What Is Due Diligence?
Due diligence is a structured investigation to verify facts, surface risks, and validate value before a transaction, onboarding, or partnership, so decisions are informed and defensible (Corporate Finance Institute, Investopedia).
The concept of due diligence originated in U.S. securities law, where brokers had to disclose material facts about investments to protect buyers. Over time, it evolved into a broader business practice used globally to ensure informed decision-making.
Today, due diligence goes far beyond securities. It is standard practice in:
- Mergers and acquisitions (M&A): Buyers review financials, operations, and compliance before acquiring a company.
- Investments: Private equity or venture capital firms examine startups before funding.
- Vendor or third-party onboarding: Companies assess suppliers’ financial health, security posture, and compliance.
- Customer onboarding: Banks and NBFCs perform customer due diligence (CDD/EDD) to comply with KYC/AML norms.
- Partnerships and data-sharing: Organizations evaluate risks before entering strategic alliances or sharing sensitive information.
At its core, due diligence helps organizations de-risk decisions by ensuring they act on verified facts rather than assumptions.
Why Is Due Diligence Important?
Run due diligence before buying or investing in a company, onboarding critical vendors, entering strategic partnerships, or onboarding higher-risk customers ( LexisNexis, UpGuard, Reserve Bank of India).
Some common scenarios include:
- M&A and Private Equity deals: Acquirers validate valuation, liabilities, and synergies.
- Large procurement or outsourcing: Enterprises evaluate third-party service providers for financial stability and operational capacity.
- Data-sharing agreements: Organizations review partners’ security and privacy controls before allowing access to sensitive data.
- Cross-border transactions: Ensures compliance with local laws, sanctions lists, and foreign exchange rules.
- Regulated-sector onboarding: Banks and NBFCs run customer due diligence (CDD) and enhanced due diligence (EDD) for higher-risk customers under RBI’s KYC guidelines.
Without proper due diligence, companies risk financial loss, regulatory penalties, reputational damage, or failed integrations.
Read: Emerging Banking Frauds in India
What Are the Main Types of Due Diligence?
Core types include financial, legal, tax, commercial/market, operational, HR, IP, technical/IT, cybersecurity, data privacy, regulatory/ESG, and confirmatory due diligence (Ansarada, Deloitte Insights).
Here’s a quick breakdown of the most common types:
- Financial due diligence: Examines revenue, profits, debts, cash flow, and financial forecasts.
- Legal due diligence: Reviews contracts, litigation history, intellectual property rights, and compliance obligations.
- Tax due diligence: Checks tax filings, liabilities, disputes, and future obligations.
- Commercial/market due diligence: Evaluates industry trends, competitors, customer base, and market risks.
- Operational due diligence: Assesses day-to-day operations, supply chains, infrastructure, and scalability.
- HR due diligence: Reviews organizational structure, employee contracts, benefits, and labor compliance.
- Intellectual Property (IP) due diligence: Confirms ownership and protection of patents, trademarks, and copyrights.
- Technical/IT due diligence: Investigates IT systems, infrastructure, and technology dependencies.
- Cybersecurity due diligence: Reviews data security, IAM practices, incident history, and vulnerability management.
- Data privacy due diligence: Ensures compliance with data laws like India’s DPDP Act or GDPR in the EU.
- Regulatory/ESG due diligence: Examines environmental, social, and governance factors, along with licenses and permits.
- Confirmatory due diligence: A final check after signing a letter of intent (LoI) to validate assumptions before closing.
India Specific Regulatory & Compliance Due Diligence
In India, Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are mandated for regulated entities under the RBI’s KYC Master Direction. At the same time, processing of personal data must comply with the Digital Personal Data Protection (DPDP) Act, 2023, alongside sector-specific norms such as SEBI and Companies Act rules (RBI, PDICAI, EY).
1. Customer Due Diligence (CDD/EDD)
Under the Reserve Bank of India’s KYC Master Direction, regulated entities such as banks, NBFCs, and payment companies are required to perform due diligence on every customer. This includes:
- Identity verification: Collecting and validating Aadhaar, PAN, or other officially valid documents (OVDs).
