What is a Letter of Intent (LoI)?

A Letter of Intent, usually abbreviated as LoI, is a short written document in which one party tells another that it intends to enter into a specific transaction. In India, Letters of Intent are used in mergers and acquisitions, employment offers, real estate deals, tender awards, and startup funding rounds. If you have been asked to send or sign an LoI, you should understand what the document does, what it does not do, and how it sits in the run up to a final contract.

This guide explains what a Letter of Intent is, when to use one, what to include, and how it compares to other early stage documents.

What is a Letter of Intent?

A Letter of Intent is a document issued by one party that records its intention to proceed with a transaction on broadly stated terms. It is usually sent after initial discussions have concluded and before the parties invest resources in due diligence, drafting, and negotiating a final contract.

The LoI acts as a gentleman's handshake in writing. It captures the commercial understanding so far and confirms that both sides are serious enough to move to the next stage. In most cases, the LoI itself is not meant to be the final agreement. A separate definitive contract will follow.

Common uses of a Letter of Intent in India

You will see Letters of Intent in many Indian business contexts:

• Mergers and acquisitions. A buyer sends an LoI to a target company setting out the proposed price, structure, and exclusivity period.
• Employment. An employer issues an LoI to a selected candidate before sending a formal appointment letter, especially for senior hires.
• Real estate. A buyer or tenant issues an LoI to confirm interest in a property before paying a token amount and moving to a sale or lease agreement.
• Public tenders. A government department or PSU issues an LoI to the winning bidder before signing the formal contract.
• Franchise and distribution. A franchisor issues an LoI outlining the rights being offered to a prospective franchisee.
• Startup funding. An investor issues an LoI or term sheet to a startup before the definitive share subscription agreement is drafted.

Is a Letter of Intent legally binding?

This depends entirely on how the LoI is drafted. Under the Indian Contract Act 1872, any document that reflects offer, acceptance, consideration, and intent to create legal relations can be treated as a contract. Courts in India look past the title of the document.

A well drafted LoI clearly states which clauses are binding and which are not. Typically:

• Binding clauses include confidentiality, exclusivity, governing law, dispute resolution, and cost allocation during due diligence.
• Non binding clauses include the commercial terms such as price, structure, and timelines, which are usually "subject to a definitive agreement".

If the LoI is silent on whether it is binding, a court will interpret the document based on the language used and the conduct of the parties. Words like "shall", "agrees to", and "undertakes" suggest a binding intent, while words like "intends", "may", and "subject to" suggest a non binding statement.

Structure of a Letter of Intent

A typical LoI is short, usually one to three pages. It includes:

1. Date and addressee

The date of issue and the name and address of the party to whom the LoI is addressed.

2. Reference to earlier discussions

A short paragraph confirming that the parties have been in discussions and that the LoI records the outcome of those discussions.

3. Transaction description

A clear statement of what the transaction is: acquisition, employment, lease, franchise, or funding.

4. Key commercial terms

Price or consideration, payment schedule, scope, and any conditions. For an acquisition, this includes the target shares, the proposed valuation, and the form of consideration. For employment, this includes role, location, joining date, and compensation.

5. Conditions precedent

What must happen before the transaction can close, such as due diligence, regulatory approvals, or board approval.

6. Exclusivity

A period during which the receiving party will not negotiate with any third party.

7. Confidentiality

A binding obligation to keep the discussions confidential.

8. Binding vs non binding

An explicit clause stating which parts of the LoI are binding and which are not.

9. Governing law and jurisdiction

Usually Indian law with jurisdiction in a specified city.

10. Signature and acknowledgement

Signature of the issuing party and a place for the receiving party to countersign to show acceptance.

Sample Letter of Intent opening

"This Letter of Intent is issued by ABC Capital Private Limited to XYZ Technologies Private Limited and records the terms on which ABC Capital intends to invest in XYZ Technologies. This Letter of Intent is subject to satisfactory completion of due diligence and the execution of definitive transaction documents."

Letter of Intent vs MoU vs Term Sheet

These three documents are often confused.

• A Letter of Intent is usually issued by one party to another. It is one sided in form but records a mutual understanding.
• A Memorandum of Understanding is signed by all parties and is slightly more detailed. It is often used in collaborations rather than transactions.
• A Term Sheet is a bulleted summary of key terms and is most common in venture capital deals.

All three can be binding or non binding depending on how they are drafted. The title matters less than the language.

Stamping and registration

A non binding LoI usually does not require stamp duty. A binding LoI that creates real obligations should be executed on stamp paper of the correct value for the relevant Indian state. LoIs for property transactions may attract higher stamp duty under state law.

Can a Letter of Intent be signed online?

Yes. Under Section 3A of the Information Technology Act 2000, an Aadhaar based eSign has the same legal effect as a handwritten signature for most commercial documents, including a Letter of Intent. This is useful when the parties are in different cities and want to lock in exclusivity before a competitor steps in.

Frequently asked questions

Can an LoI be withdrawn?

Yes, if the LoI is non binding or if the party has reserved the right to withdraw. A binding LoI cannot be withdrawn unilaterally.

Does the receiving party have to sign the LoI?

If the LoI is intended to be binding, the receiving party usually countersigns to show acceptance. If it is purely informational, a countersignature is not essential but is best practice.

What happens after the LoI is signed?

The parties move to due diligence and drafting of the definitive contract. The LoI governs the relationship during this period.

Is a Letter of Intent the same as an offer letter?

In employment, an LoI is often the document issued before a formal appointment letter. In M&A, it is the document issued before a share purchase agreement. The purpose is the same: signal intent before committing fully.

How long is an LoI valid?

It varies. Most LoIs specify an expiry date, after which the terms lapse unless extended in writing.

Draft and sign your Letter of Intent online

SignSetu lets you send a Letter of Intent for signature in minutes using Aadhaar eSign, with legal validity across India. No printing, no courier, no wet signatures. Start at SignSetu Letter of Intent eSign.