Due Diligence

Due Diligence: complete guide

Introduction

Before you invest in a company, buy a business, enter a joint venture, lend money or sign a major contract, you need to know what you are getting into. Due diligence is the structured investigation that gives you that knowledge. It examines the legal, financial, tax and regulatory position of the target business, checks whether what the other side has told you is accurate, and brings to light the risks that could affect the value of the deal or your decision to go ahead at all.

In India, due diligence commonly covers several areas. Corporate and secretarial due diligence checks the company's incorporation, share capital history, board and shareholder approvals and filings with the Registrar of Companies. Legal due diligence reviews material contracts, property titles, litigation, intellectual property, employment matters, licences and regulatory compliance. Financial due diligence looks at the quality of earnings, working capital, debt and contingent liabilities. Tax due diligence examines direct and indirect tax compliance, pending assessments and exposures under income tax, GST and other laws. Where foreign investment is involved, compliance with the Foreign Exchange Management Act, 1999 and the rules on pricing and reporting is also reviewed.

Each deal is different, and so is each due diligence exercise. An angel investor putting money into an early-stage startup needs a focused review of cap table, founder agreements and key compliances. A buyer acquiring a manufacturing business needs a much wider review of land, environmental clearances, labour law, contracts and tax. A lender needs to understand the borrower's existing charges and the enforceability of security. The scope, depth and timeline must be designed for the purpose.

Our team of chartered accountants, company secretaries and advocates carries out due diligence for investors, acquirers, lenders, joint venture partners and companies preparing for a transaction. We agree the scope with you, review the documents, raise queries with the target, and deliver a report that highlights the issues that matter, explains their impact and suggests how they can be addressed in the deal documents. This page explains who needs due diligence, the legal framework, our process, the documents typically reviewed, timelines, how we price it and what follows the report.

Who Needs It

Due diligence is commonly needed by:

• Investors in startups and private companies. Angel investors, venture capital funds and private equity funds review a company before investing, to check its corporate records, ownership and key risks.
• Buyers of companies or businesses. An acquirer buying shares or a business undertaking needs to understand the liabilities it may take on and the condition of the assets.
• Sellers preparing for sale. A vendor due diligence, carried out by the seller before the sale process, identifies issues early and allows them to be fixed or disclosed, which can speed up the deal.
• Companies preparing to raise funds. A company can commission a pre-investment review of itself to make sure its records are ready for investor scrutiny.
• Lenders and financial institutions. Banks and other lenders review borrowers, guarantors and security before sanctioning loans.
• Joint venture partners. Partners entering a joint venture review each other's standing, approvals and capabilities.
• Foreign investors entering India. Overseas companies investing in or acquiring Indian businesses need to understand local law, sector restrictions and foreign exchange compliance.
• Businesses entering major contracts. Companies outsourcing critical functions, appointing distributors or entering long-term supply contracts may review the counterparty first.
• Property buyers. Purchasers of land or commercial property carry out title due diligence to check ownership, encumbrances and approvals.

Key Benefits

• Informed decisions. You understand the true position of the business before committing money or signing documents.
• Identification of hidden liabilities. Pending litigation, tax demands, undisclosed loans, sureties given for others and compliance defaults are brought to light.
• Better negotiation. Findings can support a price adjustment, an escrow, a holdback or a change in deal structure.
• Stronger deal documents. Issues found are addressed through conditions precedent, specific indemnities, warranties and covenants in the share purchase or investment agreement.
• Regulatory comfort. The review checks whether the target has the licences and approvals it needs, and whether the deal itself needs approvals such as under foreign exchange law or competition law.
• Post-deal planning. The findings help you plan the integration, compliance clean-up and governance changes after closing.
• Protection for directors and fund managers. A documented review shows that investment decisions were taken with proper care.

Types of due diligence. The most common types are corporate and secretarial, legal, financial, tax and regulatory. Depending on the deal, a review may also include commercial due diligence on the market and business model, technical due diligence on technology or plant, environmental due diligence, and human resources due diligence. Our team covers corporate, secretarial, legal, financial, tax and regulatory areas, and we can coordinate with specialists where other areas are needed.

Red flag review or full report. A red flag review focuses only on significant issues that could affect the deal and is quicker to complete. A full due diligence report covers each area in detail, describes the documents reviewed, and records both significant and minor findings. Early-stage investments and smaller deals often use a red flag review, while acquisitions and larger investments usually need a full report. We help you decide which format suits your deal.

