Due Diligence

Due diligence is the disciplined process of investigating a business, asset or counterparty before a significant transaction — equity investment, M&A, joint venture, listing, lending or large supply contract. In Indian deal-making in FY 2026-27, due diligence has evolved from a checklist exercise to a multi-disciplinary risk and value assessment, drawing inputs from legal, tax, financial, commercial, ESG, technology and HR experts.

Why due diligence matters

Every transaction carries risk — undisclosed liabilities, regulatory non-compliance, weak contracts, contingent litigation, IP issues, related party transactions and cyber risks. A well-run due diligence:

• Confirms or refines the buyer's valuation
• Identifies deal-breakers early before time and money are sunk
• Surfaces representations and warranties to include in the share purchase / share subscription agreement
• Quantifies indemnities, escrows and price adjustments
• Plans the integration roadmap for post-deal execution

Types of due diligence

• Financial — quality of earnings, working capital, debt and debt-like items, cash flow
• Tax — direct tax positions, GST exposure, transfer pricing, withholding compliance
• Legal and secretarial — corporate records, contracts, litigation, regulatory filings
• Commercial — market position, customer concentration, competitive dynamics
• HR — manpower mix, ESOPs, statutory dues (PF, ESI, gratuity)
• Technology and IP — code ownership, data privacy, cyber security, open-source compliance
• ESG — environmental clearances, social practices, governance hygiene
• Operational — supply chain, plant capacity, capex pipeline

Standard process and timeline

1. Sign Non-Disclosure Agreement (NDA) and exchange a high-level information memorandum
2. Issue a detailed due diligence request list covering all functional areas
3. Set up a Virtual Data Room (VDR) with structured folders and access controls
4. Conduct management Q&A sessions and site visits where relevant
5. Prepare a draft due diligence report identifying issues, quantified impact and mitigation
6. Share findings with the deal team to negotiate purchase price, escrow, indemnities and conditions precedent
7. Carry out confirmatory due diligence closer to signing for material updates

Red flags to watch

• Significant unrecorded liabilities — bonus, gratuity, leave encashment
• Inconsistent GST and income-tax positions vs financial statements
• Pending tax assessments and demands above materiality
• Material related-party transactions without arm's-length pricing
• Customer concentration above 25-30% of revenue
• Pending environmental, labour or sectoral regulatory actions
• Unregistered IP, trademark disputes or open-source licensing breaches
• Promoter loans and pledges that affect post-deal control

Reverse due diligence and seller readiness

A growing trend is sellers running their own reverse due diligence before going to market — what bankers call 'vendor due diligence'. This identifies issues, allows the seller to remediate or disclose them upfront, prevents valuation chipping later, and accelerates the deal timeline. Companies anticipating a fundraise or sale in FY 2026-27 are well advised to invest in such preparation.

Working with advisors during due diligence

Due diligence is a multi-firm exercise where advisors must coordinate without duplicating work or contradicting each other. The buyer typically appoints a lead corporate advisor or banker who orchestrates legal, tax, financial, commercial and specialist diligence teams. Clear scope documents, weekly diligence committee calls and a shared issues log are the operating mechanisms that keep the exercise on track.

• Single integrated diligence committee with a clear chair and minute-taker
• Shared online issues log with severity tagging, owners and resolution status
• Daily VDR upload tracker so advisors do not miss new disclosures
• Weekly findings call covering financial, tax, legal, commercial and HR streams
• Final consolidated report distinguishing showstoppers, price-adjustment items and post-deal action points

Discipline here directly drives deal outcomes — clear issue logs lead to tighter SPA negotiations, sharper indemnities and faster closure. Indian deal markets in FY 2026-27 increasingly reward buyers who can move from term sheet to close in 90 days, which is only possible with diligence run as a tightly choreographed project.

Negotiating SPA terms based on diligence findings

Diligence findings translate directly into Share Purchase Agreement clauses. Material identified liabilities flow into specific indemnities. Pervasive risks shape general representations and warranties. Quantifiable adjustments — net working capital, debt and debt-like items, cash — feed into the purchase price mechanism. Regulatory approvals and consent rights become conditions precedent to closing.

• Specific indemnities with separate caps for identified tax, litigation and labour issues
• Representations and warranties with materiality and time-bound survival periods
• Closing date balance sheet mechanism for working capital and debt adjustments
• Conditions precedent for regulatory consents (CCI, RBI, SEBI, sectoral)
• Escrow holdback of 10-15% of consideration for indemnity claims

Conclusion

Due diligence is the single most powerful risk management tool in any transaction. Done with rigour, it not only protects the buyer but also helps the seller demonstrate transparency and command a fair valuation. As Indian markets continue to deepen and cross-border deal flows expand, mastering due diligence is a competency every founder, CFO and investor must develop.