Mergers and acquisitions (M&A) are complex corporate deals in India. While valuation and strategy often get the most attention, due diligence is what ensures a deal succeeds. Without proper due diligence, companies risk hidden liabilities, regulatory violations, disputes after acquisition, financial losses, or even deal failure. This guide explains what due diligence means in India, why it matters, and how it can be conducted effectively.
What Is Due Diligence in M&A?
Due diligence is a detailed review of a target company’s legal, financial, and regulatory status. It helps the acquiring company make informed decisions before signing a deal. In India, an M&A lawyer usually conducts legal due diligence to spot potential risks, liabilities, and compliance gaps that could affect the transaction.
Why Due Diligence Is Important in India
India has a complex regulatory system with multiple laws, authorities, and sector-specific rules. Even minor non-compliance can have serious consequences. Due diligence helps identify legal and regulatory risks, verify ownership and control, assess contracts, detect pending litigation, and support accurate valuation. This process ensures that the deal is safe and well-structured.
Types of Due Diligence
Legal due diligence examines corporate records, shareholding structure, articles of association, shareholder agreements, important contracts, ongoing litigation, and regulatory approvals. Lawyers ensure all areas comply with the law and highlight legal risks.
Financial due diligence reviews financial statements, outstanding debts, tax compliance, revenues, expenses, and related-party transactions. This gives a complete view of the company’s financial health.
Regulatory and compliance due diligence checks adherence to the Companies Act, sector-specific laws like RBI or SEBI rules, labor regulations, environmental laws, and data protection policies. Addressing gaps early prevents future legal issues.
Commercial and contractual due diligence looks at customer and supplier agreements, partnerships, loans, and intellectual property licenses. Experts ensure these contracts are enforceable and transferable, which is critical for the transaction.
Common Red Flags in Due Diligence
Due diligence may uncover issues like incomplete statutory filings, undisclosed litigation, unclear ownership of assets or intellectual property, expired contracts, or pending regulatory approvals. These issues can affect deal structure, valuation, warranties, and closing timelines. Identifying red flags early allows companies to address them before finalizing the deal.
Due Diligence for Startups vs. Established Companies
Startups often lack organized documentation, have compliance gaps, and need focused review of intellectual property and founder agreements. Established companies usually have a more complex compliance history, face stricter regulatory scrutiny, and require detailed checks on litigation and taxes. Early-stage startups need a legal compliance lawyer, while larger M&A deals involve specialized advisory teams.
How Due Diligence Shapes a Deal
Findings from due diligence directly influence deal decisions. They determine whether the transaction should proceed, whether it should be a share purchase or asset purchase, and the conditions required before closing. Due diligence also affects arrangements like escrow accounts or holdbacks. It is not just a formality but a crucial part of deal structuring.
Role of Legal Advisors in Due Diligence
Legal advisors guide businesses through due diligence by reviewing legal and compliance matters, identifying risks, preparing reports, and suggesting mitigation strategies. Their expertise helps companies make informed decisions and avoid costly disputes after closing the deal.
When Should Due Diligence Be Conducted?
Due diligence should happen before signing binding agreements, before investments or acquisitions, during restructuring or joint ventures, and prior to strategic partnerships. Conducting due diligence early allows issues to be resolved proactively, reducing delays or surprises in the deal.
How SNS Legal Can Help
SNS Legal provides expert guidance for businesses on due diligence requirements, legal risks in M&A deals, and compliance readiness of target companies. Companies can request consultations, submit queries, or get case evaluations. These services help ensure that M&A transactions are legally sound and risk-managed.
Disclaimer: This article is for informational purposes only. It does not constitute legal advice. Readers should consult professional legal guidance based on their specific circumstances.
