Acquiring an Indian Company: Due Diligence Checklist

By Nagavarapu Sudheer, M.Com., F.C.S., L.L.B., Partner, A2 Consultants

Foreign buyers often plan an Indian acquisition around price and synergies, then find that foreign investment rules, competition law and tax structure decide whether the deal can close at all. This checklist sets out the questions to settle, in the order they tend to matter.

1. Confirm that foreign ownership is permitted

Start with the target's sector. Foreign investment in India is allowed either under the automatic route or with government approval, and many sectors carry ownership caps or conditions. Investors from countries that share a land border with India face additional approval requirements, and the rules on this have been changing, so check the current position before signing anything. If the deal needs approval, the timeline and conditions belong in the term sheet from the start.

2. Get the price and payment mechanics right under FEMA

FEMA pricing guidelines set a floor for what a non-resident can pay for shares of an unlisted Indian company, usually tied to a fair value determined by a registered valuer. The rules also limit how much of the price can be deferred or held in escrow, and for how long. Earn-outs, deferred payments and indemnity holdbacks therefore need to be designed within those limits, not added later. Payments must route through authorised dealer banks with the right documentation.

3. Test whether the Competition Commission must approve

Indian merger control has two routes. The traditional test looks at the combined assets or turnover of the parties. The deal value threshold applies to transactions above ₹2,000 crore where the target has substantial business operations in India, even if the target is small. A de minimis exemption exists for small targets (assets below ₹450 crore or turnover below ₹1,250 crore), but it does not protect deals caught by the deal value threshold.

You cannot complete the transaction before approval. Review runs 30 days in Phase 1 and up to 150 days overall if it goes to Phase 2, and the clock stops when the CCI asks for more information. Thresholds are revised from time to time, so confirm the current figures.

4. Check the takeover rules if the target is listed

For a listed company, SEBI's takeover regulations can require an open offer when you cross 25% of the voting rights or acquire control. Open offer pricing follows a formula, which can change the economics of the whole deal.

5. Run due diligence that fits India

Beyond the usual financial and legal review, look at:

• Title to shares and any pledges or charges over them
• Status of statutory dues: GST, TDS, provident fund and ESI
• Pending tax, labour and commercial litigation
• Past FEMA compliance, including whether foreign investment into the target was reported on time
• Transfer pricing exposure on related-party dealings
• Ownership of intellectual property, especially where contractors created it
• Licences and approvals that may not transfer automatically on a change of control
• Compliance with the new labour codes

Problems found here should turn into price adjustments, conditions precedent, specific indemnities or escrow terms.

6. Choose the structure with tax in mind

Buying shares, buying a business through a slump sale, or subscribing to new shares each produce different tax results for buyer and seller. Consider capital gains for a non-resident seller, available treaty protection, stamp duty on the transfer and whether the target's tax losses will survive a change in ownership. Where the buyer will hold through an intermediate holding company, choose the jurisdiction early.

7. Draft protections that work under Indian law

Warranties, indemnities, conditions precedent and a clear long-stop date are standard. Restrictive covenants such as non-competes need careful drafting, because Indian contract law limits how far they can be enforced. A dispute resolution clause that fixes arbitration, the seat and the governing law can save months if something goes wrong.

8. Plan the post-closing filings

Reporting does not end at completion. Share issues to non-residents generally need to be reported within 30 days and transfers within 60 days, both on the RBI's portal. The target must also file its annual foreign liabilities and assets return by 15 July each year. Late filing attracts fees that grow with time, so build these dates into the closing checklist.

Where to start

Sequence matters. Settle the investment route and pricing first, test the competition thresholds next, then use the due diligence findings to shape the price, the structure and the contract. A2 Consultants supports foreign buyers through each of these steps, from structuring to post-closing compliance.

This article is general information, not legal or tax advice. Thresholds and rules change, so confirm the current position before acting.