M&A deals have emerged as a powerful tool for business reorganization, strategic expansion and cross-border penetration. Due diligence, as a large investigatory process prior to acquisition, is at the base of M&A by allowing the acquirer to identify legal, financial and regulatory risks. This transaction assumes much legal significance on account of statutory compliances, corporate governance and stakeholder interests which are heavily regulated by an array of legislative mechanisms in a jurisdiction like India.

This article offers an economic and comparative analysis of processes and impact of M&A due diligence in the context of corporate law, Indian legal regime in particular. It examines the legal environment, the scope of due diligence, strategic aspects and new rules which have resulted from the recent development of the law.

Legal Framework Governing Due Diligence in India

Due diligence in India is governed by a combination of corporate, securities, competition and foregin exchange laws.

1. The Companies Act, 2013

   The Companies Act, 2013 establishes foundational requirements for corporate disclosures, governance, and compliance—factors routinely scrutinized during due diligence.
   • Section 134 mandates comprehensive board reporting and disclosure of material financial data and risk management frameworks.
   • Section 186 governs inter-corporate loans and investments.
   • Section 188 regulates related party transactions, which are critical in identifying potential conflicts of interest.
      

2. SEBI Regulations

   For publicly listed companies, the Securities and Exchange Board of India (SEBI) imposes robust disclosure and acquisition norms.
   • The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("SAST Regulations"), require mandatory disclosures and open offers once specific acquisition thresholds are crossed.
      
   • The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations"), set the standard for corporate governance and periodic disclosures.
      

3. FEMA and Competition Law

   The Foreign Exchange Management Act, 1999 (FEMA) governs foreign investments, setting sectoral caps and pricing guidelines that must be verified in cross-border due diligence. The Competition Act, 2002, under Section 6, mandates approval from the Competition Commission of India (CCI) for combinations exceeding certain asset or turnover thresholds.
    

Scope and Types of Due Diligence

Due diligence spans multiple domains, each critical to evaluating the overall health and compliance status of the target entity:

1. Legal Due Diligence: Focuses on statutory compliance, litigation, employment contracts, environmental permits, intellectual property, and regulatory licenses.
2. Financial Due Diligence: Reviews audited accounts, tax filings, outstanding liabilities, and revenue streams.
3. Tax Due Diligence: Assesses direct and indirect tax exposure, transfer pricing compliance, and tax litigation.
4. Operational Due Diligence: Examines supply chains, infrastructure, and business viability.
5. Technical and Environmental Due Diligence: Important in real estate, manufacturing, and mining sectors where environmental regulations are stringent.
    

Strategic Importance

In M&A transactions, due diligence helps for risk assessment, valuing and negotiation. Structured process (due diligence performed the right way):

• Aids in spotting legal and financial red flags;
• Follows sector-specific rules and regulations;
• Assists with deal structuring and drafting representations, warranties, and indemnities.

The Satyam Computer Services scandal is a case in point. The acquiring company, Tech Mahindra, was potentially exposed to significant reputation and financial impact on account of a financial reporting irregularity that was not disclosed. This highlights the dangers of depending on superficial evaluations or unverified disclosures.
 

Methodology

The standard due diligence process typically includes the following phases:

1. Planning and Scoping

   The diligence team, comprising legal advisors, auditors, and technical experts, sets the scope based on the target company's industry and geographical presence.
    

2. Document Review via Data Room

   A virtual data room (VDR) is used to access confidential documents such as:
   • Incorporation and constitutional documents;
   • Statutory filings and regulatory approvals;
   • Ongoing or potential litigation;
   • Intellectual property registrations;
   • Employee benefit policies and ESOP schemes.
      

3. Red-Flag and Final Reporting

   Findings are reported through a "red-flag" memo, highlighting significant issues such as material litigation, regulatory non-compliance, or defective title to assets. These findings directly influence transaction value, structure, and conditions precedent.

 

Challenges Common impediments to effective due diligence include:

• Non-cooperation by the target company, particularly in hostile takeovers;
• Incomplete documentation or inaccurate disclosures;
• Cross-jurisdictional complexities in multinational transactions;
• Compressed timelines that affect the depth of diligence.

Conclusion
With corporate governance standards and regulatory scrutiny in countries such as the emerging markets of India getting more stringent, the nature of scope and sophistication of DD has to increase. Legal practitioners should exercise diligence that is complete and with future consequence in mind, and not serve the changing industry landscape in order to protect their clients and strike a blow for transparency in corporate affairs.

Due diligence is one of the most important steps in any merger or acquisition. It's the process where one company takes a close, careful look at another before deciding to move forward. This isn't just about numbers or legal documents—it's about understanding what you're really getting into. Are there hidden debts? Ongoing lawsuits? Regulatory red flags? Due diligence helps answer those questions before it's too late.

From a corporate law perspective, this process ensures that everything is above board and that both sides are being transparent. It protects everyone involved—from investors to employees—and lays the groundwork for a deal that's fair, legal, and built to last.

At its heart, due diligence is about reducing surprises and making smart, informed choices. It may seem technical, but it's really about trust and responsibility. When done right, it can be the difference between a deal that works and one that falls apart.

References:

• Companies Act, 2013, § 134, No. 18, Acts of Parliament, 2013 (India).
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, Gazette of India, Extraordinary, Part III, Sec. 4 (Oct. 23, 2011).
• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Gazette of India, Extraordinary, Part III, Sec. 4 (Sept. 2, 2015).
• Competition Act, 2002, § 6, No. 12, Acts of Parliament, 2003 (India).
• See generally Gopal K. Nath, Corporate Frauds in India: A Case Study of Satyam Computer Services Ltd., 5 Int'l J. of Res. in Mgmt. & Bus. Stud. 11 (2018).