Business Due Diligence in M&A: Legal, Financial and Tax Due Diligence Checklist

Business Due Diligence explained: this guide covers what Business Due Diligence means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Due diligence (DD) is the systematic investigation of a target company before an acquisition, merger, or investment. It allows the acquirer to make an informed decision and structure appropriate risk protection. In India, due diligence practices follow global standards with additional focus on local regulatory, tax, and labour compliance.

Structure of a Due Diligence Exercise

Legal Due Diligence Checklist

Corporate Structure

• Certificate of incorporation, MOA/AOA (current)
• Complete shareholding structure — shareholders agreement, transfer restrictions
• Subsidiary/associate companies, branch offices
• Director details — DIN, disqualifications, conflicts of interest
• AGM/EGM minutes (3 years), board minutes review
• Pending ROC filings, compliance history

Material Contracts

• Customer contracts (top 20): revenue concentration, auto-renewal, change-of-control clauses
• Supplier/vendor contracts: exclusivity, pricing, minimum purchase commitments
• Finance documents: loan agreements, charge documents, covenant compliance
• Lease agreements: key terms, renewal options, landlord consent for assignment
• Existing M&A agreements: JVA, SHA, ROFR/ROFO on shares

Intellectual Property

• Trademark registrations (all countries where operating) — status, ownership
• Patent portfolio — validity, infringement risk
• Software licenses: proprietary vs open source
• IP assignment agreements from employees/contractors
• Technology license agreements with third parties

Litigation

• Pending and threatened litigation across all forums
• Income tax demands (assessment orders, appeals pending)
• GST and customs disputes
• Consumer complaints, product liability claims
• Employment disputes, labour tribunal matters

Tax Due Diligence Checklist

• Last 6 years of Income Tax Returns with computation
• Pending assessments, scrutiny notices, demands
• Transfer pricing documentation (if international transactions): Form 3CEB reports
• GST returns (GSTR-1, GSTR-3B, GSTR-9) for last 3 years; any demand notices
• TDS compliance: TDS returns filed, demands outstanding
• MAT credit carryforward (ITA 2025 — AMT Credit)
• Unabsorbed depreciation and losses carryforward
• Tax holiday status (80IAC, 80IC, SEZ units)
• FEMA compliance: FC-GPR filings, FLA returns

Red Flags in Due Diligence

• Significant undisclosed litigation (especially government regulatory actions)
• Change-of-control clauses in top revenue contracts without consent already obtained
• Large pending tax demands with weak defense arguments
• IP owned by founder personally (not transferred to company)
• Round-tripping / related party transactions at non-arm's-length prices
• FEMA violations (unpaid penalties, unreported FDI)
• Underfunded PF/ESI liabilities or large statutory dues

Due Diligence Findings Impacting Deal Structure

• Quantified risks → price reduction (purchase price adjustment)
• Contingent liabilities → escrow arrangement (held by buyer for claim period)
• Specific risks → seller indemnification clauses in SPA
• MAC (Material Adverse Change) clauses — protecting buyer if target deteriorates between signing and closing