- Beneficial ownership checks: Identifying and verifying the individuals who ultimately control or benefit from an account or company.
- PEP and sanctions screening: Determining whether a customer is a politically exposed person (PEP) or appears on national/international watchlists.
- Ongoing monitoring: Periodic review of transactions and risk profiles, with Enhanced Due Diligence (EDD) applied to high-risk customers such as foreign nationals or high-value accounts.
CDD is not a one-time exercise. It is an ongoing compliance requirement, designed to prevent money laundering, terror financing, and fraud in India’s financial system.
know more about Bank Account verification, Check out the knowledge blog.
2. Data Privacy (DPDP Act, 2023)
The DPDP Act, 2023 introduces a new compliance layer for due diligence involving personal data. Organizations must ensure:
- Lawful processing: Data can only be collected and processed for specific, legitimate purposes.
- Consent & notice: Individuals (data principals) must be informed about how their data will be used, and explicit consent must be obtained.
- Data principal rights: People have rights to access, correction, grievance redressal, and withdrawal of consent.
- Cross-border rules: The Act applies extra-territorially, meaning even foreign entities dealing with Indian citizens’ data must comply.
For diligence teams, this means that reviewing a target company’s data practices (retention, cross-border transfers, consent management) is now just as critical as reviewing its financial records.
3. Sector-specific norms
- SEBI: Listed companies must disclose material events and financials in line with SEBI regulations, making legal and financial diligence critical in capital markets.
- Companies Act, 2013: Board approvals, related-party transactions, and auditor certifications often form part of corporate diligence.
- E-Governance and state laws: In areas like real estate, e-stamping and digital registration rules may dictate documentation requirements.
Together, these frameworks create a uniquely Indian due diligence lens, one that blends global best practices with domestic regulatory and data protection expectations.
The Due Diligence Process: What Steps are Involved?
The due diligence process typically moves from scoping → document request → analysis → risk rating → remediation → findings report → post-deal monitoring. This framework applies across M&A, vendor diligence, and customer onboarding (Deloitte Insights, UpGuard).
Step 1: Scope & Materiality
Define the goals, depth, and timeline of the exercise. For example, a $5M vendor onboarding requires narrower diligence than a $500M acquisition. Materiality thresholds help teams decide what to prioritize.
Step 2: Data Access
Build a document request list (financials, contracts, policies) and open a secure data room. In vendor or customer contexts, this may be a standardized RFI/RFP with a set of required documents and certifications.
Step 3: Analysis
Teams perform deep dives:
- Financial models (quality of earnings, cash flow).
- Contract reviews (liabilities, obligations, rights).
- Compliance mapping (licenses, disputes, regulatory filings).
- Technology and cyber scans (system architecture, IAM posture, breach history, third-party risk).
- This is where red flags, such as pending litigation or weak cyber defenses, surface.
Step 4: Risk Register
Each finding is rated by likelihood and impact, then documented in a risk register. Critical risks are highlighted in a “red-flag memo” for leadership.
Step 5: Remediation & Covenants
Mitigating risks often requires negotiation: indemnities, warranties, adjusted pricing, or specific closing conditions. For vendor or customer diligence, this could mean additional safeguards in contracts.
Step 6: Findings Report
The report distills insights into an executive summary, valuation impacts, and clear recommendations (go/no-go decisions or conditions to proceed).
Step 7: Post-Close or Onboarding Monitoring
Due diligence doesn’t end at signing. For vendors and customers, ongoing monitoring is required, continuous KYC, SLA checks, security reviews, and compliance audits. In M&A, integration teams revisit diligence findings during the first 90–100 days post-close.
Check: Merchant onboarding: A step-by-step guide
M&A vs Vendor vs Customer Due Diligence: What’s Different?
M&A due diligence is breadth-first and valuation-linked; vendor due diligence centers on third-party risk and SLAs; customer due diligence focuses on identity, AML/KYC, and ongoing monitoring (Corporate Finance Institute, UpGuard, Reserve Bank of India).
