Due diligence is often treated as one single exercise, but the reality under Indian law is quite different depending on context. Due diligence in mergers vs due diligence in lending involves distinct statutes, different risk concerns, and different outcomes if something is missed. A lawyer reviewing a merger is asking different questions than one reviewing a loan proposal, even though both processes are broadly called “due diligence.” Understanding these differences is essential for anyone working on corporate transactions or credit assessments in India.
What Is Legal Due Diligence?
Legal due diligence is the process of investigating a company, asset, or borrower before a transaction, to identify legal risks, liabilities, and compliance issues that could affect the deal. The depth, focus, and governing framework of this exercise changes significantly depending on whether it is being done for a merger or for a loan.
Due Diligence in Mergers: The Governing Framework
Legal due diligence in India for mergers is shaped primarily by these statutes:
- Companies Act, 2013, Sections 230 to 232: Govern schemes of arrangement, compromise, and amalgamation. Due diligence here confirms whether the target company’s structure, shareholding, and liabilities are accurately represented before the scheme is filed with the National Company Law Tribunal.
- Competition Act, 2002, Sections 5 and 6: Define “combinations” and require notification to the Competition Commission of India where asset or turnover thresholds are crossed. Due diligence must assess whether the merger triggers this mandatory notification requirement.
- Income Tax Act, 1961, Section 2(1B): Defines “amalgamation” for tax purposes. Due diligence checks whether the merger structure qualifies for tax-neutral treatment under this definition.
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: Apply where a listed company is involved, requiring due diligence on shareholding patterns and open offer obligations.
Due Diligence in Lending: The Governing Framework
Due diligence for lenders in India follows a different statutory path, focused on the borrower’s ability to repay and the enforceability of security:
- Companies Act, 2013, Sections 77 to 87: Require registration and modification of charges created by a company, meaning lenders must verify existing charges on the Registrar of Companies records before creating a new one.
- SARFAESI Act, 2002: Governs the enforcement of security interests. Due diligence confirms whether the security being offered can actually be enforced under this Act if the borrower defaults.
- Reserve Bank of India guidelines on credit appraisal: Require banks and financial institutions to assess a borrower’s financial health, repayment capacity, and existing debt obligations before sanctioning a loan.
- Insolvency and Bankruptcy Code, 2016: Relevant because due diligence must consider whether the borrower is already facing insolvency proceedings, which would affect the lender’s recovery rights.
Comparison Table
| Aspect | Due Diligence in Mergers | Due Diligence in Lending |
|---|---|---|
| Primary Governing Law | Companies Act 2013, Sections 230-232 | Companies Act 2013, Sections 77-87 |
| Regulatory Approval Needed | NCLT approval, CCI clearance if thresholds met | No tribunal approval, but charge registration required |
| Key Risk Assessed | Accuracy of corporate structure and liabilities | Borrower’s repayment ability and asset enforceability |
| Relevant Tax Provision | Income Tax Act, Section 2(1B) | Not typically a tax-driven exercise |
| Enforcement Mechanism | Scheme becomes binding once sanctioned | SARFAESI Act enables direct enforcement of security |
Rights and Obligations
- In mergers, the acquiring company has an obligation to disclose accurate financial and legal information to shareholders and the NCLT, while shareholders have a right to object to the scheme before approval.
- In lending, the lender has an obligation to conduct reasonable credit appraisal under RBI norms, while the borrower has an obligation to disclose existing charges and liabilities truthfully.
Exceptions and Practical Limitations
- Small mergers between wholly owned subsidiaries may follow a simplified procedure under Section 233 of the Companies Act, requiring less extensive regulatory due diligence.
- The Competition (Amendment) Act, 2023 introduced a deal value threshold, meaning even a merger below traditional asset or turnover limits may require CCI notification if the deal value exceeds two thousand crore rupees and the target has substantial business operations in India.
- Lending due diligence may be lighter for smaller, secured retail loans compared to large corporate credit facilities, where RBI norms require more detailed assessment.
Penalties and Remedies
- Failure to notify a combination under the Competition Act can attract penalties from the Competition Commission of India, and the transaction may be treated as void.
- Providing false information during merger due diligence disclosures can attract liability under Section 447 of the Companies Act, which deals with fraud.
- In lending, failure to properly register a charge under Section 77 makes the charge void against a liquidator or other creditors, significantly weakening the lender’s recovery position.
Recent Amendments Worth Knowing
The Competition (Amendment) Act, 2023 added the deal value threshold mentioned above, directly affecting how merger due diligence teams assess notification requirements. On the lending side, continued RBI updates to credit risk and large exposure norms mean due diligence checklists for lenders require periodic review to remain compliant.
Frequently Asked Questions
Merger due diligence focuses on corporate structure, shareholding, and regulatory clearances, while lending due diligence focuses on repayment capacity and enforceability of security.
Primarily the Companies Act, 2013, Sections 230 to 232, along with the Competition Act, 2002 and Income Tax Act, 1961 where relevant.
No. Only combinations crossing specified asset, turnover, or deal value thresholds under the Competition Act require notification.
Existing charges on the borrower’s assets, financial health, repayment capacity, and compliance with RBI credit appraisal norms.
Because an unregistered charge under Section 77 of the Companies Act becomes void against a liquidator or other creditors, weakening the lender’s position.
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