Last reviewed: 25 September 2026. Due diligence is where deals slow down or fall apart - not because the business is bad, but because the paperwork is not ready. This checklist covers what investors examine across finance, tax, ROC/secretarial, GST, cap table and legal, the red flags that cause problems, and how to prepare a data room that signals good governance and keeps your round on schedule.
At a glance
The checklist by area
| Area | What investors check |
|---|---|
| Financial | Audited and management accounts, MRR/ARR, burn, runway, metric reconciliation |
| Tax | Income-tax returns, TDS compliance, advance tax, notices/demands |
| GST | Returns, ITC reconciliation, registrations, any disputes |
| Secretarial / ROC | Cap table, allotments, resolutions, registers, AOC-4/MGT-7, charges |
| Legal / IP | Founder agreements, IP assignment, key contracts, litigation, licences |
| Securities law | Section 42 private placement trail (PAS-4 offer letter, PAS-3 return of allotment within 15 days), section 62 approvals for ESOPs, SH-7 for any increase in authorised capital |
| Foreign investor / FEMA | FC-GPR within 30 days of each allotment to a non-resident, FLA return by 15 July every year, FEMA-compliant valuation of each foreign round, downstream investment reporting where the startup invests in Indian subsidiaries |
| ESOPs | Scheme, grant letters, vesting schedules, perquisite TDS on exercise (section 17(1)(d) of the Income-tax Act, 2025 for tax year 2026-27, old 17(2)(vi)) |
Angel tax: section 56(2)(viib) of the 1961 Act was omitted from AY 2025-26, so it drops off the checklist for recent rounds and has no equivalent in the Income-tax Act, 2025. Rounds closed in FY 2023-24 and earlier can still be assessed or reopened under the old section, so investors check the valuation report and any DPIIT exemption for those rounds. Our angel tax status note covers pending disputes.
Prepare the data room early
Organise everything into a structured virtual data room with a clear index, grouped by area. A tidy data room does two things: it speeds diligence, and it signals disciplined governance - which itself builds investor confidence. A workable index:
| Folder | Key documents | Owner |
|---|---|---|
| 01 Corporate | COI, MoA/AoA, statutory registers, board and shareholder minutes | Company secretary |
| 02 Capital | Cap table, allotment trail (PAS-4, PAS-3, SH-7), share certificates or demat records, SHA/SSA of earlier rounds | CS with CFO |
| 03 Finance | Audited accounts, monthly MIS, MRR/ARR workings, bank statements, metric-to-books reconciliation | CFO |
| 04 Tax | ITRs and computations, TDS returns, advance tax, notices and replies, GST returns and 2B reconciliation | Tax adviser |
| 05 FEMA | FC-GPR and FC-TRS acknowledgements, FLA returns, valuation reports, downstream investment filings | CFO with FEMA adviser |
| 06 People | ESOP scheme, grant letters, vesting register, key employment and consultancy contracts | HR with CS |
| 07 Legal and IP | Founder agreements, IP assignments, trademarks, key customer and vendor contracts, litigation | Legal counsel |
Fix the red flags before they surface
The recurring problems are unfiled or mismatched tax and GST returns, an ambiguous cap table, IP not assigned to the company, and missing founder agreements. Clean these up before you go to market - fixing them mid-diligence costs momentum exactly when you cannot afford it. Investors rank what they find roughly like this:
| Red flag | Why it matters | Severity |
|---|---|---|
| FC-GPR not filed, or shares issued to a non-resident below FEMA fair value | FEMA contravention; late reporting is regularised with a Late Submission Fee, pricing breaches need compounding with the RBI | High |
| PAS-3 missed or allotment outside the section 42 process | Penalty under section 42(10) and questions over the validity of the allotment | High |
| Allotment without a valuation report | Pricing cannot be defended under FEMA, or for pre-AY 2025-26 rounds under section 56(2)(viib) | High |
| Cap table does not tie to the register of members and MGT-7 | Investor cannot confirm what it is buying | High |
| TDS or GST defaults and open notices | Quantifiable liability, usually handled by indemnity or escrow | Medium |
| Metrics in the deck do not tie to the books | Credibility and valuation hit | Medium |
Worked example: reconciling the ESOP pool to the cap table
A startup's deck shows 10,00,000 fully diluted shares with a 10% ESOP pool. The company had 9,00,000 shares in issue before any ESOP exercise, and the ESOP scheme approved by special resolution reserves 1,00,000 options. The grant register shows 70,000 options granted, of which 25,000 have vested and 5,000 were exercised last year, with shares allotted and PAS-3 filed. The correct position is 9,05,000 issued shares (as the register of members should now show), 65,000 granted but unexercised options and 30,000 options still available, which adds back to 10,00,000 fully diluted. If the deck instead counted the 5,000 exercised options inside the pool and in issued capital, it would overstate the fully diluted base by 5,000 shares and every investor's percentage would be slightly wrong. Reconcile the register of members, the ESOP register and MGT-7 before the term sheet, not after.
