Due Diligence Preparation

Due diligence prep is the structured exercise of organising, reconciling, and sanitising a company's financial, legal, and statutory records before they are presented to a buyer, investor, or lender for review. An investor's due diligence team will examine three to five years of audited financials prepared under Schedule III of the Companies Act 2013, Form 3CD tax audit reports under Sec 44AB, IT Act 1961 (≡ §63, IT Act 2025) of the Income Tax Act 1961 (≡ §63, IT Act 2025), and GST returns filed under the CGST Act 2017 — and any inconsistency across these sources raises red flags. A CA-led prep engagement identifies and resolves those inconsistencies in advance, such as revenue differences between GSTR-1 and the audited P&L, or TDS deducted but not deposited under Section 194C. Going into investor diligence unprepared significantly increases deal risk and can compress valuation.

Investors routinely request MCA filings — AOC-4 (financial statements), MGT-7/7A (annual return), DIR-12 (director changes), PAS-3 (allotment return), and SH-7 (authorised capital increases) — all filed under the Companies Act 2013. Income tax returns for at least six years, Form 26AS / AIS for cross-checking TDS credits, and any Section 143(3) scrutiny assessment orders are also standard asks. GST reconciliation between GSTR-1, GSTR-3B, and the audited revenue figure is typically a diligence focus because gaps trigger contingent liability estimates. We structure a data room with indexed folders mapped to these categories so the investor team can locate documents without back-and-forth, which also signals organisational maturity and improves deal confidence.

Entries that appear unusual to an investor — such as inter-company loans without documented interest, rounding differences in fixed-asset schedules, or year-end provisions reversed in Q1 — should be identified and explained with supporting narration before diligence begins. Related-party transactions must be disclosed under Ind AS 24 (or AS 18 for non-Ind AS companies), and any that were not at arm's length should be normalised in the adjusted EBITDA bridge with clear disclosure. Undisclosed liabilities or contingencies — including pending Income Tax appeals under Section 246A or GST demands under Section 73 — must be surfaced proactively, as investors treat concealment as a far greater risk than the liability itself. Our prep engagement includes a management representation process that ensures the data room narrative aligns with the actual financial position.

Late or missing MCA annual return filings (Form MGT-7 under Section 92, and AOC-4 under Section 137 of the Companies Act 2013) are a common diligence finding and will be noticed by any investor. Additional fees under Section 403 of the Companies Act 2013 apply for late filing, and the MCA21 portal auto-calculates these; filing them now with the applicable additional fee regularises the default prospectively. However, any prosecution initiated under Section 441 (compounding of offences) would need to be disclosed to investors as a contingent liability. We recommend filing all outstanding returns before entering investor conversations, as clean ROC records signal that management takes statutory compliance seriously and reduce the investor's perception of governance risk.

Ideally, due diligence prep should begin six to twelve months before a planned fundraise or M&A process, because some issues — such as restating a prior year's financials, obtaining a revised Form 3CD from the tax auditor, or regularising belated MCA filings — require time to resolve properly. At minimum, a three-month runway is needed to complete reconciliations, resolve GST mismatches, obtain clean bank statements, and prepare a three-to-five-year financial summary with EBITDA normalisation. Starting prep only after term sheet signing compresses the timeline, forces the management team to run operations and diligence simultaneously, and increases the risk of re-negotiation or deal collapse. Early preparation also allows the company to address any income tax demands under Section 143(1)(a) intimations before they escalate to formal scrutiny.