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A practical legal guide for international companies sourcing from or partnering with Indian businesses.
I. Introduction
When entering a business relationship in India—whether it's sourcing a supplier, appointing a distributor, or outsourcing software development—legal due diligence is one of the most important steps to protect your company from fraud, non-performance, or legal liability.
International SMEs often face challenges such as unclear ownership structures, falsified documents, or unexpected litigation involving Indian partners. A proper due diligence process helps verify the legal and commercial integrity of potential business partners and is essential for minimizing risk when operating across borders.
This guide outlines the key legal and business information to verify when engaging Indian companies and how to conduct due diligence efficiently—even if you're operating remotely.
II. Common Scenarios That Require Due Diligence
Here are typical business activities where foreign companies should conduct legal due diligence before signing a deal:
• Sourcing manufacturers or suppliers in India for OEM or private label production. In this scenario, quality, reliability, and supply chain transparency are critical. Due diligence helps verify whether the supplier has the proper certifications, financial stability, and production capacity to meet contractual obligations.
• Partnering with Indian distributors, agents, or resellers. These relationships often involve exclusivity or long-term commitments. Due diligence ensures the partner is legally authorized to operate in the sector, has a good market reputation, and is not involved in legal disputes or regulatory violations.
• Entering joint ventures, franchise agreements, or investment deals. Joint operations or equity partnerships come with shared legal risks. It’s important to verify ownership structures, historical financials, pending liabilities, and any regulatory approvals needed to enter the partnership.
• Outsourcing IT or software development to Indian service providers. Many foreign companies outsource software or customer service functions to Indian firms. Due diligence confirms lack of conflict of interests, data security practices, employment compliance, IP protection, and the absence of prior contractual disputes.
• Engaging consultants, contractors, or local agencies for long-term services. Even if the value of the engagement is relatively small, reputational risk or misuse of funds may arise if the partner has a history of fraud, misrepresentation, or legal non-compliance.
III. Understanding Legal and Business Risk: Why Due Diligence Matters
Legal due diligence is more than a checklist—it's a tool for identifying and minimizing risks before they turn into costly disputes or regulatory problems. When evaluating potential partners or suppliers in India, it’s helpful to understand the main categories of risk that legal due diligence is designed to address:
1. Identity Risk
With the increasing risk of business impersonation, fake entities, and shell companies, verifying that a company exists and is legally registered is critical. Identity risk includes the possibility of dealing with a non-existent or misrepresented business, where the entity’s name, location, or contact person is falsified. Due diligence ensures the company is real, officially registered, and controlled by people who can legally represent it.
2. Litigation Risk
This refers to the risk that your potential partner is involved in legal disputes—whether over contracts, employment, product liability, or regulatory violations. For example, if a supplier has a history of being sued by customers or employees, that’s a strong signal of reputational and operational risk. Due diligence uncovers these disputes so you can assess their seriousness before entering into a contract.
3. Contractual Risk
Contractual risk involves not only the possibility of a breach, but also structural flaws in contracts—such as vague obligations, lack of performance standards, or unenforceable clauses. Verifying how a company manages its contracts, and reviewing past disputes or payment failures, can help ensure your agreement is both sound and enforceable under Indian law.
4. Regulatory Risk
India’s regulatory environment is complex and fast-evolving. Companies must navigate a range of legal frameworks including the Companies Act, Foreign Exchange Management Act (FEMA), and sector-specific rules enforced by bodies like the RBI, SEBI, and FSSAI. Businesses operating without valid licenses or failing to comply with applicable rules risk fines, legal liability, or operational suspension. Due diligence helps verify whether your potential partner holds the correct licenses, remains in good standing with regulators, and has adapted to recent legislative changes.
5. Financial Risk
Engaging with a financially unstable company increases the risk of delayed payments, unfinished projects, or insolvency. Beyond reviewing financial filings and tax records, foreign companies should assess whether the Indian company adheres to Indian Accounting Standards (Ind AS) and maintains internal controls such as proper audit trails and segregation of duties. Red flags include unpaid tax liabilities, inconsistent financial statements, or frequent auditor changes.
6. Strategic or Structural Risk
This refers to longer-term risks related to shifts in law, policy, or industry structure. For instance, a manufacturing partner not investing in sustainability compliance may be vulnerable to export restrictions. Similarly, a tech company operating in outdated models could be disrupted by new data privacy or AI regulations. Due diligence can reveal how exposed a company is to future legal or operational disruption.
7. Internal Controls and Reporting Risk
Many Indian firms, especially smaller ones, may lack strong internal controls, which increases the likelihood of inaccurate reporting, fraud, or weak financial oversight. Verifying whether the company has robust compliance mechanisms, separation of duties, and consistent audit practices can help identify weaknesses in corporate governance that may affect your business.
