Due Diligence Checklist for Acquiring an Indian Company

Why India-Specific Due Diligence Is Different

Acquiring a company in India is not like acquiring one in the US, UK, or Singapore. India's regulatory environment involves overlapping compliance requirements from the Foreign Exchange Management Act (FEMA), the Companies Act 2013, the Competition Act 2002, sector-specific FDI restrictions, and a tax regime with extensive anti-avoidance provisions. Missing a single compliance gap can result in transaction delays, regulatory penalties, or — in worst cases — the deal falling through entirely.

This checklist is designed for foreign investors, private equity firms, and corporate acquirers evaluating Indian targets. It covers the 12 categories that matter most when the acquirer is a non-resident entity, with specific attention to cross-border regulatory requirements that domestic checklists typically overlook.

Category 1: Corporate and Governance Due Diligence

Start with the foundational corporate structure. India has multiple entity types — private limited companies, LLPs, one-person companies — and each carries different acquisition mechanics.

Key Items to Verify

• Certificate of Incorporation and MCA filings — verify the company's registration with the Ministry of Corporate Affairs
• Memorandum of Association (MoA) and Articles of Association (AoA) — check for restrictions on share transfers, pre-emptive rights, and anti-dilution provisions
• Board and shareholder resolutions — confirm the authority of current management to negotiate and approve the sale
• Statutory registers — register of members, register of charges, register of directors
• Compliance history — check for pending ROC defaults, late filing penalties, or compounding orders
• Related party transactions — review all transactions with promoter-related entities under Section 188 of the Companies Act
• Nominee and beneficial ownership — investigate whether any shares are held by nominees or through layered structures

Category 2: FEMA and RBI Regulatory Compliance

This is where most foreign acquisitions encounter unexpected complications. FEMA governs all cross-border capital flows, and non-compliance can result in penalties of up to three times the amount involved.

Critical FEMA Checks

• FDI sectoral caps — verify whether the target's sector permits 100% FDI under the automatic route or requires government approval
• FC-GPR filings — confirm all historical foreign investment has been reported within 30 days of allotment
• FLA Return compliance — annual Foreign Liabilities and Assets return must be current
• Pricing compliance — all past share issuances to non-residents must comply with RBI pricing guidelines (DCF valuation for unlisted companies)
• ECB compliance — if the target has External Commercial Borrowings, verify end-use compliance, reporting, and all-in-cost ceilings
• Downstream investment — if the target has subsidiaries, verify FEMA compliance at each level of the ownership chain
• Press Note 3 applicability — if the acquirer or its beneficial owners are from countries sharing a land border with India (China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, Afghanistan), government approval is mandatory regardless of sector

Non-compliance with FEMA is not merely a penalty issue — it can render the acquisition itself void or require unwinding. Engage FDI advisory services early in the process.

Category 3: CCI (Competition Commission) Approval

India's merger control regime is mandatory and suspensory — you cannot close the transaction without CCI approval if the thresholds are triggered.

Notification Thresholds (2025-2026)

De Minimis Exemption

Transactions where the target's assets are below INR 450 crore or turnover is below INR 1,250 crore are currently exempt from CCI notification (extended until March 2026). However, the Deal Value Threshold introduced in September 2024 can still trigger filing requirements even when asset/turnover thresholds are not met.

Timeline

CCI has 150 days from filing to approve or modify. If no decision is issued within 150 days, the combination is deemed approved. In practice, straightforward transactions receive approval in 30-45 days.

Category 4: Tax Due Diligence

India's tax regime is layered and aggressive on anti-avoidance. Tax contingencies are among the most common deal-breakers in Indian acquisitions.

Direct Tax Checks

• Open assessments — check for pending income tax assessments, demands, and appeals for the past 6-10 years
• Transfer pricing — review all related-party international transactions for arm's length compliance; check for pending TP adjustments or ongoing Advance Pricing Agreements (APAs)
• Capital gains exposure — evaluate potential capital gains tax liability on the transaction itself; long-term capital gains on unlisted shares are taxed at 12.5% (holding period > 24 months)
• Angel tax (Section 56(2)(viib)) — abolished for FY 2026-27 onwards, but verify no legacy exposure from prior rounds where shares were issued above FMV
• MAT credit — check availability and expiry of Minimum Alternate Tax credits
• Withholding tax compliance — verify TDS deductions, deposits, and filings across all categories
• Section 195 compliance — all payments to non-residents must have proper TDS deduction or lower withholding certificates