Eligibility and Legal Requirements

There is no single law that mandates due diligence for every deal, but several legal frameworks shape what must be checked and why:

• Companies Act, 2013. The review checks compliance with provisions on share capital, allotments, transfers, board and shareholder approvals, related party transactions, loans and investments, charges, directors' appointments, registers and filings with the Registrar.
• Foreign Exchange Management Act, 1999 and the non-debt instruments rules. Where foreign investment is involved, the review checks sectoral caps, entry routes, pricing guidelines and reporting of past foreign investment, and identifies approvals needed for the proposed deal.
• Income tax law. The review covers return filing, assessments, pending demands, TDS compliance, transfer pricing where relevant, and provisions that may affect the deal, such as rules on carry-forward of losses after a change in shareholding and tax on transfers of shares at below fair value.
• GST and other indirect taxes. The review covers registrations, return filing, input tax credit, pending notices and legacy tax matters.
• Labour and employment laws. The review checks registrations and contributions under provident fund, employee state insurance and other labour laws, as well as employment contracts and policies.
• Property and environmental laws. For businesses with land or factories, the review checks title, encumbrances, land use, building approvals and environmental clearances.
• Sector-specific regulation. Regulated businesses such as financial services, healthcare, education, telecom and food need their sector licences and approvals reviewed.
• Competition law. Larger deals may need approval from the competition regulator before completion, depending on the size of the parties and the deal value thresholds.
• Confidentiality. Due diligence involves access to sensitive information. A non-disclosure agreement is normally signed before documents are shared, and data protection obligations must be respected where personal data is involved.

Laws and regulatory thresholds change from time to time. We check the current position at the time of each engagement and note the date up to which the review is carried out.

Step-by-Step Guide

1. Initial consultation. We understand the deal: who the target is, what you are acquiring or investing in, the deal structure, the timeline and your key concerns.
2. Scope and approach. We agree the areas to be covered, the period under review, whether you need a red flag review or a full report, and any materiality thresholds for reporting.
3. Confidentiality and engagement. We sign an engagement letter with you, and a non-disclosure agreement is put in place with the target where needed.
4. Information request list. We prepare a detailed request list tailored to the target's business, which is shared with the target to populate a data room.
5. Public record searches. We search the records available on the MCA portal, court and tribunal records where accessible, charge records and other public sources for information about the target and its promoters.
6. Document review. Our team reviews the documents in the data room area by area, including corporate records, contracts, financial statements, tax filings, licences, property and employment records.
7. Queries and management discussions. We raise written queries on gaps and unclear points, and hold discussions with the target's management to understand the context.
8. Analysis of findings. We classify findings by seriousness, assess their legal and financial impact, and identify which can be fixed before closing and which must be covered in the deal documents.
9. Draft report. We share a draft report with an executive summary of key issues, detailed findings and recommendations, and discuss it with you.
10. Final report and deal support. We issue the final report and, where engaged, help translate the findings into conditions precedent, warranties, indemnities and post-closing obligations in the transaction documents.

Documents Checklist

The documents requested depend on the scope. A typical list includes:

Corporate and secretarial:

• Certificate of incorporation, Memorandum and Articles of Association, and all alterations
• Shareholding pattern and cap table, including options and convertible instruments
• Records of all share allotments, transfers and buy-backs, with approvals and filings
• Minutes of board, committee and general meetings
• Statutory registers and filings with the Registrar
• Shareholders agreements, investment agreements and founder agreements

Financial and tax:

• Audited financial statements for the review period and latest management accounts
• Income tax returns, assessment orders, notices and pending demands
• GST registrations, returns, reconciliations and notices
• TDS returns and compliance records
• Details of loans, sureties given for third parties, charges and contingent liabilities

Legal and regulatory:

• Material contracts with customers, suppliers, distributors and service providers
• Licences, registrations and approvals for the business
• Details of pending and threatened litigation, arbitration and regulatory proceedings
• Intellectual property registrations, applications and assignment agreements
• Property title documents, leases and approvals

Employment:

• Employment contracts for key employees and standard terms for others
• Provident fund, employee state insurance and other statutory registrations and returns
• Employee policies and details of any labour disputes

How Long It Takes

The duration depends on the scope, the size of the target and how quickly information is provided:

• Scoping and request list: two to three working days.
• Data room population by the target: often one to three weeks, depending on how organised the target's records are.
• Red flag review of an early-stage company: usually one to two weeks from receipt of documents.
• Full due diligence of a mid-sized business: usually three to six weeks, including queries and management discussions.
• Larger or multi-entity targets: longer, depending on the number of entities, locations and areas covered.

The most common cause of delay is incomplete or late information from the target. We share a tracker of pending items with you and the target so that gaps are visible and can be closed quickly.

Pricing

Due Diligence is priced on a custom basis. Every transaction is different, so we quote a professional fee after understanding the deal and reviewing the scope you need.