IV. Legal and Business Information to Verify
1. Corporate Registration
You should verify that the company is officially registered with India’s Ministry of Corporate Affairs (MCA).
What to look for
Full legal name, Corporate Identification Number (CIN), business type (e.g., Pvt Ltd, LLP, sole proprietorship), incorporation date, registered address, and current legal status (active/inactive).
Red flags
If the company is not listed in the MCA database, has been marked as "struck off" or "under liquidation," or is operating under a different name than its registered entity.
Why it matters
Verifying registration ensures you're dealing with a legally recognized business and not a shell or fraudulent entity.
2. Ownership and Management
Understanding who controls the company helps assess governance, accountability, and potential conflicts of interest.
What to look for
Names and identification details of directors, key shareholders, and significant beneficial owners (SBOs). Under Indian law, an SBO is any individual who holds, directly or indirectly, at least 10% of a company’s share capital or voting rights, either alone or together with others acting in concert (e.g., via nominee arrangements or trusts).
Disclosure requirements apply starting from 5% shareholding, and any changes in such holdings—even if the threshold isn’t crossed—must be reported to maintain transparency.
In some business structures, particularly joint ventures, franchise arrangements, or partnerships with strategic investors, it's important to identify if any shareholder has more than 25% voting power, which would give them the ability to block special resolutions, potentially influencing the company’s strategic direction.
Enhanced due diligence indicators: These include situations where the Indian entity is a holding company or has complex ownership layers. In these cases, it’s advisable to conduct a multi-layered ownership trace, especially if a shareholder appears to control over 10% indirectly or has links to other known entities in your industry.
Red flags
Frequent changes in directorship, nominee shareholders with no traceable background, beneficial owners from high-risk jurisdictions, or inconsistencies between MCA records and actual shareholding documentation.
Why it matters
Identifying who truly controls the company helps mitigate risks related to fraud, governance issues, and compliance with foreign investment or anti-money laundering regulations.
3. Licensing and Regulatory Compliance
Certain industries in India are regulated by sector-specific authorities, and companies operating in these spaces must hold valid licenses or registrations. Failure to comply can lead to regulatory actions, business interruption, or legal disputes.
What to look for
- For manufacturing, especially along global supply chains (such as electronics, auto parts, or consumer goods), ensure the company has Bureau of Indian Standards (BIS) certification, factory licenses, environmental clearances, and fire safety approvals. Manufacturing facilities must also comply with labor and occupational safety laws, which may be subject to inspection.
- For SaaS or IT services, verify whether the company is registered under Software Technology Parks of India (STPI) or Special Economic Zones (SEZ), which can offer tax and infrastructure benefits. Confirm compliance with India’s IT Act, and whether the company has implemented adequate data protection protocols.
- For fintech, digital lending, or payment processing companies, check for Reserve Bank of India (RBI) licenses such as NBFC (Non-Banking Financial Company) registration, Payment Aggregator license, or Prepaid Payment Instrument (PPI) approval. In capital markets, SEBI licenses (for investment advisors, portfolio managers, etc.) are mandatory.
- For e-commerce or digital platforms, check for Goods and Services Tax (GST) registration, and if the platform handles food products, FSSAI registration may be required. B2C platforms must also comply with Consumer Protection (E-Commerce) Rules.
- Always confirm whether licenses are current, renewed on time, and applicable to the exact activities the company performs.
Red flags
Licenses that have expired, were never obtained, or apply only to unrelated sectors. Ongoing show-cause notices or enforcement actions by regulatory bodies such as RBI, SEBI, or local authorities can indicate deeper compliance problems. Lack of documentation or unwillingness to share licensing records is also a red flag.
Why it matters
Engaging with a company that lacks the required licenses can expose you to legal liability, make your contract unenforceable, or disrupt your operations if the business is fined or shut down. This is especially critical in industries like fintech, manufacturing, and cross-border software services, where compliance burdens are higher.
4. Financial Health and Filings
Assessing a company's financial health and its compliance with statutory filing obligations is essential to understanding its stability, creditworthiness, and legal standing.
What to look for
- Audited financial statements for at least the last two financial years to evaluate revenue consistency, profitability, and liabilities.
- Annual returns filed with the MCA, which reflect compliance with company law obligations and provide insights into share capital changes and director appointments.
- GST registration and tax filings, which confirm that the company is actively operating and complying with indirect tax regulations.
- TDS (Tax Deducted at Source) compliance and income tax assessments, particularly for service-oriented businesses.
Red flags
- Companies that have not filed audited financials or statutory returns in multiple years may be dormant or trying to conceal financial stress.
- Unusually low turnover for a company claiming large-scale operations, or significant liabilities with no clear repayment plan.
- Repeated tax defaults or disputes with tax authorities, which may point to aggressive accounting practices or systemic non-compliance.
