TL;DR: Real due diligence at a serious law firm doesn’t stop at reading the financial statements and skimming a few contracts. It runs through corporate compliance history with the Registrar of Companies, every category of litigation the target could be exposed to, statutory labour and POSH compliance, tax structuring, IP chain of title, and material contract risk, methodically, with a specific document requested and a specific answer expected for each. This guide walks through that full process, organized the way a genuine due diligence exercise actually runs, with a complete checklist table at the end. For the specific contract clauses that most commonly slash a target’s actual value, our due diligence killer guide goes deeper on that one category. For the broader picture of what M&A involves, our mergers and acquisitions guide covers the fundamentals this checklist builds on.
Why this needs to be this thorough
Due diligence fails in a specific, predictable way: a team spends three weeks on the financial model and gives corporate compliance history, labour law exposure, or litigation search a single afternoon, if that. That isn’t weak diligence in those areas, it’s no diligence at all, and gaps in exactly these overlooked categories are what surface after closing, when the buyer has no real standing left to renegotiate. A genuine due diligence exercise, the kind run by an experienced M&A team, treats every category below as mandatory, not optional, regardless of how clean the target looks on the surface.
1. Corporate Existence, Constitutional Documents, and ROC Compliance History
This is where diligence actually starts, and it goes considerably deeper than confirming the company exists.
Constitutional documents. Certificate of incorporation, Memorandum and Articles of Association (or equivalent), and every amendment made to either since incorporation, cross-checked against what’s actually filed with the Registrar of Companies (RoC).
The full ROC filing history, not just the current year. Pull and review the company’s complete filing record on the MCA portal, going back to incorporation or at minimum five years. This means:
- Form MGT-7 / MGT-7A (Annual Return, under Section 92), filed within 60 days of each AGM, summarising shareholding, directorship, and registered charges for that year.
- Form AOC-4 (Financial Statements, under Section 137), filed within 30 days of each AGM.
- Form ADT-1 (auditor appointment), DIR-12 (director appointments/resignations), and DIR-3 KYC (annual director KYC, due by 30 September each year).
- Form PAS-3, filed within 30 days of any allotment of shares, cross-checked against the cap table to confirm every round of funding or ESOP exercise was actually reflected with the ROC, not just documented internally.
- Form CHG-1 and CHG-4, charge creation and satisfaction filings, cross-checked against the MCA Charge Master to confirm the Register of Charges matches what’s actually on public record, and that no charge shows as still active when it should have been satisfied.
- Form BEN-2, Significant Beneficial Ownership declarations, confirming the disclosed beneficial ownership structure actually matches reality, a real point of scrutiny where a target has complex or nominee shareholding.
- Form DPT-3, annual deposit and exempted deposit filing, and MSME Form I, half-yearly disclosure of amounts owed to micro and small enterprise suppliers beyond 45 days, both worth checking since gaps here indicate broader compliance discipline problems, not just isolated misses.
Statutory registers. Confirm the company actually maintains, and has kept updated, its Register of Members, Register of Directors and KMP, Register of Charges, and Register of Related Party Transactions, as required under Section 88 and related provisions. Missing or stale statutory registers are a genuine red flag under Sections 86, 90, 128, 448, and 450, and are frequently the first thing an ROC inspection or a serious buyer’s diligence team checks.
Board and shareholder governance. Minutes books for board meetings and general meetings, confirming the first board meeting was held within 30 days of incorporation as required, and that major corporate actions, share allotments, borrowings, related party transactions under Section 188, any loans to directors under Section 185 or investments under Section 186, were properly authorised, not retrofitted with paperwork after the fact.
A specific, high-value check most templates skip: compounding of offences and any strike-off history. Confirm whether the company or any of its directors have ever compounded an offence under the Companies Act, whether the company has ever received a Section 248 strike-off notice from the ROC for inactivity, and if so, whether restoration was properly completed. This history doesn’t disqualify a target, but it’s exactly the kind of pattern a buyer’s legal team is trained to look for, since it often correlates with broader governance discipline problems.
Secretarial audit. Where applicable under Section 204, review the Secretarial Audit Report and any qualifications or adverse observations in it, since this is effectively an independent compliance opinion on the company already.
