M&A Due Diligence in India: Ten Red Flags That Kill Deals

Mergers and acquisitions in India fail, reprice, or restructure at the due diligence stage at a higher rate than comparable transactions in more mature markets. The reasons are structural: India's corporate compliance environment rewards box-ticking over substance, many founder-led companies have operated for years without strong legal counsel, and legacy FEMA and tax violations accumulate over time in ways that only become visible when a sophisticated buyer conducts a thorough legal review. This post catalogues the ten most frequently encountered deal-killing due diligence findings in Indian M&A transactions, drawn from the experience of conducting legal due diligence across sectors including technology, financial services, manufacturing, and healthcare. ## 1. Cap Table Inconsistency with ROC Records The cap table maintained by a company — typically in a spreadsheet managed by the CFO or company secretary — frequently diverges from the official record maintained by the ROC. This divergence occurs because share transfers, ESOP exercises, and convertible instrument conversions were not reported to the ROC through the prescribed forms (Form SH-4, PAS-3, or MGT-6) within the statutory timelines. A buyer who pays for a 60% stake and discovers post-closing that the ROC records reflect a different shareholding structure faces a title defect that can be expensive and time-consuming to cure. Due diligence on the cap table must include a full reconciliation of the company's internal records against the last filed MGT-7 and any RD/ROC filings. For the seller, the remedy before the transaction is to file all outstanding returns, execute any missing transfer documents, and obtain a fresh register of members certified by the company secretary. ## 2. Undisclosed Significant Beneficial Owners (SBO) Under Section 90 of the Companies Act 2013, every individual holding (directly or through intermediaries) more than 10% of the shares, voting rights, or dividend entitlement of a company must be registered as a Significant Beneficial Owner (SBO) in Form BEN-1, and the company must maintain a register of SBOs and file Form BEN-2 with the ROC. SBO non-compliance is alarmingly common, particularly in companies with complex structures involving trusts, holding companies, or nominee shareholders. A buyer conducting due diligence on a target company whose SBO register does not match the disclosed beneficial ownership structure faces potential violations that the company (and now the buyer) could be held responsible for under Section 90(10) — penalties up to ₹10 lakh for the company and ₹1 lakh per day for continuing violations. More significantly, an undisclosed SBO can mean there is a beneficial owner of the target whose consent is required for the transaction but who has not been disclosed to or approached by the buyer. ## 3. FEMA Non-Compliance in the Target's Funding History Every Indian company that has received foreign investment — from a foreign national, a non-resident Indian, or a foreign entity — must have made timely FC-GPR filings for each round of investment. Missing or late FC-GPR filings are the most common FEMA violation found in due diligence. Additional issues include: shares issued to foreign investors at below-FMV (violating NDI Rule 21); ordinary equity issued to foreign investors instead of CCPS (permissible in certain sectors but frequently not documented correctly); and ODI violations where the target company has made overseas investments without proper RBI reporting. FEMA violations are compoundable but the compounding process is time-consuming and must be completed before the transaction closes if the buyer is a foreign entity (since the buyer inherits the liability risk). For domestic buyers acquiring companies with FEMA history, the risk is different but the due diligence obligation is the same. ## 4. Intellectual Property Not Owned by the Target In technology, pharma, FMCG, and media companies, the IP is the core asset. Due diligence regularly finds that the IP is not owned by the company: - Software written by founders before incorporation, without a subsequent IP assignment - Code written by contractors under agreements that did not include IP assignment clauses (or included clauses that assigned IP to the contractor) - Brand names used commercially but never registered as trademarks, with a third party having filed a trademark application in the intervening period - Patents filed in the name of an individual inventor (often a founder) rather than the company - Open-source components incorporated into proprietary code in violation of the open-source license (copyleft provisions in GPL-licensed code being the classic example) A target whose core technology is not legally owned by itself cannot be acquired on the terms proposed. The cure varies: IP assignment from founders is typically achievable; a trademark conflict may require a brand name change; open-source violations require code rewrites. ## 5. Undisclosed Litigation and Regulatory Proceedings Indian company disclosure practices are inconsistent. Sellers routinely disclose active litigation but omit: demand notices from the Income Tax Department that are not yet at the assessment stage; show-cause notices from SEBI or the RBI that have not yet resulted in orders; employee disputes lodged with the Labour Commissioner that have