Why it matters
A company's financial filings help you assess its ability to meet contractual and payment obligations. Non-compliance with filing obligations may result in penalties, disqualification of directors, or legal ineligibility to enter new contracts.
5. Litigation and Legal Risks
Legal disputes or regulatory proceedings can reveal a pattern of non-compliance or raise concerns about a partner’s credibility and reliability.
What to look for
- Civil litigation history, including pending or resolved cases related to breach of contract, unpaid dues, or property disputes. These are often available in district court records or online databases.
- Criminal proceedings, including charges against the company or its directors for fraud, dishonesty, or statutory violations.
- Labor and employment disputes, especially if the company has a history of wrongful terminations, non-payment of wages, or union-related conflicts.
- Regulatory enforcement actions, such as penalties or suspensions imposed by bodies like the RBI, SEBI, or local municipal authorities.
Red flags
- A high volume of unresolved litigation or ongoing criminal proceedings involving company executives.
- Multiple cases with the same type of issue (e.g., repeated contract defaults or wage disputes), which may indicate systemic problems.
- Ongoing investigations that could materially impact the company’s reputation or ability to deliver on commitments.
Why it matters
Engaging with a partner involved in extensive or serious litigation could expose you to downstream legal risks, reputational harm, or contract disruption if the company is found liable or penalized.
6. Reputation and Track Record
A company’s business reputation is often as important as its legal standing. Reputational checks can provide insight into operational reliability, service quality, and ethical behavior.
What to look for
- Client references, testimonials, or case studies that verify the company’s past performance and capabilities.
- Online reviews or feedback on B2B directories such as IndiaMART, Justdial, Clutch, or Trustpilot. While reviews can be subjective, consistent negative patterns are a warning sign.
- Press coverage or media reports, especially stories related to legal troubles, fraud, product recalls, or investor disputes.
- Inclusion on government watchlists, denied party lists, or blacklists from industry regulators.
Red flags
- A lack of online presence or unverifiable references.
- Numerous complaints of missed deadlines, substandard quality, or unethical conduct.
- History of client disputes or early termination of major contracts.
Why it matters
Even if a company appears legally compliant, reputational issues can pose serious operational and brand risks. A poor track record may also suggest internal management weaknesses or poor stakeholder relations.
V. Tips for Conducting Due Diligence Remotely
Many parts of due diligence can be done without traveling to India:
• Access the MCA portal (https://www.mca.gov.in) to review basic corporate filings, director information, and compliance status. Use the company’s CIN to search official data.
• Use public litigation databases like Indian Kanoon or district court websites to search for ongoing civil or criminal cases.
• Request certified copies of incorporation documents, licenses, and compliance filings directly from the company.
• Check for authenticity and consistency across different documents. For example, check if the company address and director names match across MCA records and other documents.
• Be cautious of scanned, unsigned, or outdated documents and insist on originals or certified true copies where possible.
• Engage a local Indian lawyer to verify translations, confirm regulatory filings, or request internal records not publicly available.
VI. How Trustiics Can Help
Through Trustiics, you can access vetted, experienced local lawyers in India without leaving your office—from anywhere in the world. Your selected lawyer can support you with:
- Customized legal due diligence based on the nature and value of your deal
- Verification of corporate registration, licenses, litigation status, and shareholding structures
- Enhanced due diligence for joint ventures, equity investments, and cross-border partnerships
To get started, simply choose one of our Trusted Legal Experts and send a brief description of your legal needs. You’ll then receive a free quote. If you approve the quote, you can authorize a secure online credit card payment, which will be held in escrow. The payment will only be released to the lawyer after the service is completed. If you're not satisfied with the service, you’ll receive a 100% refund.
Alternatively, you can contact us at support@trustiics.com and our support team will coordinate the legal due diligence process in India for you.
VII. Legal Tools to Protect Your Company
Due diligence is the first step. You should also take contractual and procedural steps to protect your business:
- Use a professionally drafted agreement with clear terms on governing law, dispute resolution venue (such as Singapore or London arbitration), and remedies for breach.
- Include legal clauses such as representations and warranties, indemnification, and performance milestones.
- Request notarized documents and verify signatories’ authority to bind the company.
- Consider escrow or milestone-based payment structures when dealing with first-time partners or high-risk engagements.
- Maintain documentation trails and communication records in case of future disputes or investigations.
To safeguard your interests in the Indian market, consult one of the vetted Indian lawyers on Trustiics who can help draft or review contracts tailored to your specific needs.
VIII. Conclusion
Legal due diligence is an essential part of doing business internationally—especially in a market as dynamic and diverse as India. By verifying the legal standing, financial health, and reputation of potential partners, you reduce your risk of contract breaches, fraud, and regulatory non-compliance.
Trustiics is here to help you access trusted legal support from India and other key markets—so you can grow your business with confidence and clarity, knowing expert legal assistance is just a few clicks away.