2. Litigation and Regulatory Proceedings, Across Every Forum
A serious litigation review doesn’t stop at “any active lawsuits.” It runs a structured search across every forum the target, its directors, and key management personnel could plausibly be exposed to.
Civil litigation. Recovery suits, breach of contract claims, property disputes, both as plaintiff and defendant, since a pattern across many small claims can reveal a structural business problem a single case wouldn’t show.
Criminal proceedings. Any FIRs, criminal complaints, or prosecutions against the company or its directors, including cheque dishonour matters under Section 138 of the Negotiable Instruments Act, which are genuinely common and worth a specific check given how frequently they arise from ordinary commercial disputes.
NCLT and NCLAT matters. This deserves particular attention. Check specifically for any oppression and mismanagement proceedings under Sections 241 and 242 of the Companies Act, 2013, the statutory remedy available to shareholders holding the threshold set under Section 244, typically 10% of members or 10% of issued share capital, where a company’s affairs are alleged to be conducted in a manner prejudicial to shareholders or the company itself. The NCLT’s powers under Section 242 are genuinely broad, up to and including ordering a share buyout, removing directors, or unwinding transactions, so an active or recently resolved Section 241-242 matter is a serious diligence flag requiring its own dedicated review. Also check for any insolvency exposure, both as a potential creditor with claims against a third party in the Corporate Insolvency Resolution Process, and, more importantly, whether the target itself has ever been subject to a CIRP application or winding-up petition. Our complete guide to Sections 241 and 242 of the Companies Act covers this specific remedy in full detail.
Regulatory proceedings. Any show-cause notices, penalty orders, or ongoing investigations from sector regulators relevant to the target’s business, SEBI where securities are involved, RBI where the target is an NBFC or handles payments, or any other sectoral regulator. Where the target’s business or its directors could plausibly attract scrutiny under the Prevention of Money Laundering Act or from the Enforcement Directorate, this needs a specific, separate check, particularly for cross-border transactions.
Tax litigation. Pending assessments, appeals before the Commissioner of Income Tax (Appeals) or the Income Tax Appellate Tribunal, GST show-cause notices, and any customs or foreign trade policy disputes for import-export businesses.
Employment and labour disputes. Claims before labour courts or industrial tribunals, and any pending matters connected to the POSH Act’s Internal Committee process, covered in more detail below.
IP litigation. Trademark or patent opposition, infringement claims brought by or against the target, and domain name disputes.
Arbitration. Any ongoing domestic or international arbitration the target is party to, including the seat, governing rules, and current stage, since an arbitral award still pending enforcement is a real contingent liability even if not yet reflected as a court judgment.
3. Employment, Labour Compliance, and POSH
This category is consistently under-scrutinised relative to how much it actually affects valuation, and gaps here are specifically known to move price or kill deals during real diligence processes.
POSH Act compliance. Confirm the company has constituted an Internal Committee where it employs 10 or more people, as legally required. Check that the Committee is actually properly composed under the Act’s requirements, that the company has filed its mandatory annual report to the District Officer, due by 31 January each year, disclosing complaints received and disposed of, and that the required workplace notices and SHe-Box portal registration, where applicable locally, are actually in place. Review the history of any complaints handled by the Internal Committee, and their outcomes. Non-compliance here carries a fine of up to ₹50,000 for a first offence, with escalating consequences including potential licence cancellation for repeat non-compliance, and it is a well-known, specific red flag that investor and acquirer diligence teams check deliberately, not incidentally.
Provident Fund and ESI compliance. Confirm PF and ESI registration, that contributions have been deposited on time and in full, and that there are no pending dues or show-cause notices from EPFO or ESIC. This is genuinely one of the most common issues discovered during real diligence, and pending statutory dues here have directly caused valuation reductions and, in some documented cases, caused acquirers to walk away from otherwise attractive deals.
Contract labour compliance. Where the target engages contract labour through a staffing agency, confirm registration under the Contract Labour (Regulation and Abolition) framework, and understand that liability for the contractor’s own PF and ESI defaults can extend to the target as principal employer, a genuinely significant, often overlooked contingent liability.
