a step by step guide to due diligence for indian companies
/ Due Diligency

A Step-by-Step Guide to Due Diligence for Indian Companies

In today’s competitive business landscape, due diligence is no longer a choice—it’s a necessity. Whether you’re planning a merger, acquisition, partnership, or investment, conducting thorough due diligence helps Indian companies minimize risks and make informed decisions. At PK Chopra & Co., with over 60 years of expertise in professional services, we have guided businesses of all sizes through successful due diligence processes across India and beyond.

This guide provides a clear step-by-step approach to due diligence for Indian companies.

Step 1: Define the Objective of Due Diligence

Before diving into documents, companies must first understand why they are conducting due diligence.

  • Is it for an acquisition?
  • Is it for a joint venture?
  • Is it for raising funds?

Defining the objective helps determine the depth and scope of the review.

Step 2: Prepare a Due Diligence Checklist

A detailed checklist ensures that no critical area is overlooked. A standard checklist includes:

  • Financial records
  • Legal compliance documents
  • Tax filings and assessments
  • Intellectual property (IP) details
  • Employee contracts and HR policies
  • Environmental and regulatory compliance

Step 3: Conduct Financial Due Diligence

This step verifies the company’s financial health and performance.

  • Review audited financial statements for the past 3–5 years
  • Assess revenue streams, profitability, and cash flow
  • Analyze debts, liabilities, and contingent obligations
  • Examine working capital and liquidity ratios

This helps identify whether the company’s valuation is fair.

Step 4: Legal Due Diligence

Legal risks can derail business deals. Companies must ensure:

  • Proper incorporation and statutory filings under the Companies Act
  • Compliance with Registrar of Companies (RoC) requirements
  • Validity of contracts, leases, and vendor agreements
  • Pending or ongoing litigations
  • Ownership rights over assets and intellectual property

Step 5: Tax Due Diligence

Tax compliance is crucial to avoid future disputes. This includes:

  • Verification of GST, Income Tax, and TDS filings
  • Review of past tax assessments, disputes, or notices
  • Transfer pricing compliance for cross-border transactions
  • Examination of tax incentives and exemptions

Step 6: HR and Employee Due Diligence

Employees are a company’s biggest asset. Key checks include:

  • Validity of employment contracts
  • Adherence to labor laws (PF, ESI, gratuity, etc.)
  • HR policies and employee benefit programs
  • Retention of key employees post-deal

Step 7: Intellectual Property (IP) Due Diligence

For companies in tech, pharma, or creative industries, IP is critical.

  • Verification of patents, copyrights, and trademarks
  • Ensuring proper registration and ownership rights
  • Checking for pending disputes over IP rights

Step 8: Regulatory and Environmental Compliance

Non-compliance can attract heavy penalties. Companies must review:

  • Industry-specific licenses and approvals
  • Environmental clearances (if applicable)
  • Sectoral compliance such as RBI, SEBI, or FEMA regulations

Step 9: Operational Due Diligence

Operational efficiency directly impacts profitability. This involves:

  • Reviewing supply chain and vendor contracts
  • Assessing production capacity and scalability
  • Evaluating technology systems and IT infrastructure
  • Checking business continuity and risk management policies

Step 10: Final Risk Assessment and Reporting

Once all reviews are complete, findings must be consolidated into a Due Diligence Report (DDR). This report highlights:

  • Strengths and opportunities of the company
  • Red flags and risk areas
  • Recommendations for negotiation or corrective actions

Why Due Diligence Matters for Indian Companies

  • Protects investors and stakeholders
  • Reduces risks in mergers and acquisitions
  • Ensures regulatory compliance
  • Builds transparency and trust with stakeholders

Conclusion

Due diligence is the foundation of sound business decisions. For Indian companies, it ensures compliance, reduces risks, and creates a roadmap for growth. With offices across India, PK Chopra & Co. combines decades of expertise with modern practices to guide businesses through every step of the due diligence process.

FAQs

1. What is the main purpose of due diligence in India?
To verify the financial, legal, and operational soundness of a company before entering into business transactions.

2. How long does a due diligence process take?
Depending on the complexity, it may take anywhere from 2–12 weeks.

3. Who typically conducts due diligence for companies in India?
Professional firms like PK Chopra & Co., which have expertise in legal, financial, and compliance matters.

4. Is due diligence mandatory for mergers and acquisitions in India?
Yes, due diligence is a critical step before finalizing mergers, acquisitions, and joint ventures.

5. What happens if due diligence is not done properly?
It can lead to hidden liabilities, compliance penalties, or overvaluation of the target company.