What is due diligence?

Due diligence is the work done before a significant decision to find out whether the facts are what they appear to be. It is used before mergers and acquisitions, private equity and venture investments, lending, joint ventures, appointing distributors or agents, onboarding major suppliers, and hiring senior executives. The aim is not to eliminate risk but to identify it early enough to price it, manage it or avoid it.

The term comes from the idea of the care a reasonable person would exercise. In a transaction, it describes both the process and the standard: what a careful buyer, investor or lender would have checked.

What types of due diligence are there?

Due diligence is usually divided into workstreams, each led by specialists:

Outside transactions, the same thinking applies to vendor due diligence on suppliers, background verification on individuals, and Know Your Customer checks by regulated entities.

How does the due diligence process work?

1. Scoping. Identify the decision, the key risks and the questions that would change the outcome.
2. Information gathering. Review data-room documents, management responses and site visits, together with independent sources such as corporate registries, court records, regulatory databases, media and other open-source intelligence.
3. Analysis and verification. Test management's claims against independent evidence, reconcile financial data and map ownership, including beneficial ownership.
4. Interviews and enquiries. Speak to management and, where appropriate and lawful, to former employees, customers, suppliers and industry sources.
5. Reporting. Present findings by severity, with their implications for price, structure, conditions or the go/no-go decision.

Why does due diligence matter in India?

Indian transactions often involve family-controlled groups, related-party networks, informal arrangements and records spread across many authorities, so published information does not always tell the full story. Directors have a duty under s. 166 of the Companies Act 2013 to exercise due and reasonable care, skill and diligence, and lenders and investors increasingly expect a documented basis for their decisions.

For anti-bribery purposes, due diligence on business partners is one of the six principles in the UK Ministry of Justice guidance on adequate procedures, and is widely used as a benchmark by Indian companies in the absence of notified guidelines under s. 9 of the Prevention of Corruption Act 1988.

What are common due diligence failures?

• Relying only on information supplied by the target.
• Treating integrity checks as a database search rather than an investigation.
• Limiting checks to the target entity and ignoring promoters, related parties and key intermediaries.
• Completing due diligence at onboarding and never refreshing it.
• Failing to escalate red flags because the deal timetable is fixed.

Our articles on due diligence on business partners in India and on integrity due diligence before an acquisition explore these gaps in practice.

How does due diligence differ from an audit?

A statutory audit gives an opinion on whether financial statements are true and fair, based on sampling and management's records. Due diligence is decision-focused, forward-looking and scoped by the buyer or investor. A forensic audit looks back at suspected wrongdoing. They can overlap, but each answers a different question.

Spectra Forensics' integrity due diligence service covers integrity, ownership and reputation workstreams alongside financial and legal advisers.