Gratuity and full and final settlement practices. Confirm the company’s gratuity liability is properly recognised, ideally with a current actuarial valuation, and that exit settlements for departed employees have been processed in line with statutory timelines.
Employment documentation itself. Review the actual employment agreements for key personnel, the employee handbook or HR policy manual, code of conduct, and any confidentiality, IP assignment, and non-compete provisions binding key employees, checking enforceability under the applicable state’s position, since non-compete enforceability varies meaningfully across jurisdictions. Review statutory registers required to be maintained under labour law, including wage registers and attendance records, since these are exactly what a labour inspection would request, and their absence or disorganisation is itself informative about the target’s broader compliance culture.
Equity compensation. Where the target has an ESOP pool, confirm the scheme documentation is proper, vesting schedules in the cap table match what was actually granted, and that any exercised options were properly reflected in subsequent PAS-3 filings.
4. Intellectual Property Ownership
Confirm the target actually owns the IP its value is built on, not just uses it. This means verifying that every employee and contractor who created meaningful IP has a proper, written assignment, including work created by contractors or co-founders before the company was formally incorporated, and work that is AI-assisted, since many older assignment agreements were never drafted with that scenario in mind. Our complete IP assignment guide covers exactly what a proper assignment needs to include, and what a gap here typically looks like when it surfaces. Also confirm trademark and patent registrations are current, correctly owned by the target entity itself rather than a founder personally, free of pending opposition, and, for technology targets specifically, that open source components used in the product are properly licence-compliant and disclosed.
5. Material Contracts
Review every contract material to the target’s business, customer agreements, vendor and supplier contracts, licensing arrangements, real estate leases, and insurance policies, checking specifically for change of control clauses that could be triggered by the transaction itself, assignment consent requirements particularly relevant in an asset deal, and whether liability, indemnity, and termination provisions are consistent with the target’s valuation. Our guide on the specific contract clauses that quietly slash a company’s valuation during due diligence covers this exact review in depth.
6. Financial and Tax Position
Beyond standard financial statement review, confirm the statutory auditor’s report and any qualifications in it, related party transaction disclosures, and the contingent liabilities note specifically. Review the tax compliance history, any pending income tax assessments or appeals, GST show-cause notices, and, for applicable businesses, transfer pricing documentation.
Confirm the transaction structure’s tax treatment specifically. Where Indian target shares are transferred at less than fair market value, Section 50CA of the Income Tax Act deems the fair market value as the consideration for the seller’s capital gains computation regardless of actual price paid, with a corresponding provision potentially taxing the buyer on the shortfall under Section 56(2)(x). Where the deal is structured as a full business transfer rather than a share sale, India’s slump sale rules under Section 50B apply an entirely different computation based on net worth. Getting the structure right before signing, not after, is one of the more consequential decisions in the whole transaction.
7. Data Protection
For any target handling personal data connected to India, confirm its posture under the DPDP Act specifically: notice and consent mechanisms, breach response readiness, and vendor and data processor agreements that reflect the target’s own obligations. Our complete guide to the DPDP Act covers what a genuine compliance posture needs to include.
8. Confidentiality Throughout the Process
Before any of the above review begins, a properly structured NDA needs to be in place covering both directions. Our complete NDA guide covers structuring this correctly for exactly this kind of transaction.
What Changes for Cross-Border Deals
Foreign companies acquiring an Indian target need to confirm FEMA and RBI compliance, particularly sectoral foreign investment caps and whether government approval is required rather than the automatic route, and resolve the entity structure question early given its downstream tax and repatriation consequences. Our company registration and compliance service can help structure this correctly.
Indian companies acquiring domestically or expanding through outbound acquisition need to check whether the deal triggers a Competition Commission of India notification requirement under Section 5 of the Competition Act, and, for outbound deals, the reverse FEMA considerations around overseas investment limits and RBI reporting.
Once diligence findings are in hand, the deal typically moves to a share purchase agreement or asset purchase agreement, or a joint venture agreement where it isn’t a full acquisition. Our M&A term sheet guide and template covers what’s binding versus non-binding at that stage, and our shareholders’ agreement guide covers post-acquisition governance.
