Due diligence is the process of validating what is being bought. In India deals, the most common surprises come from tax exposures, weak documentation, related party arrangements, and compliance gaps that have accumulated over time.
A structured due diligence checklist helps investors and acquirers identify red flags early, quantify exposures, and negotiate protections such as indemnities, escrows, and purchase price adjustments.
What Due Diligence Typically Covers
Due diligence is usually performed across multiple workstreams:
- Financial due diligence
- Tax due diligence
- Legal and regulatory due diligence
- HR and payroll due diligence
- Operational and commercial diligence
- IT and data diligence where relevant
This guide focuses on a practical checklist that can be used to build a data room and run reviews efficiently.
Financial Due Diligence Checklist
Quality of earnings and profitability
Key checks include:
- Revenue recognition policies and cut off testing
- Customer wise revenue and concentration analysis
- Gross margin trends and drivers
- EBITDA normalisation for one offs and non recurring items
- Related party income and expenses and pricing logic
- Segment reporting and profitability by business line
Working capital and cash flow
Review:
- Working capital trends and seasonality
- Receivables ageing and bad debt provisioning
- Inventory valuation method and slow moving stock
- Payables ageing and overdue statutory dues
- Cash flow conversion and cash leakage areas
Net debt and contingent liabilities
Review:
- Bank debt and security documents
- Guarantees and letters of credit
- Off balance sheet exposures
- Contingent liabilities and provisions
- Capital commitments and lease obligations
Financial reporting and controls
Review:
- Accounting policies and consistency
- Closing process and month end discipline
- Internal controls and approval matrix
- Key reconciliations such as bank GST and TDS
- Auditor notes and management letter points
Tax Due Diligence Checklist
Direct tax
Review:
- Income tax returns and computation workings
- Tax assessments and notices and litigation
- Tax positions on key items such as disallowances and incentives
- MAT or AMT positions where applicable
- Deferred tax and tax provisioning approach
Transfer pricing for group entities
If the target has related party transactions:
- TP study and benchmarking support
- Form 3CEB filings and alignment with books
- Intercompany agreements and evidence for services
- True ups and year end adjustments
Indirect tax GST
Review:
- GST registrations and returns filing status
- GSTR 1 and GSTR 3B consistency
- GSTR 2B based ITC eligibility and blocked credits
- Classification and rate positions and exemptions
- Reverse charge exposures
- E invoicing and e way bill compliance where applicable
- Refund positions and pending claims
Withholding tax TDS
Review:
- Section mapping and rate application
- Deposit and filing timeliness and defaults
- 206AA and 206AB applicability handling
- Salary TDS processes and Form 16 issuance
- Non resident payments and Section 195 documentation
Legal and Regulatory Checklist
Corporate and ROC compliance
Review:
- Incorporation documents and shareholding structure
- Statutory registers and minutes
- Annual filings and event based filings
- Charges and borrowings and security filings
- Related party approvals and disclosures
FEMA and foreign investment
If foreign investment exists:
- FC GPR and FC TRS filings and acknowledgements
- Valuation and pricing compliance
- FLA return filing status
- Downstream investment reporting where applicable n
Contracts and litigation
Review:
- Material customer and vendor contracts
- Change of control clauses
- Termination and penalty clauses
- IP ownership and licensing
- Pending litigation and notices
HR and Payroll Checklist
Review:
- Employee master and employment contracts
- PF ESI PT and labour welfare compliance
- Bonus and gratuity provisions and payments
- Contractor arrangements and compliance risk
- ESOP plans and vesting schedules
- POSH compliance and HR policies
Operational and Commercial Checklist
Review:
- Key process maps and SOPs
- Dependency on key people and key customers
- Vendor concentration and supply chain risks
- Inventory controls and shrinkage risks
- Insurance coverage and claims history
Data Room Structure Practical Approach
A clean data room reduces time and cost. Suggested folders:
1 Corporate and secretarial 2 Financial statements and MIS 3 Tax direct and indirect and withholding 4 Banking and debt 5 Contracts and litigation 6 HR and payroll 7 Operations and IT
Maintain an index and version control to avoid confusion.
Common Red Flags in India Deals
- Unreconciled GST and ITC and vendor non compliance
- TDS defaults and incorrect section mapping
- Cash sales or revenue cut off issues
- Related party transactions without documentation
- Missing ROC filings or incomplete statutory registers
- FEMA reporting delays for foreign investment
- Weak payroll compliance and contractor risks
- Pending litigation and tax notices
How Perfect Accounting Can Help
Perfect Accounting and Shared Services supports transaction readiness and due diligence:
- Sell side diligence and data room preparation
- Financial and tax due diligence support
- Compliance gap assessment and remediation plan
- Working capital and net debt analysis
- Support on SPA clauses for tax and compliance protections