Key Considerations for Conducting Due Diligence in the Indian Market

Companies determining their market entry strategy in India should be aware of regulations related to FDI, foreign exchange, security and corporate law, as well as direct and indirect taxes.

All companies entering the market must be in compliance with The Companies Act of 2013 as well as other acts related to the Securities and Exchange Board of India (SEBI), if it is listed.

Below we highlight major due diligence considerations.

Foreign direct investment

Companies must ensure that they are in compliance with the relevant foreign investment rules to avoid government censure.

India offers two routes for FDI: the automatic route (does not require pre-approval by the government) and the government approval route.

Making external foreign currency payments

Foreign exchange is governed by the Foreign Exchange Management Act (FEMA), which replaces the Foreign Exchange Regulation Act (FERA).

The Act is aimed at making external trade and payments easier as part of the country’s economic liberalization in the 1990s.

The highest authority regulating the law related to foreign exchange is the Reserve Bank of India (RBI).

Corporate governance

Companies must also be aware of corporate laws in the country, which are mainly governed by The Companies Act, 2013.

The Act discusses laws related to mergers and acquisitions, board room decision making, party transactions, corporate social responsibility, and shareholding.

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Corporate Establishment and Structuring

The Companies Act has been amended in 2015 and in 2018. 

The 2017 Companies (Amendment) Act irons out existing policy inconsistencies between financial regulatory mechanisms, such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), prioritizing corporate governance and financial transparency.

Employment contracts and labor laws 

Labor laws in India provide for a minimum of guarantees and benefits to all employees that can supersede the provisions of labor contracts.

For example, a termination policy outlined within the contract should be verified against the current law prior to it being carried out.

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HR and Payroll

In India, companies that employ more than 100 workers need the government’s permission to conduct layoffs.

Three types of employment contracts exist in India – permanent (direct) contracts, fixed contracts, and temporary contracts.

Besides company rules and regulations, employers are advised to incorporate the following clauses into contracts – non-disclosure, employee poaching, unfair competition, trademarks, patents, and trade secrets.

Trade unions

India’s trade union movement is rooted in the country’s early acceptance of a mixed economy – incorporating both socialist and capitalist systems.

According to the law, where the number of blue-collar workers at a location exceeds seven, they are entitled to form a union to improve their ability to negotiate the remuneration and other terms of employment.

All unions in India are tracked by the Labour Bureau, Ministry of Labour and are regulated by The Trade Union Act of 1926, which was amended in 2001.

The latest data, released for 2012, showed an estimated 16,154 trade unions in India, with a combined membership of 9.18 million.

Work culture 

In India, the workplace set up is often hierarchical with clear boundaries between management levels.

The country’s business etiquette is a combination of Western and Eastern practices, but local customs do permeate relationships.

These need to be acknowledged for successful business interactions.

For instance, when giving feedback, an understanding of honor-shame becomes important in the Indian context, which can otherwise be inadvertently interpreted as non-constructive criticism.

India’s market dynamics

While the government is keen to attract FDI, foreign companies must carefully consider their options for investment in India and the available avenues for establishing a business presence.

India represents a promising future as an emerging market, but has various regulatory and tax issues that strongly contrast with other emerging economies.

Red tape and bureaucracy can further contribute to delays, adding roadblocks to a company’s growth.

In such a market, it is imperative for companies to conduct due diligence to safeguard their assets and reputation.

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