The Complete Due Diligence Checklist
| Category | What to Request / Check | Key Red Flags |
|---|---|---|
| Corporate & ROC | MOA/AOA and amendments; 5-year ROC filing history (MGT-7, AOC-4, DIR-12, DIR-3 KYC, ADT-1, PAS-3, CHG-1/CHG-4, BEN-2, DPT-3, MSME-1); statutory registers; board/shareholder minutes; Secretarial Audit Report | Missing or stale statutory registers; charges not matching MCA Charge Master; unallotted shares never filed via PAS-3; history of compounding offences or Section 248 strike-off |
| Litigation (all forums) | Civil suits; criminal proceedings (incl. Section 138 NI Act); NCLT/NCLAT filings (Sections 241-242, insolvency); regulatory notices (SEBI/RBI/ED); tax litigation; labour disputes; IP litigation; arbitration | Active or recent Section 241-242 oppression proceedings; undisclosed insolvency exposure; pattern of small claims suggesting systemic issues |
| Employment & POSH | Internal Committee constitution and annual filings; PF/ESI registration and contribution history; CLRA compliance for contract labour; gratuity valuation; employment agreements; HR policy manual; ESOP scheme docs | No IC despite 10+ employees; pending PF/ESI dues; unregistered contract labour; non-compete gaps for key employees |
| IP | Trademark/patent/copyright registrations and ownership; employee and contractor assignment agreements; open source licence audit; IP litigation history | IP registered to a founder personally, not the company; missing assignments for pre-incorporation or AI-assisted work |
| Material Contracts | Customer, vendor, lease, and insurance agreements above materiality threshold | Change of control clauses; assignment consent requirements; liability terms inconsistent with valuation |
| Financial & Tax | Audited financials and auditor qualifications; contingent liabilities note; tax assessment and appeal history; GST notices; transfer pricing docs | Undisclosed contingent liabilities; unresolved tax disputes; structure not accounting for Section 50CA/50B treatment |
| Data Protection | DPDP notice/consent framework; vendor DPAs; breach history | No documented breach response plan; vendor contracts silent on data obligations |
| Cross-Border (if applicable) | FEMA/RBI approvals; sectoral caps; CCI notification assessment; entity structure | Missing government approval where required; deal value crossing CCI thresholds unaddressed |
Frequently asked questions
What is the most commonly missed item in M&A due diligence?
Two categories are consistently under-checked relative to their actual impact: intellectual property ownership, particularly whether contractors and pre-incorporation contributors properly assigned their work, and statutory labour compliance, particularly pending PF or ESI dues and POSH Act compliance, both of which have directly caused valuation reductions or deals falling through when discovered late.
Why does NCLT litigation history matter in due diligence?
Oppression and mismanagement proceedings under Sections 241 and 242 of the Companies Act give the NCLT genuinely broad powers, including ordering a share buyout, removing directors, or unwinding transactions. An active or recently resolved matter here signals real governance risk that a standard contract review wouldn’t surface.
Does a target’s PF or ESI non-compliance actually affect deal value?
Yes, and this is well documented in practice. Pending statutory dues discovered during diligence commonly lead to a valuation reduction, an escrow holdback, or in serious cases, an investor or acquirer walking away from the deal entirely.
Should due diligence happen before or after the term sheet?
Due diligence typically happens after a term sheet is signed but before the definitive agreement, since the term sheet establishes genuine alignment on structure and price before either side invests in a full review. The findings then inform the specific representations, warranties, and indemnities in the definitive agreement.
What happens if a serious issue is found during due diligence?
Depending on severity, this typically leads to a price adjustment, a specific indemnity addressing the issue, a condition precedent requiring resolution before closing, or in serious cases, the deal falling through entirely.
This article is general information, not legal advice. Due diligence scope and requirements vary by transaction structure, sector, and jurisdiction. For advice on your own transaction, speak to a qualified lawyer.
Authored and reviewed by Prakhar Rai, Advocate, founder of My Legal Pal, enrolled with the Bar Council of India. Connect on LinkedIn.
If you’re preparing for or navigating an acquisition, merger, or investment, getting the due diligence right the first time protects everything that follows. Our team advises on both the buy side and the sell side, for foreign companies entering India and Indian companies acquiring at home or abroad. See our complete mergers and acquisitions services, or speak to our contract lawyers in India about your specific transaction.
