Due diligence in acquisitions is the systematic legal investigation a buyer conducts before committing to purchase a target company. In India, inadequate diligence is the single most common reason buyers discover undisclosed liabilities, regulatory non-compliance, or defective title after closing-by which time the seller’s indemnity capacity may be diminished. The scope of due diligence in acquisitions covers seven core legal workstreams, each capable of affecting the transaction price, structure, or the buyer’s decision to proceed. This guide sets out what each workstream covers, the red flags that demand attention, and how findings should be reflected in the transaction documentation.
Corporate diligence establishes that the target company legally exists, is in good standing, and has the authority to be sold.
- Certificate of Incorporation, Memorandum of Association (MOA), and Articles of Association (AOA)
- Shareholding structure: the cap table must account for all issued shares, all outstanding convertible instruments (CCPS, CCDs, warrants), all option grants under the ESOP, and any warrants. The stated cap table should match the Register of Members filed with the Registrar of Companies.
- All existing shareholder agreements (SHA): these must be reviewed for ROFR clauses (which give existing shareholders the right to purchase the selling shareholder’s shares before they are transferred to the buyer), tag-along rights, and any consent requirements that must be satisfied before the sale can complete.
- Board resolutions and general meeting minutes: confirm the company has not passed any resolutions that create undisclosed encumbrances or obligations.
- ROC filings: verify that all annual returns, financial statements, and other mandatory MCA/ROC filings are current and that no ROC notices, compounding applications, or disqualification orders are pending.
Red flags: Multiple classes of shares with undisclosed rights, option pools larger than disclosed, any existing SHA that was not disclosed in the data room, or overdue ROC filings that may attract fines under the Companies Act, 2013.
2. Title and Property Diligence
Property diligence varies significantly based on whether the target owns or leases its operational premises.
Owned immovable property:
- Registered sale deeds establishing chain of title back to original owner
- Encumbrance certificate (EC) for at least 13-30 years confirming no registered mortgage, charge, or pending litigation affecting the property
- Latest property tax receipts and utility bills confirming possession
- Mutation records (khata/revenue records) confirming the property stands in the company’s name
- Any pending acquisition, requisition, or notices under land acquisition laws
Leased premises:
- Original lease deed, registered if the term exceeds 11 months (as required by the Transfer of Property Act, 1882, read with the Registration Act, 1908)
- Unexpired term remaining and renewal options
- Change-of-control clause in the lease: if the lease contains a clause requiring landlord consent on a change of control of the tenant company, this consent must be obtained before or at closing. Failing to obtain it may allow the landlord to terminate the lease post-acquisition.
- Assignment provisions and sub-letting restrictions
3. Intellectual Property Diligence
For technology, consumer, or brand-driven targets, IP diligence in acquisitions may be the most value-critical workstream.
What to review:
- All trademark registrations (Trademark Registry certificates), their classes, jurisdictions, and status (active, pending, opposed, expired). Verify ownership is in the company’s name, not the founder’s personal name.
- Patent registrations and applications under the Patents Act, 1970
- Copyright ownership for original works (software code, content, designs)
- Domain name registrations
Source code and development IP-the most common diligence failure: All software development, whether done by employees, contractors, or third-party development firms, must be covered by proper IP assignment agreements with the work clearly assigned to the company. The Copyright Act, 1957 vests copyright in an original work with the creator unless there is a written assignment. For contractor-developed code, without an IP assignment clause, the contractor retains copyright. Buyers regularly discover that a target’s core technology IP is partially or wholly owned by a former developer or development firm.
Red flags: Trademarks registered in founders’ personal names rather than the company, source code repositories with no IP assignment from contributors, open-source software included in commercial products without licence compliance, any pending IP infringement claims or oppositions.
