+91 7305 345 345Due Diligence
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Due diligence service in India is an investigation process that includes an audit, or review of investment chances performed to affirm all the related facts under consideration. In any type of financial dealings in the business, due diligence report plays a vital role to examine the financial records of the opposite party before fixing or signing into a proposed transaction.
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Business Due Diligence for Companies Incorporated in India
When a company is incorporated in India under the Companies Act, 2013, it cannot overlook business due diligence. Due diligence is the process of examining a company's financial, legal, tax, and operational records to verify the veracity of the data provided. It lowers the risk for investors of funding a business with unreported issues. It guarantees openness and fosters confidence among stakeholders for the business itself. In India, regulatory regulations require due diligence in addition to being a good practice. Due diligence is a procedure that includes multiple steps; it first examines the documentation of incorporation of the company, its ownership and shareholding, documents related to the tax filed, financial statements, intellectual property, and even personnel records. A thorough due diligence process gives the investor a comprehensive overlook of the risks, compliance status, and overall health of the company, helping them make an informed choice.
What is Business Due Diligence?
Business due diligence refers to a review of a company’s records and operations. It involves examining all material aspects of a company, including:
- Legal status and corporate governance.
- Shareholding and ownership patterns.
- Financial statements, tax filings, and regulatory compliance.
- Contracts with vendors, employees, and customers.
- Intellectual property, property ownership, and licences.
- Pending disputes, litigations, or regulatory actions.
Why is Due Diligence Important?
Business due diligence is important because:
1. It protects you from costly surprises
Due diligence validates ownership of shares and assets, verifies account accuracy, and uncovers issues, undisclosed debts, litigation, tax exposures, vendor dependencies, and gaps in the Intellectual Property.
2. It keeps you on the right side of the law
A reasonable diligence maps the target’s facts against laws so you don’t get penalised under the following statutes:
Companies Act, 2013
Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations
Income Tax Act, 1961
- CGST Act, 2017
- FEMA/FDI regulations
- Competition (CCI)
Sectoral regulators such as RBI (NBFC/fintech/forex), IRDAI (insurance), TRAI/DoT (telecom), SEBI (market intermediaries), state shops & establishments, food/drugs/environment boards as applicable.
3. It reduces personal exposure for directors and investors
In India, directors can face personal consequences for faulty disclosures, unpaid taxes, or non-compliance (e.g., GST, TDS, CSR). Diligence creates a clean trial to show that you acted with reasonable care.
4. It preserves the value of your tax credits and avoids future demands
GST input tax credit often goes bad if suppliers are non-compliant or if documentation doesn’t match. Diligence reconciles GSTR-1/3B/2B, checks vendor-level compliance, and validates e-invoices/e-way bills, so your credits don’t get reversed later.
5. It verifies titles, permits, and the right to operate
From factory land to shop leases to software licences, everything in India runs on paperwork. Diligence checks title chains, statutory licences (pollution consents, trade licences, labour registrations, FSSAI, factory licences) and later any verifies encumbrances/charges.
6. It tests solvency and viability (and IBC exposure)
Ageing of payables/receivables, covenant compliance, undisclosed defaults, or past IBC brushes often surface only in diligence. This helps you avoid a distressed asset in disguise or price it correctly with ring-fences and security.
7. It builds trust with auditors, investors, and buyers
When you run a vendor due diligence before a fundraise or sale, you surface and fix issues proactively. That reduces the price of chips later and keeps momentum in negotiations.
Documents Required During Due Diligence
A due diligence exercise begins with the collection of documents. The following are generally required:
1. Foundational Documents
- Certificate of Incorporation
- Memorandum of Association (MoA).
- Articles of Association (AoA).
2. Ownership and shareholding records
- Shareholding pattern (current and historical).
- Registers of members and share transfers.
- Board resolutions relating to capital raising or transfers.
3. Financial records
- Audited financial statements for the last 3 to 5 years.
- Books of accounts.
- Bank statements.
- Income tax returns filed.
4. Record on taxation
- PAN, TAN, GSTIN.
- Tax payment receipts (income tax, GST, TDS).
- TDS returns and payments.
- PF/ESI records.
- Historical Service Tax/VAT filings.
5. Statutory registers
- Share allotment register.
- Share transfer register.
- Register of directors and key managerial personnel.
- Register of charges and loans.
6. Property and IP documents
- Title deeds, lease agreements, and encumbrance certificates.
- Trademark, patent, copyright registrations or applications.
- Utility bills and possession proof.
7. Employee records
- Appointment letters, contracts, and ESOP details.
- Payroll and wage registers.
- PF, ESI, gratuity, and bonus compliance records.
- Pending employee disputes.
8. Operational records
- Business model documents.
- Material contracts with customers and vendors.
- Machinery list and asset registers.
- Sector-specific licences (FSSAI, factory licence, etc.).
Procedures for Due Diligence
Review of MCA Filings and Public Records
Anyone can access basic company details and filings on the Ministry of Corporate Affairs (MCA) portal. In India, the major part of the due diligence starts with the MCA portal.
- Date of incorporation, CIN, and company active status.
- Authorised and paid-up capital of the company.
- Date of the last Annual General Meeting (AGM) and filing of the Annual Return MGT7/MGT7-A.
- Cross-check the director's disqualification status under Section 164 of the Companies Act, 2013.
- Check if the company has filed the DIR-12 form for the appointment or resignation of directors.
- For a small fee, filings like balance sheets, annual returns, and resolutions can also be downloaded. These provide a transparent snapshot of the company’s compliance.
Review of Articles of Association (AoA)
The AoA plays an important role in due diligence of the company because it contains:
- Rights attached to different classes of shares.
- Restrictions on transfer of shares in private companies.
- Pre-emption rights or rights of first refusal.
