Financial Due Diligence

A buy-side financial due diligence engagement covers at minimum three years of audited financial statements prepared under Schedule III of the Companies Act 2013, along with the corresponding Form 3CD tax audit reports filed under Sec 44AB, IT Act 1961 (≡ §63, IT Act 2025) of the Income Tax Act 1961 (≡ §63, IT Act 2025). We examine revenue recognition policies against Ind AS 115, inventory valuation methods, related-party transactions disclosed under Ind AS 24, and contingent liabilities. Working capital trends are stress-tested using the actual debtor ageing, creditor terms, and stock turnover ratios. The objective is to identify normalised EBITDA, off-balance-sheet exposures, and any restatement risk before the buyer commits to a valuation.

Tax due diligence begins with a review of income tax returns for the last six assessment years, reconciling book profit with taxable income and examining the Form 26AS / AIS for any unreconciled TDS credits or high-value transaction flags. We look for unexplained additions made by the Assessing Officer under Section 69 or Section 68 of the Income Tax Act 1961, pending appeals before the CIT(A) or ITAT, and any Section 143(2) notices still open. Transfer pricing documentation under Section 92D and Form 3CEB is reviewed where the target has international transactions. Deferred tax assets — particularly MAT credit entitlement under Section 115JAA — are verified for recoverability against projected profitability.

GST due diligence focuses on reconciliation between GSTR-1, GSTR-3B, and the audited revenue figure, as well as the GSTR-2B input tax credit (ITC) matched against the books. We assess the risk of ITC reversal demands under Section 16(2)(c) of the CGST Act 2017, particularly where vendors are non-filers or have cancelled registrations. Classification disputes — especially between goods and services, or between different HSN/SAC codes — are reviewed against the rate notifications issued under Section 9 of the CGST Act. Pending GST audit observations under Section 65 or scrutiny notices under Section 61 are quantified as contingent liabilities. For targets in manufacturing, the transitional credit claimed under erstwhile Form TRAN-1 is verified against the then-existing CENVAT balances.

A sell-side due diligence report (also called a Vendor Due Diligence or VDD report) is structured around Schedule III financial headings and presents normalised financial statements for three to five years, with clear adjustments disclosed and footnoted. The report is addressed to the management of the target company and is shared with potential investors under a reliance letter that extends contractual comfort to named parties. It is typically used alongside a draft Information Memorandum in Series A/B fundraising rounds or PE transactions to reduce the buyer's own diligence timeline and increase process control. The report flags quality of earnings adjustments, working capital peg methodology, and known litigation or contingency, allowing the management to address weaknesses proactively before buyer scrutiny.

A standard buy-side financial due diligence engagement for a mid-market target (turnover INR 10–200 crore) typically takes 3–6 weeks from the date of data room access. We require a structured data room containing audited financials, board resolutions, MCA filings (particularly Form MGT-7 and AOC-4), bank statements, debtor/creditor schedules, statutory registers, and all tax assessment orders. The timeline compresses to 2–3 weeks when management provides a well-prepared data room with indexed documents. Any delays in furnishing records — particularly correspondence with the Income Tax Department under Section 148 re-assessment or GST SCNs under Section 73/74 — proportionately extend the timeline. We issue a diligence checklist at engagement start so the target's finance team can begin preparation in parallel.