The main factors that affect the quote are:

• The areas to be covered, such as corporate, legal, financial, tax and regulatory
• Whether you need a red flag review or a full report
• The size and complexity of the target, including the number of entities, locations and contracts
• The period under review
• Any foreign investment, regulated activity or property-heavy business that needs specialist attention
• The timeline, especially where the deal has a tight closing date
• Whether you also need support with transaction documents after the report

Our quote sets out the scope, the deliverables, the expected timeline and any assumptions, so you know exactly what is included before we begin. Charges for certified copies, official searches or inspections, where needed, are payable at actual.

Common Mistakes to Avoid

• Starting too late. Leaving due diligence until just before closing gives little time to deal with findings properly.
• Unclear scope. Not agreeing the areas, period and materiality threshold at the start leads to gaps or wasted effort.
• Relying only on management statements. Representations should be backed by documents and public records wherever possible.
• Ignoring the cap table history. Errors in past share allotments, transfers or foreign investment reporting are common and can be expensive to fix.
• Overlooking tax exposures. Pending assessments, input tax credit mismatches and TDS defaults can create significant liabilities after the deal.
• Not linking findings to deal documents. Issues found in due diligence should be reflected in conditions precedent, warranties and indemnities, or they may not be protected.
• Missing approvals for the deal itself. Some deals need approvals under foreign exchange law, competition law or sector regulation before completion.
• Weak confidentiality arrangements. Sharing sensitive documents without a non-disclosure agreement exposes both sides to risk.

What Happens After

Once you receive the final report, the findings feed into the next stages of the deal:

• Decision on the deal. You decide whether to proceed, renegotiate or walk away based on the findings.
• Negotiation of terms. Findings may support a change in price, deal structure, escrow, holdback or earn-out.
• Transaction documents. Key issues are addressed through conditions precedent to be fixed before closing, specific indemnities, warranties and post-closing covenants.
• Pre-closing rectification. The target may need to make late filings, regularise share issues, obtain missing licences or settle disputes before closing.
• Regulatory approvals. Any approvals needed for the deal are applied for.
• Post-closing integration. The findings help plan governance changes, compliance clean-up and integration into the buyer's or investor's systems.

Our team can support you through each of these stages, including drafting and reviewing transaction documents and handling post-closing filings such as share allotments, transfers and foreign investment reporting.

FAQs

What is the difference between legal and financial due diligence?

Legal due diligence reviews corporate records, contracts, litigation, licences, property and regulatory compliance. Financial due diligence reviews the quality of earnings, assets, liabilities, working capital and cash flows. Most deals need both, along with tax due diligence.

How long does due diligence take?

A red flag review of an early-stage company usually takes one to two weeks from receipt of documents. A full review of a larger business can take several weeks. The main factor is how quickly the target shares complete information.

Who pays for due diligence?

Usually the party commissioning it, typically the investor, buyer or lender, pays for its own due diligence. A seller may commission a vendor due diligence at its own cost to prepare for a sale.

What is a red flag report?

A red flag report focuses only on significant issues that could affect the decision or the deal terms. It is shorter and quicker than a full report and is commonly used for early-stage investments.

Can due diligence be done without the target's cooperation?

A limited review based on public records is possible, but meaningful due diligence needs access to the target's documents and management. Most deals provide this through a data room under a confidentiality agreement.

What happens if serious issues are found?

Serious issues can lead to renegotiation of price or terms, specific indemnities, conditions to be met before closing, or in some cases a decision not to proceed.

Is a non-disclosure agreement necessary?

Yes. Due diligence involves sensitive commercial and personal information. A non-disclosure agreement protects both parties and sets out how the information can be used.

Do you review foreign investment compliance?

Yes. Where the target has received foreign investment, or the deal involves a foreign investor, we review compliance with foreign exchange law, including sectoral caps, pricing and reporting.

Can a company carry out due diligence on itself before fundraising?

Yes. A pre-investment or vendor review helps the company find and fix gaps in its records before investors begin their own due diligence, which can make the funding process faster.

Does due diligence cover the promoters?

It can. Background checks on promoters and key managers, such as directorships, litigation and regulatory actions, are often included where relevant to the deal.

Will the report give an opinion on whether to invest?

No. The report sets out facts, findings and their likely impact, and suggests how issues can be addressed. The decision to invest or acquire is a commercial one that remains with you.

Can you help draft the investment or purchase agreement?

Yes. Our team can help translate the due diligence findings into conditions precedent, warranties, indemnities and covenants, and can draft or review the transaction documents as a separate engagement.

How current is the information in the report?

The report reflects documents and information available up to a cut-off date stated in the report. If the deal closes much later, a bring-down review may be needed to check for changes.

Related Tax & Compliance services

• Employee Stock Option Plan (ESOP)
• ESI Registration
• GST Advisory
• GST Return Filing