- Special clauses affecting shareholder rights.
By reviewing the AoA, an investor gets a clear understanding of whether shares are freely transferable and what restrictions exist in their transfer.
Review of Statutory Registers
Under the Companies Act, 2013, every company is obligated to maintain statutory registers. During due diligence, these registers are checked to confirm:
- Correct details of shareholders.
- Records of share allotments and transfers.
- Details of directors and KMPs.
- Minutes of the board and general meetings to confirm decisions were duly authorised.
Review the Financial Records of the Company
Financial due diligence is one of the most important steps in ensuring the financial health of the company. For this, you need to:
- Verify bank statements against reported revenues.
- Review the related party transactions
- Check the valuation of assets and liabilities.
- Check compliance with Accounting Standards/Ind AS.
- Review internal audit and statutory audit qualifications.
- Review of debt obligations.
- Cross-check of audited statements with actual books of accounts.
- Cash flow sustainability to assess solvency.
Review Taxation
Tax compliance is important because hidden tax liabilities can penalise your company and reduce its valuation. Due diligence includes:
- Verification of income tax returns and tax payments.
- Reconciliation of TDS with Form 26AS.
- Pending assessments, appeals, or show cause notices from tax authorities.
- GST e-way bill compliance and reconciliations.
- GST filings, reconciliation, and pending dues.
- Employee-related statutory dues (PF/ESI).
Review Legal Records
- Check whether the company has valid labour law registrations, such as the Shops and Establishments Act of the respective state, and the Factories Act, 1948.
- Review contracts with suppliers, distributors, franchisees, etc.
- Check whether the company has complied with environmental regulations
- Title verification of property.
- Pending litigations in courts or tribunals
- Review of insurance policies and check whether there are any pending insurance claims.
- Verify arbitration awards or regulatory penalties pending.
- Search High Court and NCLT/NCLAT records for litigation involving the company.
Review of Operational Aspects of the Company
Understanding day-to-day business operations is equally important:
- Business model and scalability.
- Dependence on key vendors or customers.
- Number of employees and workforce stability.
- Production facilities and technology stack.
- Site visits and employee interviews to confirm ground reality.
- CSR compliance if applicable (Section 135 of the Companies Act, 2013).
Common Challenges in Due Diligence in India
- Poor record-keeping by small companies
- Delay in sharing the documents with the MCA
- Incomplete disclosures by the Promoters
- Time Pressure in Mergers and Acquisitions Transactions
- Undisclosed data and litigation matters
- Inadequate technology system
Due Diligence Checklist
Here is a quick checklist for your reference:
- Incorporation documents (MoA, AoA, COI).
- Shareholding pattern and registers
- Board resolutions and minutes.
- Audited financials for the last 3 to 5 years.
- Bank statements and cash flow.
- Income tax and GST returns.
- TDS, PF, ESI compliance.
- Statutory registers under the Companies Act, 2013.
- Property ownership/lease documents.
- Intellectual property registrations.
- Major customer/vendor contracts.
- Employee records and payroll compliance.
- Pending litigations and disputes.
- MCA filings and RoC records.
- Licences and regulatory approvals.
Why Choose Kanakkupillai?
Conducting business due diligence is not just a compliance requirement. Still, it is a preventive measure to protect your company against future risks, hidden liabilities, and unforeseen financial or legal troubles. We provide:
- Expertise in all Areas: Our team includes professionals from different fields, such as Chartered Accountants, Company Secretaries, Lawyers, and Tax Experts. They ensure that every aspect of your company, whether it is financial, legal, tax, or operational, is reviewed extensively.
- Comprehensive Approach: Unlike basic verification agencies, we go beyond just documents. Our due diligence checks compliance, governance, intellectual property, taxation, and operational health, providing a complete view of the company.
- Regulatory Knowledge: Our experts have hands-on experience with the Companies Act, 2013, SEBI regulations, IBC, and tax laws. They identify compliance gaps before they lead to disputes or penalties.
- Confidentiality: We recognise the sensitive nature of financial and legal documents. Every due diligence assignment is conducted with strict confidentiality and care.
- Full Support: From collecting statutory documents to providing a final due diligence report that includes risk assessment and recommendations, we manage the entire process, saving you time and effort.
Frequently Asked Questions
What is business due diligence in simple terms?
Business Due Diligence is a background check of a company covering financial, legal, tax, and operational aspects to verify whether the company is healthy, compliant, and worth investing in.Who conducts due diligence for Indian companies?
Due diligence is usually conducted by professional firms with expertise in accounting, law, or related fields on behalf of investors, lenders, or buyers.Is due diligence legally mandatory for private limited companies?
No, due diligence is not mandatory by law, but it becomes essential during mergers, acquisitions, investments, or fundraising to protect stakeholders.How long does a due diligence process take in India?
Depending on the size and complexity of the company, due diligence can take 3 weeks to 3 months.What are the main documents checked during due diligence?
Audited financial statements, tax filings, MCA records, statutory registers, MoA, AoA, litigation records, employee contracts, and intellectual property documents are key.Why is MCA data review important in due diligence?
The Ministry of Corporate Affairs portal provides for public records of company incorporation, directors, charges, and filings. It gives the first overview of compliance.Can due diligence uncover fraud or mismanagement?
Yes, discrepancies between financials, tax returns, and statutory filings can reveal fraud, fund diversion, or a lapse in governance of the company.How is legal due diligence different from financial due diligence?
Legal due diligence checks compliance with laws, contracts, and disputes, while financial due diligence verifies accounts, revenues, expenses, and liabilities. Both are compulsory and complementary to each other.Can foreign investors rely only on Indian company disclosures?
No, the foreign investors are required to conduct independent due diligence, as promoter disclosures are often incomplete. Regulators also advised for independent verification.What makes Us Different
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