Common Mistakes to Avoid During Due Diligence in India
Due diligence is one of the most critical stages of any business transaction—be it mergers and acquisitions, investments, joint ventures, fundraising, or strategic partnerships. In India, where regulatory frameworks, compliance requirements, and business structures can be complex, overlooking key aspects of due diligence can lead to financial losses, legal disputes, and reputational damage.
At PK Chopra & Co., with decades of experience in management consultancy and accountancy services, we have observed that many businesses—both Indian and international—tend to make recurring mistakes during the due diligence process. Understanding and avoiding these pitfalls is essential to ensure informed decision-making and long-term business success.
Below are the most common mistakes to avoid during due diligence in India.
1. Treating Due Diligence as a Mere Formality
One of the biggest mistakes companies make is viewing due diligence as a checkbox exercise rather than a strategic evaluation tool. Many businesses rush through the process to close deals quickly, ignoring red flags that may surface later.
Why it matters:
Due diligence is not just about compliance; it is about understanding the true health, risks, and opportunities of the target entity. A superficial approach may hide financial inconsistencies, legal exposures, or operational inefficiencies.
Best practice:
Approach due diligence as a deep diagnostic exercise, not a paperwork formality.
2. Inadequate Financial Due Diligence
Financial due diligence goes beyond reviewing balance sheets and profit & loss statements. Common errors include:
- Relying solely on audited financials without verification
- Ignoring contingent liabilities
- Overlooking related-party transactions
- Not examining cash flow sustainability
In India, accounting practices can vary across organizations, especially in family-run or mid-sized enterprises.
Best practice:
Conduct a detailed analysis of accounting policies, revenue recognition, tax provisions, debt structures, and working capital cycles.
3. Overlooking Tax Compliance and Exposure
India’s tax environment is dynamic, with frequent changes in laws related to income tax, GST, transfer pricing, and international taxation. A major mistake is assuming that past tax filings ensure full compliance.
Common tax-related oversights include:
- Pending tax assessments or appeals
- Incorrect GST classification
- Non-compliance with TDS/TCS provisions
- Transfer pricing risks for cross-border transactions
Best practice:
A comprehensive tax due diligence should identify historical exposures and future tax risks.
4. Ignoring Legal and Regulatory Risks
Legal due diligence is often underestimated, especially when businesses assume that operations have been running smoothly. In India, unresolved litigation, regulatory non-compliance, or contractual weaknesses can significantly impact valuation and deal viability.
Key areas often missed:
- Pending lawsuits and notices
- Non-compliance with Companies Act, FEMA, or labour laws
- Invalid licenses or registrations
- Weak or one-sided contracts
Best practice:
Engage professionals who understand Indian corporate and regulatory laws thoroughly.
5. Not Evaluating Corporate Governance Practices
Poor corporate governance can be a hidden risk, particularly in closely-held or promoter-driven companies. Issues such as lack of board independence, weak internal controls, or absence of proper documentation often surface post-acquisition.
Why it matters:
Weak governance increases the risk of fraud, mismanagement, and regulatory scrutiny.
Best practice:
Review governance structures, decision-making processes, internal audit systems, and compliance culture.
6. Incomplete Operational Due Diligence
Many buyers focus heavily on financials while ignoring operational realities. Operational due diligence helps assess whether the business model is sustainable and scalable.
Common mistakes include:
- Not evaluating dependency on key individuals
- Ignoring supply chain vulnerabilities
- Overlooking technology and data security risks
- Failing to assess HR policies and employee contracts
Best practice:
Understand how the business functions on a day-to-day basis and identify operational bottlenecks.
7. Underestimating Human Resource and Labour Law Risks
India has stringent labour laws, and non-compliance can lead to serious legal and financial consequences. Companies often fail to review:
- Employment agreements
- Statutory compliances (PF, ESIC, gratuity)
- Pending labour disputes
- Contract labour arrangements
Best practice:
HR due diligence should be an integral part of the overall process, especially in labour-intensive industries.
8. Failing to Assess Industry-Specific Risks
Each industry in India—be it manufacturing, IT, healthcare, fintech, or real estate—has unique regulatory and operational challenges. A generic due diligence approach often misses industry-specific compliance requirements.
Best practice:
Customize due diligence based on the sector, regulatory framework, and market dynamics.
9. Lack of Local Expertise and Context
For foreign investors especially, one of the most common mistakes is not involving professionals with on-ground Indian experience. Business practices, compliance norms, and documentation standards in India may differ significantly from global norms.
Best practice:
Partner with an India-based professional services firm that understands both Indian and global business environments.
10. Not Translating Findings into Actionable Decisions
Even when due diligence is conducted thoroughly, businesses often fail to use the findings effectively. Risks identified are sometimes ignored, poorly negotiated, or inadequately addressed in transaction documents.
Best practice:
Use due diligence insights to renegotiate valuation, structure indemnities, or decide whether to proceed with the transaction at all.
Conclusion
Due diligence in India requires a structured, multi-disciplinary, and strategic approach. Avoiding the common mistakes outlined above can help businesses mitigate risks, protect investments, and ensure long-term success.
At PK Chopra & Co., established in 1963, we bring decades of experience in management consultancy, accountancy, and outsourcing services, supported by skilled professionals and global best practices. Our end-to-end due diligence solutions are designed to empower informed decision-making and build lasting business partnerships.
If you are planning a transaction in India or expanding your business operations, a well-executed due diligence process can make all the difference.