New Delhi, July 6 -- Over the past two decades, the growing deal market in India has put transaction due diligence (TDD) at the centre stage. What was largely a retrospective validation exercise has become a forward-looking and strategic investment lens.

The shift has become especially visible over the past year. In 2025, total deal value in India increased to approximately $123.8 billion from $106.3 billion in 2024, even as deal volumes moderated by 3%, reflecting a concentration of capital into fewer but larger transactions, according to EY India M&A report.

As competition for quality assets intensifies, diligence is playing a central role for investors in determining whether valuations are justified and how risks are assessed and structured. TDD is no longer a backend validation step; it is increasingly shaping investment decisions.

Beyond historical validation

Historically, TDD was used to validate reported financial performance, including quality of earnings, revenue recognition, working capital and accounting policies. While foundational, the scope of TDD has broadened to become more business-plan driven and analytically intensive, with a clear focus on understanding the underlying drivers of performance. This includes evaluating revenue and cost drivers in detail, assessing the scalability of business models and testing margin sustainability.

Increasingly, performance is being benchmarked against similar or adjacent companies to assess relative positioning, identify operational gaps and evaluate whether growth and profitability assumptions are realistic. The emphasis has shifted from explaining what has happened to understanding what is likely to happen and whether the assumptions underpinning future performance are credible.

Since the late 2000s, and more sharply after 2018, increased participation from private equity investors has intensified competition for attractive assets. Investors needed deeper, more granular insights to support investment decisions. Benchmarking, once relatively limited in scope, consequently became more sophisticated, with comparisons drawn across both listed and unlisted peers.

Private equity investors also evaluate businesses through the lens of the full investment lifecycle, including the likely trajectory of revenue, margins, working capital and cash flows during the holding period, as well as the potential expectations of the next buyer at exit. As a result, TDD has evolved from a largely historical validation exercise into a forward-looking assessment of value creation potential and exit readiness.

Towards 'integrated' diligence

Once a largely physical exercise conducted in on-site data rooms, the diligence process has now moved almost entirely to virtual data rooms hosted on secure digital platforms. Accessibility and speed have improved, enabling teams to work more collaboratively across locations.

At the same time, the scope of diligence has expanded. In addition to financial and tax reviews, transactions now routinely involve commercial, operational, technology, ESG, HR and integrity diligence, reflecting the increasing complexity of businesses and investment considerations, i.e., Integrated Due Diligence.

Investors want integrated insights to assess business performance. Revenue performance, for instance, is now evaluated alongside customer behaviour and the enabling technology platform, while working capital is analysed in the context of contractual and operational realities. Similarly, the impact of necessary future investments is often adjusted from the enterprise value.

As diligence has become more integrated with deal execution, advisers have had to provide inputs on transaction documents, including definitions, upsides, deferral and holdback mechanisms for purchase consideration, target working capital, and clauses relating to representations, warranties and indemnities.

Another notable development is the rise of vendor diligence. Once relatively uncommon, sellers now widely use sell-side diligence to provide potential buyers with a consistent and credible information base. This has improved transparency, reduced information asymmetry and enabled more efficient deal processes, particularly in competitive situations.

Complexity supported by technology and AI

Competition also means greater demands on the diligence function. Transactions often involve multiple bidders, creating pressure to deliver differentiated insights within compressed timelines. Engagements that previously extended over five to six weeks are now frequently completed in close to four weeks despite increased scope and complexity.

Technology has emerged as a key enabler, with advanced analytics and automation tools helping to process large datasets more efficiently, identify anomalies and test assumptions at scale.

Artificial intelligence is also playing a role in faster document reviews, more efficient contract analysis and improved extraction of insights from large and unstructured datasets. While still evolving, these capabilities are improving both efficiency and analytical depth, allowing teams to focus more on interpretation, judgement and decision support rather than manual processes.

What comes next

Transaction due diligence in India has moved well beyond its traditional role of validating historical performance. It is now a forward-looking, insight-driven exercise that directly informs valuation, supports deal structuring and strengthens investment decisions.

Technology - particularly AI - is expected to further reshape diligence. The next phase of evolution will likely bring more predictive analysis, greater consistency in outcomes and increasingly real-time decision support. Diligence will also need to assess AI's impact on underlying businesses, including its implications for competitive positioning, operating models, cost structures and growth prospects.

As dealmaking becomes more competitive, capital more selective and timelines more compressed, the ability to combine data, technology and professional judgement into clear and actionable insights will be critical.

Published by HT Digital Content Services with permission from VC Circle.