage, or significant regulatory non-compliance history, underwriters will either decline to write the risk or attach exclusions that make the policy of limited value.

The product is not a substitute for rigorous due diligence. Underwriters review the due diligence reports as part of the underwriting process. A buyer who has not conducted thorough tax, legal, financial, and FEMA due diligence will not obtain meaningful warranty coverage from an insurer who has seen the same gaps in the diligence record.

Conclusion

Warranty and indemnity insurance in India is past the experimental stage. The Asia-Pacific W&I insurance market continued to grow in 2024, reflecting increasing adoption across cross-border and private equity transactions.. India’s contribution to that figure is growing, driven by PE exits, increased cross-border acquisition activity, and sellers’ increasing resistance to lengthy escrow arrangements.

The regulatory placement question, the FEMA coverage gap, and the higher retention and premium levels relative to mature markets all require specific attention. None of them are reasons to avoid the product. They are the points where deal structuring decisions made early in a transaction determine whether the W&I policy delivers its intended protection or creates a gap at precisely the moment it is needed.

Corporate Legit Consulting LLP advises foreign companies and investors on M&A risk mitigation India frameworks including W&I insurance coordination, indemnity clause structuring in share purchase agreements, FEMA compliance warranties, tax liability assessment for insurance purposes, and post-acquisition regulatory compliance. Reach out before the due diligence process begins.