Investing into India: Why diligence matters more than ever

As India's capital markets deepen and investment opportunities continue to present themselves, investors are placing greater emphasis on governance, founder quality and due diligence. While strong growth prospects remain attractive, capital is becoming more selective and investors are increasingly focused on understanding potential risks before committing funds.

These themes were recently explored at a seminar hosted by Withers KhattarWong in Singapore, in collaboration with Khaitan Legal Associates. Khaitan Legal Associates is a full service independent Indian law firm with offices in Mumbai, a presence in New Delhi and Bengaluru, and correspondent offices across various cities in India.

Drawing on recent transaction experience, the speakers discussed the evolving landscape for private equity, venture capital, family office and strategic investors looking at opportunities in India. The discussions highlighted a notable shift in investor priorities. Opportunities remain abundant, but investors are no longer prepared to overlook governance gaps, documentation issues or founder-related risks in pursuit of growth alone.

As Daniel Yong, Joint Managing Partner and Head of the Investment Funds and Corporate teams at Withers KhattarWong, observed, "There was a time in the not-too-distant past where everyone wanted to do deals. I won't go so far as to say that due diligence became a formality, but it sometimes became like a check-the-box exercise. I think those days are largely gone."

Looking beyond the numbers

Investors today are applying greater scrutiny not only to the business fundamentals themselves, but increasingly to the people behind them.

Vivek Bajoria, Partner at Khaitan Legal Associates, noted that investors have traditionally spent more time on the due diligence of companies than founders, despite the significant influence Indian founders often have on long-term outcomes. "I believe knowing the founder more than the company makes a lot of difference," he said.

The discussion highlighted that founder relationships can have a direct impact on value creation and preservation. Businesses may have compelling products, growing revenues and attractive market opportunities, but disputes between founders can quickly undermine those advantages.

Sakate Khaitan, Senior Partner at Khaitan Legal Associates, observed that co-founder agreements are often overlooked despite their importance. "When two co-founders start fighting with each other, it reduces value in a significant way," he said.

Investors are therefore increasingly examining founder dynamics, decision-making structures and governance arrangements, recognizing that commercial success often depends as much on people as it does on financial performance.

The diligence issues that matter most

Many issues identified during due diligence can usually be rectified through post-completion undertakings or remediation plans. However, the speakers noted that certain findings can be significantly more problematic.

Varsha Jalan, Partner at Khaitan Legal Associates, identified historical fundraising exercises and compliance issues as among the most challenging matters to address. "The most difficult part is when the founder cannot stand behind his own cap table," she said.

According to Varsha, incomplete filings and legacy compliance issues from previous fundraising rounds can create complexities that are difficult to resolve and may require engagement with regulators.

Related-party transactions also continue to attract close investor scrutiny. Investors want to understand whether transactions have been conducted on arm's-length terms and supported by appropriate approvals, as weaknesses in these areas may indicate broader governance concerns.

The speakers also cautioned against relying solely on information presented during formal due diligence exercises.

As Gary Beh, Corporate Partner at Withers KhattarWong, noted, "Management presentations tend to be well-rehearsed. The real work often lies not in what the company presents, but in probing beyond it to uncover what else is there."

The discussion highlighted the importance of independent verification, site visits and broader background checks, particularly where significant amounts of capital are being deployed.

Capital markets are changing the investment landscape

The conversation also turned to the growing depth of India's capital markets and the impact this is having on investment structures and exit planning.

Historically, many India-focused businesses were structured through offshore holding companies with a view towards international listings. As domestic capital markets have matured, however, companies are executing or exploring reverse flips and other restructuring strategies to facilitate listings in India.

Sakate noted that increasing domestic liquidity is creating more pathways for investors to realise value. "As depth in the markets grows, there is more capital available for exits for unlisted companies," he said.

At the same time, Singapore continues to play an important role as a gateway jurisdiction for investment into India. Investors value the stability, regulatory certainty and established ecosystem that Singapore offers, while retaining flexibility to adapt their structures as businesses grow and exit opportunities evolve.

Leon Kwong Wing, Private Client and Tax Partner at Withers KhattarWong, noted that "Singapore continues to offer investors a stable platform for structuring cross-border investments, supported by an extensive treaty network and a well-established fund management ecosystem." Given the arguably unexpected outcome in the Tiger Global case, Sakate and Kwong Wing considered the potential for Mutual Agreement Procedure as an alternative to resolving tax disputes before they arise.

The panel broadly agreed that investors should think about exit strategies at the outset of a transaction, rather than treating them as issues to be addressed years later.

Protection starts before a dispute

The discussion concluded with a focus on investment protection and the practical realities of enforcing rights when relationships deteriorate.

Pardeep Khosa, Partner and Head of the Litigation team at Withers KhattarWong, noted that investors sometimes place too much emphasis on dispute resolution clauses without paying sufficient attention to governance rights and information access.

"Many investors focus heavily on whether disputes should be resolved through arbitration or litigation. While that is important, it is only one element of an effective investment protection strategy," he said.

Instead, he observed that investors should focus on obtaining meaningful oversight throughout the life of the investment.

"The more important questions are whether you have visibility into the business, meaningful information rights, appropriate governance protections and a clear exit strategy."

Daniel similarly cautioned against over-reliance on contractual remedies. "You can spend many hours negotiating representations and warranties, but how often do you actually see someone sue on a representation and warranty?" he observed.

The consensus among the speakers was that legal protections remain important, but they are not a substitute for thorough due diligence, strong governance and careful selection of partners.

What's next?

India's investment story remains compelling, supported by growing capital markets, expanding businesses and increasing opportunities across sectors. However, as the market matures, investors are approaching opportunities with greater discipline and a sharper focus on governance, founder quality and downside protection.

As Sakate succinctly put it: "India is not Singapore." For investors looking to participate in India's growth, understanding those differences may be one of the most important investments they make.

If you would like to discuss investing into India, structuring cross-border investments or protecting your interests throughout the investment lifecycle, our specialist legal teams would be pleased to advise.