Financial Due Diligence

A full-scope financial due diligence engagement covers financial statements prepared under Schedule III of the Companies Act 2013, tax audit reports in Form 3CD under Sec 44AB, IT Act 1961 (≡ §63, IT Act 2025) of the Income Tax Act 1961 (≡ §63, IT Act 2025), GST returns (GSTR-1, GSTR-3B, GSTR-9) filed under the CGST Act 2017, and ROC filings maintained on the MCA21 portal. Working-capital due diligence examines debtor ageing, inventory turnover, and creditor terms against the corresponding balance sheet line items. Tax diligence covers open income tax assessments, any Section 148 re-opening notices, and Transfer Pricing compliance under Section 92D. The objective is to produce a normalised earnings bridge, quantify contingent liabilities, and identify any off-balance-sheet exposure that affects the deal valuation.

GSTR-1 (outward supply details) and GSTR-3B (summary return with tax paid) filed under the CGST Act 2017 provide an independent source of revenue data that we reconcile against the audited turnover figure and Form 26AS. Divergences between GSTR-1 and the audited revenue can indicate unrecorded sales, timing differences, or incorrect HSN/SAC classification — all of which carry assessment risk under Section 61 or Section 73 of the CGST Act. GSTR-9 (annual return) and GSTR-9C (reconciliation statement under Section 44 of the CGST Act) are used to verify that the company has not claimed excess ITC and that any reversal obligations under Section 17(5) have been complied with. For manufacturing targets, we also cross-check e-way bill data against the delivery records to confirm physical movement of goods supports the declared supply chain.

We examine Form MGT-7/7A (annual return under Section 92 of the Companies Act 2013), Form AOC-4 (financial statements filing under Section 137), Form PAS-3 (allotment returns under Section 75), Form SH-7 (increase in authorised capital), and DIR-12 (director change notices) available on the MCA21 portal. PAS-3 filings reveal the full cap table history including all prior allotments, rights issues, and ESOPs, which is essential for verifying the equity structure disclosed in the term sheet. Any gap between MGT-7 and AOC-4 filing dates, or pending strike-off proceedings under Section 248, signal governance lapses. Charge registration documents under Section 77 reveal all secured borrowings and encumbrances on assets, which may not be fully visible from the balance sheet alone.

Working-capital due diligence establishes the 'normalised' or 'peg' level of net working capital — defined as current assets minus current liabilities, excluding cash and debt — that a buyer expects the target to deliver at closing. We compute a trailing-twelve-month average working capital from the quarterly management accounts or interim Schedule III statements, excluding one-off items such as advance taxes paid under Section 207 of the Income Tax Act 1961 or GST deposits under litigation. If the actual closing working capital is below the peg, the seller adjusts the consideration downward; if above, the buyer pays a top-up. This mechanism is standard in PE and M&A transactions and is documented in the Share Purchase Agreement; failure to model it accurately during diligence can result in significant post-closing price adjustments.

A statutory audit under Section 143 of the Companies Act 2013 is a retrospective verification that the financial statements give a true and fair view under the applicable accounting standards (Ind AS or AS). Financial due diligence is a transaction-specific analytical exercise that goes further: it normalises earnings for non-recurring items, stress-tests working capital, quantifies contingent tax and GST liabilities, and produces investor-facing outputs such as an EBITDA bridge and a quality-of-earnings analysis. The audit report confirms historical accuracy; it does not normalise earnings or assess deal-specific risks. Investors will rely on the audit report as a source document but will not substitute it for a separate due diligence report, because the auditor's responsibility runs to the shareholders under the Companies Act, not to the transaction parties.