not yet reached court; and consumer complaints pending before the consumer forum. Each of these has different risk profiles, but the aggregate undisclosed exposure can represent a material contingent liability. Buyers conducting thorough due diligence will conduct independent searches of the ROC database, MCA21 portal, NCLT case management system, court websites, and the High Court of Delhi's online database for the target company and its directors. ## 6. Related Party Transactions Without Board or Shareholder Approval Section 188 of the Companies Act 2013 requires board approval (and in certain cases, shareholder approval by ordinary resolution) for related party transactions — contracts with directors, their relatives, or companies in which directors have a 2% or more shareholding or management interest. Non-compliance renders the transaction voidable and exposes directors to personal liability. Due diligence routinely finds: contracts with companies owned by promoter families that were not disclosed to the board; lease arrangements for office premises owned by directors at above-market rates; and management fees paid to holding companies without board approval. These arrangements must be ratified before closing or will become indemnified items under the Share Purchase Agreement. ## 7. Provident Fund and ESIC Non-Compliance Employer non-compliance with the Employees' Provident Funds and Miscellaneous Provisions Act 1952 (EPF Act) and the Employees' State Insurance Act 1948 (ESI Act) is among the most common findings in due diligence of Indian companies with more than 20 employees. Common issues: engaging workers through contractors who are not registered under EPF; incorrectly excluding allowances from the PF wage calculation; failure to register contract workers under the ESI Act. The liability is significant: employers are jointly and severally liable with contractors for PF and ESI contributions under the principal employer provisions of both Acts. The EPFO has the power to attach and auction property for recovery of dues. In a share acquisition, the buyer inherits this liability. Buyers conducting due diligence on companies with substantial contract labour will request EPFO and ESIC compliance certificates covering at least the past three years. ## 8. Incomplete or Inaccurate Register of Charges Every charge (mortgage, pledge, hypothecation, lien) created by a company on its assets must be registered with the ROC within 30 days of creation under Section 77 of the Companies Act 2013 (Form CHG-1). An unregistered charge is void against the liquidator and any creditor of the company — but it is still enforceable between the parties to the charge instrument. Due diligence routinely finds charges that were created but not registered, or charges that were satisfied but not formally released (Form CHG-4 not filed). A buyer who discovers unregistered charges after closing faces the risk of the lender asserting the charge in future — particularly in financial distress scenarios. The ROC record of charges must be reconciled against the company's internal records and any bank and lender certificates of no dues. ## 9. GST Non-Compliance and Disputed Input Tax Credit GST compliance — particularly input tax credit (ITC) claims under the Central Goods and Services Tax Act 2017 — is a significant due diligence area for operating businesses. Common issues include: ITC claimed on invoices from vendors whose GST registrations were subsequently cancelled (creating reversal liability); discrepancies between GSTR-2A/2B and the books; and show-cause notices from the GST department for ineligible ITC claims. The GST department is actively conducting adjudication proceedings against ITC irregularities discovered in the 2018-2021 compliance period. A target with significant pending GST adjudications represents a material contingent liability that must be assessed and reflected in the pricing or indemnity structure. ## 10. Deficient Transfer Pricing Documentation For targets that are subsidiaries of foreign companies or have intercompany transactions with related offshore entities, transfer pricing documentation under Section 92D of the Income Tax Act 1961 is a mandatory annual compliance requirement. The documentation must be maintained before the due date of the return and be provided to the Transfer Pricing Officer on demand. Due diligence finds: missing transfer pricing documentation for prior years; benchmarking studies that used inappropriate comparables; and transactions for which no arm's length price analysis was conducted. Pending transfer pricing assessments — particularly at the ITAT (Income Tax Appellate Tribunal) stage — can represent significant tax demands that must be disclosed and priced. --- The due diligence findings above are not merely academic. Each represents a transaction that was repriced, restructured, or terminated because the seller did not conduct its own legal house-keeping before the process began. Corpus Juris Legal conducts vendor-side and buyer-side legal due diligence for M&A transactions across all major sectors. Our teams operate from Connaught Place and are experienced in NCLT Delhi proceedings, FEMA regularisation, and SEBI compliance — the regulatory verticals where the most consequential due diligence findings arise. If you are preparing to sell or acquire a business, early engagement substantially changes the outcome.