Common due diligence red flags in Indian MSMEs

ROC filings late or missing

• What it is: annual financial statements (AOC-4) or annual returns (MGT-7) filed late or not at all, or event-based forms (such as MGT-14 for resolutions) never filed.
• Why it matters: it is the first thing a lawyer checks on the MCA portal, and it signals how the rest of the record has been kept.
• Fixing it: your CS files the pending forms with the additional fees; longer defaults may need compounding. The fees grow with every day of delay.

Share allotments and transfers not papered

• What it is: shares issued without a return of allotment (PAS-3) or the approvals behind it, transfers without a stamped transfer deed (SH-4), or share certificates never issued.
• Why it matters: an investor is buying into the cap table; if past issues are defective, so is the ownership they are relying on.
• Fixing it: your CS works out what is missing and files or ratifies it. Some defects need legal advice.

Board and shareholder records missing

• What it is: no minutes for meetings that approved borrowings, allotments or related-party dealings; registers not maintained.
• Why it matters: approvals are evidence that decisions were taken properly. Without them, the decisions can be questioned.
• Fixing it: never backdate a minute or a register. Ask your CS how to deal with meetings that were held but not minuted, hold meetings to ratify past decisions where the law allows, and start keeping registers from the ledger you have.

GST returns that do not reconcile

• What it is: sales in GSTR-1 not matching GSTR-3B, input tax credit claimed that does not appear in GSTR-2B, or turnover in GST returns not matching the books.
• Why it matters: mismatches lead to notices and demands, which a counterparty treats as a liability.
• Fixing it: your CA reconciles the returns for the open years, corrects what can be corrected, and documents the rest.

TDS and income tax mismatches

• What it is: TDS not deducted or deposited on time, returns not filed, or income not matching Form 26AS and the Annual Information Statement.
• Why it matters: interest and penalties accrue, and unexplained differences invite scrutiny.
• Fixing it: your CA files corrections and pays what is due.

PF, ESI and labour compliance

• What it is: registrations missing after crossing the headcount thresholds, contributions deposited late, no PoSH Internal Committee with ten or more employees.
• Why it matters: these are liabilities to employees and regulators that pass to whoever owns the company.
• Fixing it: register, deposit arrears with interest, and constitute the committee.

Charges not registered or not satisfied

• What it is: a loan secured on company assets without the charge registered with the ROC (CHG-1), or an old charge still showing after the loan was repaid.
• Why it matters: lenders and buyers see the charges register and ask about every entry.
• Fixing it: register late charges where possible and file satisfaction for repaid loans with a no-dues letter from the lender.

Related-party transactions without approvals

• What it is: payments to or dealings with promoters, relatives or their other companies, without the board or shareholder approvals the Companies Act requires.
• Why it matters: counterparties want to know money is not leaving the company on terms that are not arm's length.
• Fixing it: document the transactions, take the approvals, and disclose them properly in the accounts.

IP owned by founders, not the company

• What it is: the brand registered in a founder's name, code written by contractors with no assignment, designs owned by an agency.
• Why it matters: an investor or buyer is paying for assets the company may not own.
• Fixing it: assignment deeds from founders, employees and contractors, and trademark filings in the company's name.

Licences that lapsed

• What it is: a fire NOC, pollution consent, FSSAI licence or trade licence past its renewal date.
• Why it matters: a lapsed licence can stop operations.
• Fixing it: renew, and keep a calendar of renewal dates.

Contracts that cannot be found

• What it is: customer and supplier arrangements that run on email and purchase orders, or signed copies nobody can locate.
• Why it matters: revenue that is not backed by a contract is revenue a counterparty cannot rely on.
• Fixing it: collect signed copies, paper the important relationships, and keep them in one place.

For how these fit into a deal, see how due diligence works in India.

Official sources

The rules this guide describes come from these. Check the current text there, or ask your CA or CS.

• Ministry of Corporate Affairs: company filings, charges and the Companies Act 2013
• G.S.R. 880(E), 1 December 2025: the revised small-company limits
• GST portal: registrations, returns and GSTR-9C
• Income Tax Department: the Income-tax Act 2025 and returns
• TRACES: TDS returns and Form 26AS
• EPFO and ESIC: provident fund and employees' state insurance
• Code on Social Security 2020: PF, ESI and gratuity thresholds