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Introduction
The recent strategic investment by Japan’s Mitsubishi UFJ Financial Group (MUFG) in Shriram Finance has ignited a debate on the legality and appropriateness of non-compete fees paid to promoters in India. While such clauses are standard in mergers and acquisitions (M&A), the unique structure of this deal-where promoters retain management control, raises critical questions about compliance with Indian contract law, corporate governance norms, and competition regulations.
This article maps the legal framework governing non-compete agreements in India, blends judicial precedents that shape enforceability, and explores the regulatory implications under corporate and competition law. It also contrasts global practices to show how other jurisdictions treat similar arrangements and concludes with practical compliance strategies.
Background of the Transaction
MUFG is acquiring a significant stake in Shriram Finance, positioning itself as a strategic investor rather than a controlling shareholder. Reports suggest that promoters of Shriram Finance will receive a non-compete fee as part of the transaction. Traditionally, non-compete fees are justified when promoters exit the business entirely, ensuring they do not establish competing ventures. However, in this case, promoters will continue to exercise management control, making the rationale for such payments less clear and potentially contentious.
This fact alone complicates the commercial rationale for a non-compete payment. If the promoters remain embedded in decision-making, the argument that the investor requires protection from competitive threats becomes less persuasive-and potentially vulnerable to regulatory and judicial scrutiny.
Legal Framework: Section 27 of the Indian Contract Act, 1872
The enforceability of non-compete clauses in India is primarily governed by Section 27 of the Indian Contract Act, 1872 (“Contract Act”), which states:
‘Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.’
The principal exception recognised under Indian law permits reasonable restrictions when they are ancillary to the sale of goodwill or business. For a non-compete clause to be valid:
- it must be reasonable in scope and duration;
- it should be necessary to protect legitimate business interests; and
- it should not amount to an absolute restraint on trade.
In the Shriram-MUFG context, the promoters’ continued involvement in management could weaken the argument that MUFG needs protection from competitive threats, making the non-compete fee vulnerable to challenge under Section 27 of the Contract Act. In my opinion, this structure pushes the goodwill exception close to its doctrinal limits and invites closer examination under Section 27.
Judicial Precedents
Under Indian law, non-compete clauses are not automatically invalid, instead, they are assessed in light of the doctrine of restraint of trade and public policy. Courts examine whether such clauses are reasonable in terms of scope, duration, and consideration. Where promoters continue to be operationally involved, courts and regulators may view the payment as economic insulation rather than a bona fide transfer of goodwill, thereby heightening the risk of legal challenge.
Indian courts have consistently subjected restrictive covenants to close scrutiny, and the key case laws illustrates this approach:
- Niranjan Shankar Golikari v. Century Spinning & Manufacturing Company Limited (1967)
The Supreme Court upheld restrictions during employment but emphasized that post-employment restraints must be reasonable and justified.
- Gujarat Bottling Co. Ltd. v. Coca Cola Co. & Ors. (1995)
In this case, the Apex Court recognized that negative covenants ancillary to lawful contracts are enforceable when they are reasonable and necessary to protect legitimate interests. Importantly, it notes that negative covenant restricting a person’s liberty to carry on trade or profession is construed strictly in the context of employer-employee relationships, and less strictly in cases involving the sale of a business or goodwill.
- Percept D’ Mark (India) Private Limited v. Zaheer Khan (2006)
The Court struck down post-contractual restraints as void under Section 27, reiterating that Indian law does not favour restrictions beyond the term of the contract.
Applying these principles, a non-compete fee paid to promoters who retain control could be seen as disproportionate and lacking necessity, especially if the promoters continue to influence strategic decisions.
Regulatory Considerations
The Securities and Exchange Board of India (SEBI) may examine whether such payments constitute undue benefit to promoters, particularly if they are not linked to a genuine transfer of control.However, as per Regulation 26(6) of the SEBI (Listing Obligations and Disclosure Requirements)Regulation, 2015, promoters are permitted to enter into transactions with third parties to receive compensation or profit-sharing from dealings in the company’s securities provided board and shareholder approval is obtained. This means that arrangement such as non-compete fees are not outright prohibited, but they must pass the test of transparency and shareholder consent. Besides, the disclosure norms under SEBI’s takeover regulations mandate transparency in such arrangements. If approvals are secured, disclosures are made, and no challenge arises, promoters can indeed structure such arrangements to maximize deal value.
In addition, the Competition Commission of India (CCI) could assess whether the clause restricts market competition or creates barriers for new entrants. If the non-compete agreement is overly broad, it may attract scrutiny under the Competition Act, 2002.
Global Perspective
Globally, non-compete clauses are treated more liberally than in India, subject to reasonableness tests:
- European Union: Non-compete clauses are permissible if they are proportionate and necessary for protecting transferred goodwill. Geographic scopes are tightly controlled, and compensation are tightly controlled.
- United States: Courts apply a ‘reasonableness’ standard, considering duration, geography, and legitimate business interests but maintain limited enforceability. However, recently Federal Trade Commission (FTC) decision banned non-complete clauses commonly signed by the workers for not joining their employer’s rival though its implementation remains subject to ongoing legal challenges.
- Singapore & Hong Kong: Similar to India, these jurisdictions impose strict scrutiny, allowing only reasonable restrictions.
India’s approach remains conservative, prioritizing freedom of trade over contractual autonomy, making it essential for businesses to structure non-compete clauses carefully particularly in promoter-led businesses.
Implications for Future Deals
If regulators or courts were to challenge the MUFG-Shriram arrangement, the resulting precedent could materially influence how non-compete clauses are structured in India.
Companies may need to:
- justify non-compete fees with clear evidence of risk mitigation;
- limit restrictions to reasonable time frames and geographies scope;
- ensure strict compliance with applicable disclosure and governance norms; and
- avoid payments that could be perceived as disguised promoter benefits.
Conclusion
The MUFG-Shriram structure tests the boundaries between commercial deal-making and public interest constraints. It is significant because it blurs conventional buyer–seller roles in M&A transactions: the investor provides capital while promoters remain operationally central. This hybrid model, increasingly common in strategic investments and private equity deals.
The legal conclusions drawn in this context could set important precedents affecting deal design, valuation, and negotiation leverage across India’s financial and corporate sectors. While non-compete, fees are a standard M&A tool, their legitimacy and prudence remain highly context-dependent-particularly where promoters retain control or substantial influence. If such arrangements are secured approvals, disclosed under applicable laws and not challenged, they could serve as a legitimate mechanism for promoters to maximize deal value.
Authors: Avantika Shukla (Senior Associate) & Aditya Kamboj (Associate)