Here’s how they compare:
Combine secure data rooms, screening databases, cyber scanners, and document-AI to accelerate diligence while improving coverage.
Modern Tools & Data Sources for Diligence
Modern due diligence leverages both traditional data sources and digital intelligence tools:
- Data rooms: Virtual repositories for financials, contracts, and disclosures.
- Screening databases: Global sanctions, PEP (Politically Exposed Persons), and watchlists.
- Credit bureaus: Creditworthiness and repayment history for companies or individuals.
- OSINT (open-source intelligence): Publicly available media, regulatory filings, and web data.
- Cybersecurity scanners: Vulnerability scans, penetration tests, IAM posture reviews.
- Contract analytics (AI): Automated parsing of clauses, risk language, and red-flags.
- Privacy mapping tools: Data inventorying to test DPDP/GDPR compliance.
Deliverables: What Should a Diligence Report Include?
Produce a concise findings deck, red-flag tracker, risk heat map, and a remediation plan tied to terms (price, indemnities, covenants), plus a 90-day action plan for post-close/onboarding.
Deliverables usually include:
- Findings deck & executive summary: Key risks, opportunities, and impacts on valuation or onboarding.
- Red-flag tracker: List of critical risks requiring immediate remediation.
- Risk heat map: Likelihood vs impact matrix for leadership decisions.
- Remediation plan: Indemnities, warranties, covenants, or compliance steps tied to identified risks.
- 90-day action plan: Ensures issues raised in diligence are addressed post-close (in M&A) or after onboarding (in vendor/customer contexts).
Costs, Timelines & Common Pitfalls
Timelines vary (2-10+ weeks) by scope; the biggest pitfalls are shallow scoping, poor data access, ignoring cyber/privacy, and no post-deal monitoring (Deloitte Insights).
1. Costs:
Can range from a few lakhs for vendor due diligence to crores for large M&A deals, depending on scope and advisory involvement.
2. Timelines:
- M&A: 4-10+ weeks.
- Vendor due diligence: 2-6 weeks.
- Customer onboarding: Real-time to a few days (for EDD).
3. Pitfalls:
- Defining too narrow a scope and missing material risks.
- Poor data room hygiene, causing delays.
- Overlooking cyber and privacy risks in a digital era.
- Treating diligence as “one-and-done” rather than a continuous monitoring requirement.
India Templates, Policies & Best Practices (RBI, DPDP, PMLA)
Maintain RBI-aligned CDD/EDD SOPs and DPDP-compliant privacy notices, with periodic refresh cycles (RBI, EY).
Best practices for Indian businesses:
- CDD/EDD SOPs: Based on RBI KYC Master Direction; include ID verification, BO identification, PEP/sanctions checks, and risk scoring.
- DPDP Act notices: Standardized consent and privacy notices to meet DPDP 2023 obligations.
- Refresh cycles: Annual or semi-annual review of vendors and customers, depending on risk rating.
- Sectoral overlays: SEBI disclosures, Companies Act filings, or IRDAI/RBI circulars where applicable.
FREQUENTLY ASKED QUESTIONS:
Q: What is due diligence, in one line?
A: A structured verification to confirm facts, value, and risks before a deal or onboarding (Corporate Finance Institute).
Q: What are the main types?
A: Financial, legal, tax, commercial, operational, HR, IP, tech/cyber, privacy, ESG; plus confirmatory (Ansarada).
Q: How is India’s CDD/EDD different?
A: RBI mandates identity and beneficial-owner verification plus ongoing monitoring for regulated entities (RBI).
Q: What’s cyber due diligence?
A: Assessing a company’s security posture, IAM, past breaches, and third-party risk, often mapped to frameworks like NIST or ISO (Deloitte Insights, NIST CSRC).
Q: What changed with the DPDP Act, 2023?
A: It introduced lawful processing, consent/notice obligations, data rights for individuals, and extra-territorial scope (EY, DLA Piper Data Protection).
Q: What is confirmatory due diligence?
A: A verification exercise conducted after signing a Letter of Intent (LoI) to validate assumptions before finalizing terms (Ansarada).