4. Employment and Labour Diligence
Key employment documents:
- Employment contracts for all permanent employees and fixed-term employees, with specific review of: notice periods (which affect headcount reduction cost), non-compete and non-solicitation clauses, IP assignment clauses (confirming all work product belongs to the employer), and garden leave provisions
- Contractor agreements: classification of contractors vs employees matters-misclassified contractors may have statutory entitlements as employees under the Industrial Disputes Act, 1947 or the Code on Social Security, 2020
Statutory compliance:
- Provident Fund (PF) compliance under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952: outstanding PF demand notices are a common red flag
- Employee State Insurance (ESIC) compliance
- Gratuity liability (under the Payment of Gratuity Act, 1972): verify whether provisions in the accounts match actual liability
- Prevention of Sexual Harassment (POSH) compliance: Internal Complaints Committee (ICC) constitution and annual report compliance under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013
Pending disputes: All pending labour court, industrial tribunal, and employment-related disputes involving current or former employees.
5. Regulatory and Licence Diligence
Every business operates under one or more regulatory licences or registrations. Diligence in acquisitions must verify that all applicable licences are current, valid, and not subject to suspension, cancellation, or investigation.
Universal licences: GST registration (verify GSTIN is active and returns are current), Shop & Establishment registration, Professional Tax registration, Income Tax PAN and TAN.
Sector-specific licences:
- FSSAI licence for food businesses (Food Safety and Standards Authority of India)
- Drug Manufacturing Licence and Drug Sales Licence under the Drugs and Cosmetics Act, 1940 for pharmaceutical businesses
- IRDAI registration for insurance entities
- RBI NBFC registration for lending businesses
- Telecom licences under the Telecom Act, 2023 for telecom operators
- DGCA approvals for aviation or drone-related businesses
- Environmental clearances, Consent to Establish, and Consent to Operate under the Water (Prevention and Control of Pollution) Act, 1974 and the Air (Prevention and Control of Pollution) Act, 1981
Change of control in licences: Many sector-specific licences provide that a change of control requires prior regulatory approval or intimation. Non-compliance can result in the licence being deemed to lapse post-acquisition.
6. Litigation Diligence
Litigation diligence in acquisitions requires independent verification-the data room disclosure may be incomplete.
Active investigations: Buyer’s counsel should search:
- eCourts portal (ecourts.gov.in) for civil and criminal proceedings
- National Consumer Disputes Redressal Commission (NCDRC) portal
- NCLT and NCLAT portals for insolvency or company law proceedings
- High Court portals for Delhi, Bombay, Madras, Calcutta, or whichever is relevant to the target’s operations
- Debt Recovery Tribunal (DRT) records for loan recovery proceedings
- SEBI enforcement orders and SAT proceedings for regulated entities
Contingent liabilities: Pending tax assessments (income tax, GST, customs, excise, service tax), statutory demands under the Employees’ Provident Fund Act, and any environmental penalties or regulatory investigations should each be individually quantified and either reflected as a price adjustment, escrow holdback, or specific seller indemnity in the SPA.
7. Material Contracts Diligence
Change-of-control clauses: Many material contracts-revenue agreements, technology licences, key customer agreements, distribution agreements, and financing arrangements-contain provisions triggered by a change of ownership or control of the contracting party. These typically require the counterparty’s prior written consent to the change of control. Identifying and managing such clauses is critical to a smooth post-closing integration.
Financing covenants: Loan agreements often include “change of control events of default.” Before closing, the buyer must either obtain lender consent or refinance the target’s existing debt.
Customer and supplier concentration: Identify the top 5-10 customers and top 5-10 suppliers by revenue contribution. Assess whether these relationships are governed by contracts with adequate notice periods, and whether any are personally dependent on a departing founder.
Key Takeaways
- IP assignment agreements from all developers and contractors must be verified in every technology acquisition; missing assignments are among the most value-destructive diligence findings.
- Change-of-control clauses in material contracts, leases, and regulatory licences must be identified and managed before closing.
- Pending PF, ESIC, and tax demands should be quantified and reflected as specific indemnities or escrow holdbacks in the Share Purchase Agreement.
This article is for informational purposes only and does not constitute legal advice. Readers should seek appropriate professional counsel for their specific circumstances.
META TITLE: Due Diligence in Acquisitions India: Legal Checklist