Foreign investor round: what gets checked
A foreign VC's diligence focuses on the FEMA trail: FC-GPR for every allotment to a non-resident and FC-TRS for every secondary transfer, FLA returns for each year since the first foreign money came in, pricing at or above fair value under the Non-Debt Instruments Rules backed by a valuation from a chartered accountant, SEBI-registered merchant banker or practising cost accountant (usually on DCF), and downstream-investment compliance if the startup has Indian subsidiaries. Our FEMA share valuation service and foreign subsidiary accounting and FEMA service cover both sides of this.
Frequently asked questions
What is investor due diligence?
It is the review an investor runs before closing a round - across finance, tax, legal, secretarial and commercial areas - to confirm the company is what it claims and to surface risks that affect valuation or deal terms.
What financial documents will investors ask for?
Audited financials, management accounts, MRR/ARR and unit economics, revenue recognition policy, burn and runway, bank statements, and a reconciliation of the metrics you pitched to your books.
What tax and TDS items are checked?
Income-tax returns and computations, TDS deduction and filing history, advance tax, any notices or demands, and GST returns and reconciliations - unfiled or mismatched returns are common red flags.
What secretarial and ROC records matter?
Incorporation documents, share allotments and cap table, board and shareholder resolutions, statutory registers, charges, and timely AOC-4/MGT-7 filings. Gaps here slow or derail deals.
Why is the cap table so important?
Investors need a clean, verifiable cap table showing every share issuance, ESOP grant, convertible instrument and vesting position. Ambiguity here directly affects their ownership and the deal.
What legal and IP items are reviewed?
Founder agreements, IP assignment to the company, key contracts, employment terms, litigation, and regulatory licences. Unassigned IP or missing founder agreements are frequent problems.
How should a startup prepare a data room?
Organise documents by area - financial, tax, secretarial, legal, HR, IP - in a structured virtual data room, with an index, so diligence moves quickly and signals good governance.
Does angel tax still come up in diligence?
Only for older rounds. Section 56(2)(viib) was omitted from AY 2025-26 and the Income-tax Act, 2025 has no equivalent, so rounds from FY 2024-25 onward are not exposed. Rounds up to FY 2023-24 can still be examined in assessment or reassessment, so keep the valuation reports and any DPIIT exemption for those years in the data room.
What FEMA filings will a foreign investor ask for?
FC-GPR for each allotment to a non-resident (due within 30 days), FC-TRS for secondary transfers, FLA returns filed by 15 July every year, and the valuation certificate for each foreign round. Missing filings can usually be regularised by paying a Late Submission Fee, but that should happen before the round, not during it.
Do we need a fresh valuation report for every round?
For shares issued to a non-resident, yes: FEMA pricing needs a fair valuation on an internationally accepted method, certified by a chartered accountant, SEBI-registered merchant banker or practising cost accountant, reasonably close to the allotment. For resident investors a report is still good practice, and the Companies Act requires a registered valuer's report for a preferential allotment.
What are the most common red flags?
Unfiled or mismatched tax/GST returns, an unclear cap table, unassigned IP, missing founder agreements, related-party transactions without documentation, and metrics that do not tie to the books.
We run a pre-diligence health check across finance, tax, GST, ROC and cap table, and help build your data room.
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