Indirect Tax Checks

• GST compliance — verify registrations across all states, reconcile GSTR-3B with GSTR-1 and GSTR-2A for input tax credit mismatches
• GST demands and notices — check for SCNs (Show Cause Notices), anti-profiteering complaints, or reverse charge disputes
• Legacy taxes — verify closure of pre-GST disputes under Excise, Service Tax, and VAT with respective settlement schemes
• Customs duty — if the target imports goods, verify compliance with customs valuation, EPCG obligations, and advance authorisation norms

Category 5: Labour and Employment Compliance

Indian labour law is complex, with over 40 central statutes and numerous state-level variations. Non-compliance creates contingent liabilities that can materially affect valuation.

Key Checks

• Provident Fund (EPF) — verify timely deposits, correct coverage of all eligible employees, and no pending EPF demands or inspections
• ESIC compliance — Employee State Insurance coverage and contribution compliance
• Gratuity provisioning — verify actuarial valuation of gratuity liability under the Payment of Gratuity Act
• Contract labour — check registration under the Contract Labour Act and compliance with principal employer obligations
• Shop and Establishments Act — state-level registration and compliance in each state of operation
• Industrial disputes — pending labour court cases, workmen demands, or union negotiations
• ESOP/SAR schemes — verify FEMA compliance of employee stock options if participants include non-residents

Category 6: Intellectual Property

IP ownership verification is critical, particularly for technology and pharmaceutical acquisitions.

Key Checks

• Trademark registrations — verify ownership, renewal status, and any opposition or rectification proceedings
• Patent portfolio — confirm patent registrations, pending applications, and whether any patents are subject to compulsory licensing risk
• Copyright and software — verify ownership of proprietary software, source code escrow arrangements, and open-source license compliance
• Trade secrets and NDAs — review confidentiality agreements with employees and contractors
• IP assignment chain — ensure all IP created by founders, employees, and contractors has been properly assigned to the company through written agreements
• Domain names — verify ownership of all web domains and social media handles

Category 7: Real Estate and Property

Key Checks

• Title verification — conduct a 30-year title search for all owned properties; India's land records are often fragmented and inconsistent
• Lease agreements — review all commercial lease terms, renewal clauses, and lock-in periods
• Encumbrances — check for mortgages, liens, or easements registered against properties
• SEZ/STPI compliance — if the target operates from a Special Economic Zone or Software Technology Park, verify compliance with export obligations and bonding requirements
• RERA compliance — applicable if the target is in the real estate development business

Category 8: Environmental and Regulatory Permits

• Environmental clearances — verify clearances from the Ministry of Environment, Forest and Climate Change or State Pollution Control Boards
• Consent to Operate (CTO) — current status and renewal timeline for air, water, and hazardous waste consents
• Sector-specific licenses — industry permits such as drug manufacturing licenses (CDSCO), telecom licenses (DoT), NBFC registration (RBI), or insurance licence (IRDAI)
• Import-export licenses — IEC registration and any DGFT restrictions

Category 9: Litigation and Contingent Liabilities

• Pending litigation — compile all pending cases across forums: civil courts, consumer forums, NCLT, High Courts, Supreme Court, labour courts, and tax tribunals
• Arbitration proceedings — domestic and international arbitration matters
• Regulatory notices — pending show cause notices from any regulatory authority (RBI, SEBI, MCA, EPFO, ESIC, pollution boards)
• Disclosed vs. undisclosed contingencies — cross-reference legal department records with financial statement contingent liability notes
• Director disqualification risk — check DIN status of all directors for any disqualification orders

Category 10: Financial Due Diligence

• Audited financial statements — minimum 3 years, ideally 5; verify audit qualifications and emphasis of matter paragraphs
• Revenue quality — analyse customer concentration, recurring vs. one-time revenue, and revenue recognition policies
• Working capital — review debtor aging, inventory obsolescence, and creditor payment cycles
• Related party pricing — verify that all related party transactions are at arm's length
• Off-balance-sheet items — corporate guarantees, letters of credit, contingent liabilities, and capital commitments
• Bank accounts and debt — verify all bank facilities, security interests registered with CERSAI, and covenant compliance
• Statutory dues — outstanding payments to government authorities (GST, TDS, EPF, ESIC, professional tax, advance tax)

Category 11: Technology and Cybersecurity

With the DPDP Act 2023 now in force, data protection due diligence has become a mandatory addition to the M&A checklist.

