Financial and tax due diligence in India for US buyers and investors

Types of due diligence

Investors often ask for a short red flag review first, followed by a full report if the deal proceeds. For smaller investments, a focused review of specific areas may be enough. We also support investor due diligence for funds, vendor due diligence for promoters preparing to sell, and wider due diligence support.

Quality of earnings

A quality of earnings (QoE) review looks behind reported profit to find the earnings a buyer can expect going forward. In India, the starting point is usually the audited Ind AS or Indian GAAP accounts, which then need adjusting.

• One-off items: insurance claims, legal settlements, government grants or gains on asset sales
• Related party pricing: salaries to promoters' family members, rent paid to promoter-owned property and purchases from group companies at non-market prices
• Revenue recognition: cut-off, unbilled revenue, customer rebates and long-term contracts
• Cost normalisation: staff costs that will change after the deal and services the promoter group provides without charge
• Accounting differences: adjustments needed to bring Indian numbers in line with US GAAP

The result is an adjusted EBITDA bridge that your deal team can use in the valuation model, and a list of issues to address in the share purchase agreement.

Net working capital and net debt

Most deals are priced on a cash-free, debt-free basis, with an adjustment for working capital. Getting the definitions right in India matters, because several common liabilities are easy to miss.

We analyse monthly working capital over 12 to 24 months to propose a normal level, the peg, and identify seasonality and one-off movements. We then help your lawyers draft the completion accounts or locked box mechanism.

Tax due diligence in India

Indian tax due diligence covers direct and indirect taxes for the years that remain open to assessment or reassessment. Typical areas include:

• Income tax assessments, pending appeals and outstanding demands
• Tax deducted at source on payments to employees, vendors and non-residents
• Transfer pricing on transactions with group companies, including any US affiliates
• GST compliance: registrations, input credit claims, e-invoicing and reconciliation with returns
• Past share issues and transfers, and whether they were priced in line with tax rules on fair value
• Brought-forward losses, which can be lost when shareholding changes
• Permanent establishment risk where the target's staff work for foreign group companies

We rate each exposure by likelihood and size, so your lawyers can decide whether to cover it through price, a specific indemnity, an escrow or warranty and indemnity insurance.

FEMA and company law checks

If the target already has foreign investors, or if a US buyer will invest directly, Foreign Exchange Management Act (FEMA) rules apply. We check:

• Whether past foreign investments were reported on time to the RBI, through FDI filings such as Form FC-GPR and FC-TRS
• Whether the annual FLA return has been filed
• Sectoral caps and conditions, and whether the investment needs government approval
• Pricing of share issues and transfers to non-residents, which must respect the fair value rules
• Overseas investments made by the target, and their reporting
• Downstream investments by the target into other Indian companies

On the company law side, we review ROC filings, statutory registers, board and shareholder approvals, related party transactions and charges registered against assets. Gaps can often be fixed through compounding or late filing, but they need to be identified before the deal closes.

Cap table, ESOPs and convertible instruments

For venture and growth investments, the cap table often needs as much attention as the accounts. We check that it agrees with the company's records and filings:

• Share allotments match board and shareholder approvals and allotment filings with the Registrar
• Share transfers are supported by transfer deeds, stamp duty and, for non-residents, FC-TRS filings
• ESOP pools were approved properly and grants follow the scheme, with tax treatment reviewed by our ESOP advisory team
• Compulsorily convertible preference shares and debentures held by foreign investors meet FEMA conditions
• Convertible notes issued to non-residents meet the FEMA rules for startups, including the minimum of ₹25 lakh in a single tranche
• Liquidation preferences, anti-dilution and conversion terms are reflected correctly in fully diluted numbers

Indian founders preparing for a round can use our fundraising advisory to clean up these points before investors start their review.

Due diligence for US acquirers: extra points

• FCPA exposure: after acquisition, the target's books and controls become part of the US group. Weak controls over cash payments, agents and government interactions are a priority finding.
• Controls readiness: if the buyer is US-listed, the target will come within SOX after integration. A high-level controls review helps plan this.
• Integration: the Indian entity's financial year, chart of accounts and reporting need to be aligned with the group. We can support MIS and reporting set-up after closing.
• Background checks: where needed, corporate intelligence on promoters and key people complements the financial work.

Common red flags in Indian targets

• Cash sales or cash expenses that are not fully recorded
• Large balances with related parties that are not on commercial terms
• Old disputed tax demands, sometimes disclosed only as contingent liabilities
• Provident fund not paid on allowances, creating back-dated liabilities
• Foreign investment received but not reported to the RBI
• Revenue concentrated in a few customers without written contracts
• Statutory audit reports with qualifications or CARO 2020 adverse remarks
• Inventory or receivables in the books that are not supported by records

Where a review finds signs of deliberate misstatement, we can escalate to a forensic audit before the deal proceeds.

After signing: completion and integration

1. Completion accounts or locked box: we prepare or review the closing balance sheet and the price adjustment.
2. FEMA reporting: a transfer of shares between a resident and a non-resident must be reported in Form FC-TRS, generally within 60 days of the transfer or payment, whichever is earlier, and a fresh issue of shares in Form FC-GPR within 30 days.
3. Tax compliance on the deal: tax deducted on payments to non-resident sellers is deposited and reported, and the remittance paperwork completed.
4. First-year audits: we can act as statutory auditor or internal auditor of the acquired company, independent of each other.
5. Controls and reporting: a risk control matrix and group reporting pack bring the company into the US group's processes.