Due Diligence on an Indian Target for a US or Foreign Buyer

Which accounting framework does the Indian target use?

First confirm the framework the target actually uses. Larger and listed companies apply Ind AS, which is largely converged with IFRS, while many private companies still apply Indian GAAP (Accounting Standards notified under the Companies Act). Which applies depends on net worth, listing status and group relationships, and it affects every later comparison.

Obtain the statutory financial statements, audit reports, accounting policies and any group reporting packs. Check whether management accounts follow the same policies as the annual accounts. Reporting to a foreign parent may include conversion entries that never appear in the local ledger, so the buyer needs a clear bridge between each basis.

The buyer’s US GAAP reporting needs are separate from the target’s local compliance. Identify differences that matter for the deal model and future consolidation, but do not treat every conversion entry as an earnings adjustment. Indian and US standards explain the accounting, but they do not set the scope of a quality of earnings review.

Which Ind AS and US GAAP differences move EBITDA?

Lease accounting, revenue recognition, capitalisation of development costs and the treatment of certain employee and financing costs can all shift EBITDA between Ind AS and US GAAP. A difference is not automatically an adjustment. The buyer should define one consistent basis for analysis and separate accounting presentation from economic substance.

Under Ind AS 116, lessees generally put almost all leases on the balance sheet, so rent becomes depreciation and interest and EBITDA rises. Under US GAAP (ASC 842), operating leases keep a single straight-line lease cost within operating expenses. The same rent can therefore produce different EBITDA, even though the cash paid is identical.

Ind AS 115 and ASC 606 follow a similar revenue model, but judgements on performance obligations, variable consideration and principal-versus-agent can differ. Ind AS also permits capitalising some development costs that US GAAP generally expenses. Decide whether each item is an error, a framework conversion or presentation, and keep lease treatment consistent with the valuation multiple.

Why do promoter and related-party flows matter?

Indian SMEs are often promoter-run, with transactions involving family members, group companies and personally owned assets. These arrangements can affect reported earnings, the business’s independence and what assets the buyer actually acquires. Diligence should establish the substance of each arrangement, not assume that a related-party transaction is improper.

Review promoter salaries and commissions, rent for promoter-owned premises, loans, guarantees, shared staff and purchases or sales with group entities. Decide which will continue after the deal and at what market terms. A below-market rent may need a negative adjustment to EBITDA, while a promoter salary above market rates may support an add-back.

Check ownership of key assets such as property, trademarks, domain names and licences that may sit outside the target. Confirm guarantees given by promoters for company borrowings, which may need replacing at completion. Unsupported management explanations should stay on the open-items list rather than being accepted into the earnings bridge.

How do cash and accrual differences affect the numbers?

Some Indian SMEs record certain income or expenses when cash moves rather than when earned or incurred, particularly in management accounts. This can shift profit between periods. Diligence should bridge invoices, receipts, advances and receivables, and identify unrecorded liabilities, so that EBITDA reflects the period in which business activity actually took place.

Bridge sales invoices to customer receipts and receivables so that cash collections are not mistaken for revenue of the current period. Identify customer advances that relate to future deliveries. On the cost side, look for unrecorded supplier invoices, unpaid bonuses, leave encashment, gratuity and other year-end accruals that may be missing from monthly figures.

Bank statements help test completeness and classification, but cannot validate claims of unrecorded sales on their own. Cash sales that are not invoiced or recorded raise tax as well as earnings questions and should be flagged rather than added to EBITDA. Where policies change between years, restate earlier periods on a consistent basis.

What GST and TDS exposures should the buyer test?

GST and TDS records help test whether the accounting records match statutory filings, and they can reveal exposures that need specialist review. Differences may arise legitimately from timing or classification, so explain them before drawing conclusions. Unresolved exposures are usually dealt with through price adjustments, indemnities or specific conditions in the agreement.

Reconcile GSTR-1 and GSTR-3B with recorded turnover, credit notes and advances, and GSTR-2B with input tax credit claimed. Investigate material gaps in taxable value, ineligible credit, reverse-charge payments and outstanding notices or demands. Separate recoverable balances supported by evidence from amounts that are disputed or uncertain.

For TDS, check deductions on salaries, contractors, professional fees, rent and payments to non-residents, together with deposits, quarterly returns and Form 26AS. Missed deductions or late deposits can lead to interest, penalties and disallowance of expenses. Financial diligence identifies and quantifies the evidence; Indian tax specialists should assess legal liability and protections.

How do FEMA pricing, reporting and repatriation affect the deal?

Foreign investment into an Indian company must follow FEMA rules on sectors, routes, pricing and reporting. Pricing guidelines generally require shares issued or transferred to a non-resident to be valued at or above fair value, and transfers from a non-resident to a resident at or below it. Repatriation of cash later depends on separate rules.

An issue of shares to a foreign investor is reported in Form FC-GPR, and a transfer between a resident and a non-resident in Form FC-TRS, both through the RBI FIRMS portal within prescribed timelines. Review the target’s past filings and acknowledgements, since late or missing reports may need regularisation before or at completion.

Plan how money will return to the buyer. Dividends depend on distributable profits, board and shareholder approval and withholding tax, with treaty relief where available. Buy-backs, capital reductions, sale proceeds and royalties or service fees each follow different tax and FEMA rules. A strong bank balance does not mean cash can be remitted immediately.

How should a foreign buyer organise the Indian workstreams?

A foreign buyer should coordinate financial, tax, FEMA, legal and commercial workstreams from the start, with one issues list and agreed owners. Indian matters often cut across these areas: a related-party loan may raise accounting, tax, company-law and FEMA questions at once, so siloed reviews can miss the connection.

Set up a clear data request covering statutory accounts, management accounts, GST and TDS returns, FEMA filings, board minutes, material contracts and related-party agreements. Ask for English translations where documents are in regional languages, and confirm which records are kept by external accountants or company secretaries.

Plan for time-zone and communication differences. Agree regular calls with management and advisers, a single point of contact at the target, and turnaround times for questions. Promoter-led businesses may rely on a few individuals for answers, so schedule their availability early in the process.

Finally, link findings to the deal documents. Indian exposures such as GST notices, missing FEMA filings or TDS defaults are commonly handled through price adjustments, specific indemnities, escrow arrangements or conditions to complete, such as regularising filings before closing. Agree these with legal advisers on both sides.

Keep a record of how each issue was resolved after closing.

Which Ind AS and US GAAP differences can move EBITDA?