• DPDP Act compliance — assess the target's readiness for DPDP Act obligations, particularly if it qualifies as a Significant Data Fiduciary
• CERT-In compliance — verify compliance with CERT-In's 2022 cybersecurity directives on incident reporting (6-hour reporting window)
• IT infrastructure audit — evaluate cloud hosting arrangements, data residency, backup systems, and disaster recovery capabilities
• Data processing agreements — review agreements with third-party data processors
• Software licenses — verify compliance with all enterprise software licenses (Microsoft, Oracle, SAP audit risk is significant in India)

Category 12: ESG and Sustainability

ESG due diligence has moved from optional to essential, particularly for acquisitions by European or US acquirers subject to mandatory ESG disclosure requirements.

• BRSR compliance — Business Responsibility and Sustainability Report filing (mandatory for top 1,000 listed companies)
• CSR obligations — Section 135 of the Companies Act requires companies with net worth above INR 500 crore, turnover above INR 1,000 crore, or net profit above INR 5 crore to spend 2% of average net profits on CSR activities
• Supply chain due diligence — evaluate the target's supply chain for forced labour, child labour, and environmental risks
• Carbon footprint — assess emissions data and readiness for carbon trading obligations

Red Flags That Should Trigger Deep Investigation

Experienced acquirers in India watch for specific warning signs during due diligence. Any of the following should trigger deeper investigation and potentially a price adjustment or walk-away decision.

Financial Red Flags

• Revenue concentration — if more than 40% of revenue comes from a single customer or related group, the business has significant key-customer risk
• Circular transactions — sales to entities that simultaneously purchase from related parties of the target, creating artificial revenue
• Inventory build-up — unexplained increases in inventory that do not correlate with sales growth, potentially indicating obsolescence or channel stuffing
• Deferred tax assets — large deferred tax assets from carried-forward losses that may expire before utilisation
• Auditor changes — frequent changes in statutory auditors, particularly mid-term resignations, which may indicate disagreements over accounting treatment

Regulatory Red Flags

• Unsigned FC-GPR filings — allotment of shares to foreign investors without corresponding FC-GPR filings with the AD bank
• Pricing discrepancies — shares issued to non-residents at prices below the minimum prescribed under FEMA pricing guidelines
• Missing annual filings — late or missing ROC annual returns (Form AOC-4, Form MGT-7) suggest broader governance weaknesses
• Director DIN issues — directors whose Director Identification Numbers are flagged as deactivated or disqualified on the MCA portal
• Pending compounding applications — applications to the RBI for compounding of FEMA violations indicate acknowledged non-compliance

Transaction Structure Considerations

The due diligence findings should inform your choice between a share purchase and asset purchase structure:

Post-Acquisition Filing Requirements

After closing, foreign acquirers must complete several regulatory filings within strict deadlines. Missing these deadlines carries compounding penalties.

• FC-GPR / FC-TRS — file within 30 days of allotment (new shares) or 60 days of transfer (existing shares)
• ROC filings — Form MGT-14 (board resolutions), SH-7 (capital changes), DIR-12 (director changes) within 30 days
• RBI annual compliance — FLA Return by July 15 each year
• CCI compliance — if conditions were imposed, comply with remedies within specified timelines
• Tax compliance — withholding tax on purchase consideration, Form 15CA/15CB for cross-border payments

For detailed post-acquisition filing guidance, see our post-acquisition RBI and ROC filings checklist.

Due Diligence Timeline and Budget

A well-planned due diligence process for an Indian acquisition should follow this timeline and budget framework:

Total due diligence costs for a mid-market Indian acquisition (enterprise value INR 50-500 crore) typically range from INR 40 lakh to INR 1 crore, depending on complexity. For larger transactions or regulated sectors, costs can reach INR 2-3 crore. These costs are a small fraction of the potential liability from undiscovered compliance gaps — a single unresolved transfer pricing adjustment can exceed INR 10 crore.

Key Takeaways

• India M&A due diligence requires 12 distinct categories of investigation — financial analysis alone is insufficient
• FEMA compliance is the most common area of non-compliance in Indian companies receiving foreign investment; verify every historical allotment
• CCI notification is mandatory and suspensory above the prescribed thresholds — budget 30-45 days for approval on straightforward deals
• Tax contingencies (transfer pricing, GST, legacy indirect taxes) are the most frequent source of post-acquisition disputes
• The DPDP Act has added cybersecurity and data protection as a mandatory due diligence category from 2025 onwards