When a buyer instructs us to conduct legal due diligence on a target company in India, the scope is far wider than most clients expect. Due diligence is not a box-ticking exercise. It is the process by which a buyer understands what they are actually acquiring, what risks they are inheriting, and what they need to negotiate before signing.
This article sets out the key areas a buyer's lawyer examines in an Indian M&A transaction, and explains why each of them matters.
1. Corporate and Title Verification
The starting point is confirming that the seller actually owns what they are selling. This means reviewing the target's constitutional documents, its register of members, share transfer history, and any existing shareholders' agreements. In India, many disputes arise because shares were transferred informally, or because a prior agreement restricts what the current holder can do with their shares.
Under the Companies Act, 2013, share transfers must comply with the articles of association and any shareholders' agreement in place. If there are pre-emption rights, rights of first refusal, or lock-in restrictions, these must be identified and resolved before completion.
2. Material Contracts
A target's revenue often depends on a small number of key contracts. Buyers need to know whether those contracts contain change of control clauses, whether they are assignable, and what the termination provisions say. In Indian practice, many commercial contracts include clauses requiring counterparty consent to assignment. A share sale avoids direct assignment but may still trigger change of control provisions.
We review all material agreements including customer contracts, supplier arrangements, distributor agreements, technology licences, and lease agreements. The question is not just whether the contracts exist, but whether they will survive the transaction on the same terms.
3. Employment and Labour
India has a layered employment law framework. The Industrial Disputes Act, 1947, the Contract Labour (Regulation and Abolition) Act, 1970, and the recently enacted Labour Codes all create obligations that a buyer inherits on acquisition. In a share purchase, the buyer steps into the shoes of the employer for all existing employees, including those engaged through contractors.
Buyers need to understand the total headcount, the terms of employment, any pending grievances or disputes, and whether provident fund and ESIC contributions are current. Outstanding labour liabilities can be significant and are frequently underestimated.
4. Litigation and Regulatory Exposure
We review all pending and threatened litigation. In India, commercial disputes can take years to resolve, and a target's litigation register is often more revealing than its financial statements. Disputes before consumer forums, labour tribunals, tax authorities, and civil courts all need to be assessed for quantum and likely outcome.
Beyond litigation, regulatory exposure matters. Does the target hold the licences it needs to operate? Are there outstanding show cause notices from SEBI, the Registrar of Companies, or sector-specific regulators? Has the target complied with its filing obligations under the Companies Act?
A clean litigation register does not mean no risk. In Indian M&A, some of the most significant liabilities are those that have not yet crystallised into formal disputes. Experienced counsel will identify contingent exposures that the target's management may not have flagged.
5. Tax Due Diligence
Tax liabilities in India can arise years after the relevant transaction. Income tax assessments, GST audits, and transfer pricing adjustments can create retrospective demands that a buyer inherits. We review the target's direct and indirect tax history, the status of pending assessments, and any tax positions taken that may be challenged by the authorities.
In cross-border M&A, withholding tax obligations and the application of double taxation avoidance agreements also need to be considered at the structuring stage.
6. Intellectual Property
For technology and brand-heavy businesses, IP due diligence is critical. Are trademarks registered in the correct entity's name? Is the software owned by the company or licensed from a third party? Are there any assignments of IP from founders or employees that were never formalised?
We also check for third-party IP claims and whether the target has any ongoing disputes relating to infringement.
7. Real Property
Where the target owns or leases immovable property, we examine title documents, encumbrance certificates, and lease agreements. In India, title to immovable property can be complicated by historical transactions, succession issues, and the absence of a unified land record system. A buyer acquiring a company with significant real estate holdings should not assume that the title is clean without proper verification.
What Happens After Due Diligence
The findings from due diligence directly shape the transaction documents. Issues identified are typically addressed through price adjustments, specific indemnities in the share purchase agreement, conditions precedent to completion, or representations and warranties with appropriate carve-outs.
Due diligence is not the end of the process. It is the foundation on which a properly negotiated transaction is built. A buyer who skips or rushes due diligence is making a significant and avoidable mistake.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. It does not create a lawyer-client relationship. For advice specific to your situation, please consult a qualified legal professional. LawCite Advocates is a law firm registered in India.