Due diligence is the process that incorporates prudent investigation of the legal, economic, social, fiscal, and financial framework of a business entity or an individual. It encompasses a detailed reputational examination of an organisation or an individual, along with financial and business transactions, before initiating any professional relationship. The process of due diligence is based on gathering and evaluating information to assess, evaluate and uncover the risks, such as financial, legal, operational or reputational, associated with a potential transaction or investment that could impact the decision being made. The due diligence process is adopted by individuals or organisations who are in the process of a merger, acquisition or investment, onboarding vendors and their counterparts, or hiring senior management.

With the Securities Act of 1933/Securities and Exchange Board of India Act, 1992 – including SEBI amendments issued vide Securities Laws (Amendment) Ordinance, 2014 – PRS, due diligence has become a crucial and mandatory component of M&A deals. The statute, commonly referred to as the 1933 Act, the Federal Securities Act (US) or the Securities Act of 1933/Securities and Exchange Board of India Act, 1992 – including SEBI amendments issued vide Securities Laws (Amendment) Ordinance, 2014 – PRS for India and Indian companies “Truth in Securities” law, mandates that investors get financial information from securities being offered for public sale. This means that businesses must submit the information that is easily accessible to investors before becoming public. Further, the Reserve Bank of India’s (RBI) directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs, mandate that appropriate due diligence shall be performed to assess the capability of the service provider to comply with obligations in the outsourcing agreement. Due diligence shall take into consideration qualitative and quantitative, financial, operational, and reputational factors and shall involve an evaluation of all available information about the service provider.