Due diligence in mergers and acquisitions (M&A) is the process of examining a target company’s financial, legal, tax, operational and regulatory position before finalising a deal. For Indian businesses, it plays a critical role in identifying hidden risks, validating valuations and ensuring acquisitions do not come with unexpected liabilities.
A thorough due diligence process helps acquirers understand what they are truly investing in, while enabling both parties to negotiate better terms and structure a deal with greater confidence. From uncovering compliance gaps to assessing financial health, due diligence is the foundation for M&A transactions that create long-term value rather than costly surprises.
Why is due diligence important and what are the main steps involved?
Due diligence is a critical risk-management and governance exercise before any acquisition is completed. It gives the acquirer clarity on what they are buying, the obligations they assume, and liabilities that financial statements may not reveal. Without proper due diligence, the target's undisclosed liabilities can transfer to the buyer after closing.
The process follows a structured sequence:
- Both parties sign a Non-Disclosure Agreement (NDA) before any confidential information is shared.
- The buyer’s advisers review the data room across legal, financial, tax and operational workstreams, as findings in one area frequently affect another.
- Management meetings are held to go beyond documents and assess the leadership team directly.
- Findings are compiled into a report that separates manageable risks from deal-breakers.
- The report guides negotiations, with unresolved risks addressed through representations, warranties and indemnities before closing.
What are the types of due diligence in Indian M&A transactions
Every M&A transaction involves multiple due diligence workstreams running simultaneously, with each one examining a different dimension of the target company’s risk profile. The main types of due diligence are as follows:
Legal due diligence
Legal due diligence examines the target's corporate structure, contracts, litigation history, and intellectual property ownership. It also checks compliance with applicable Indian laws, including the Companies Act, 2013, labour legislation, and sector-specific regulations. For listed company acquisitions, it also covers compliance with the Securities and Exchange Board of India (SEBI) Takeover Regulations and open offer obligations.
Financial due diligence
Financial due diligence verifies the accuracy of historical financial statements, working capital position, off-balance-sheet liabilities and the quality of reported earnings. It assesses whether the financial picture presented by the target reflects the business's actual economic position.
Tax due diligence
Tax due diligence covers direct and indirect tax positions, pending income tax demands, Goods and Services Tax (GST) compliance, transfer pricing arrangements for group companies and the tax efficiency of the proposed transaction structure. The choice between a share deal and an asset deal can have materially different tax consequences under Indian law.
Regulatory and compliance due diligence
Regulatory and compliance due diligence assesses the approvals and obligations involved in a transaction. These may include approvals or requirements from the Competition Commission of India (CCI), SEBI for listed entities, the Reserve Bank of India (RBI) for cross-border transactions under the Foreign Exchange Management Act (FEMA), 1999, and the National Company Law Tribunal (NCLT) for merger schemes.
Operational due diligence
Operational due diligence evaluates the target’s business model, supply chain, technology infrastructure, customer concentration and key management dependencies.
For technology acquisitions, it also includes cybersecurity and data privacy reviews under the Digital Personal Data Protection (DPDP) Act, 2023, and the DPDP Rules, 2025, which are being implemented in phases with full compliance expected by May 2027. Diligence should check the target's consent, breach-notification, and data-processor contract readiness under this framework.
How does due diligence differ from the buyer and seller perspective?
Due diligence is not exclusive to the buyer. Both parties in an M&A transaction conduct their own reviews, but their objectives, focus areas and stakes differ.
|
Aspect |
Buy-side due diligence |
Sell-side due diligence |
|
Who conducts it |
The acquiring entity or prospective buyer |
The business being sold and its shareholders |
|
What it focuses on |
Evaluating the target’s financial health, operations, legal position, compliance status and key risks before acquisition |
Preparing the business for sale by organising records, addressing concerns and presenting the company accurately |
|
What it helps achieve |
Better acquisition decisions, fair valuation and a clearer post-acquisition integration strategy |
A smoother transaction process, stronger negotiating position and improved valuation support |
|
What it involves |
Detailed examination of financial records, contracts, customer relationships, market standing and regulatory compliance |
Internal assessment of financial, operational and legal matters that a prospective buyer is expected to review |
|
End goal |
Identify potential deal-breakers, assess transaction viability and reduce exposure to post-closing liabilities |
Reduce surprises during buyer review, support a seamless transaction and maximise business value |
What are the key risks associated with due diligence?
Due diligence often reveals risks that may not be visible during initial discussions or reviews. These risks can affect valuation, negotiations, transaction structure and the buyer’s exposure after closing.
- Hidden liabilities: Due diligence can uncover unresolved tax disputes, pending litigation, contractual obligations, employee claims or regulatory breaches that may not be immediately visible from financial statements.
- Customer concentration: Due diligence identifies whether a business relies heavily on one or two major clients. While this may appear stable initially, the loss or change of a key relationship can significantly impact future revenue.
- Regulatory non-compliance: Due diligence helps detect missing licences, delayed statutory filings or sector-specific violations that could lead to penalties, compliance issues or operational disruption after the transaction.
- Overstated business performance: Due diligence reviews revenue projections, customer retention assumptions and growth forecasts to determine whether they accurately reflect future performance or create an inflated valuation.
- Key person dependency: Due diligence highlights whether the business relies heavily on founders, executives or technical specialists. If these individuals leave after acquisition, business continuity and future growth may be affected.
Conclusion
A merger or acquisition is a major financial decision, and due diligence determines whether the deal is built on clarity or uncertainty. More than a pre-deal checklist, it helps businesses identify risks, validate valuations and define responsibilities before ownership changes hands.
For Indian businesses, where regulatory requirements and compliance risks can be complex, effective due diligence is crucial to protecting deal value. Maintaining accurate financial records and audit-ready books helps businesses handle scrutiny with confidence.
TallyPrime helps businesses stay prepared with organised financial records, GST compliance history and reliable books, making it easier to support due diligence and make informed business decisions.
