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
| Workstream | Led By | Key Focus Areas |
|---|---|---|
| Legal DD | M&A Lawyers | Corporate structure, contracts, litigation, IP, regulatory |
| Financial DD | Investment bankers / Big 4 CAs | Financial statements, EBITDA, working capital, capex |
| Tax DD | Tax CAs | Direct tax, GST, TDS, transfer pricing, pending demands |
| Commercial DD | Management consultants | Market position, competition, customer concentration |
| HR DD | HR consultants | Employment contracts, PF/ESI, pending labour disputes |
| Technical/IT DD | Tech consultants | IP systems, cybersecurity, data compliance (DPDP 2023) |
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
Need Expert Help?
Our CA and legal experts at TaxClue are ready to assist you with compliance, filings, and advisory.
Get Free Consultation