The Indian items that surface late
| Area | What to look for |
|---|---|
| Gratuity | Actuarial valuation, whether it is funded, and the assumptions used |
| Leave | Accrued encashable balances, the policy that created them, and whether they are provided for |
| Provident fund and insurance | Challans against the register, arrears, interest and damages, and any inquiry or notice |
| Contractor workers | Licences, contractor compliance evidence, and the principal employer position |
| Classification | Consultants and off-roll staff who look like employees on the facts |
| Standing orders | Whether certified where required, and whether current practice matches them |
| Disputes | Pending cases, conciliation proceedings, union agreements and their expiry |
| Harassment | Internal committee constitution, the complaint register and the annual reports |
| Registrations | Establishment registrations per location, professional tax, labour welfare fund |
| Senior contracts | Change of control clauses, severance terms and deferred or equity-linked commitments |
The first two are usually understated rather than hidden. Gratuity is a defined benefit obligation and an unfunded one is a real debt sitting outside most management accounts, while leave encashment accumulates quietly wherever the policy allows unlimited carry-forward.
How employment transfers
The structure of the transaction decides what happens to employees, and the two common structures behave very differently.
- Share purchase. The employer entity does not change, so contracts of employment continue unaffected and the liabilities remain where they were. The buyer inherits everything, which is why diligence matters more here.
- Business or asset transfer. Employment does not automatically follow the assets. Workers transferring may have rights arising from the transfer of an undertaking, including notice and compensation, unless the conditions for continuity are met, typically that service is uninterrupted, terms are not less favourable and the transferee is liable for compensation as if there had been no transfer.
- Continuity of service is the item to settle explicitly, because it drives gratuity eligibility and notice for every transferring employee, and settling it after completion is much harder.
- Consent may be required to transfer employment in a business transfer, which makes the communication plan part of the deal timetable rather than an afterthought.
- Union agreements, settlements and awards may bind the transferee, and their terms need to be read rather than summarised.
Verify the transfer of undertaking provisions and the conditions for continuity under the Industrial Relations Code, 2020, and the gratuity continuity position under the Code on Social Security, 2020, before structuring the people aspects of a transaction.
Running the people workstream
- Reconcile headcount three ways: the payroll register, the statutory contribution registers, and the list management gives you. Differences are the finding, not the noise.
- Sample the employment documents rather than accepting a template. Appointment letters issued over ten years rarely say what the current template says.
- Check contractor compliance evidence directly with the contractor's filings where possible. An indemnity from a small vendor is worth what the vendor is worth.
- Look at the pay structure for a proportion rule problem. Structures that push most of remuneration into excluded allowances have a contribution exposure that crystallises on review.
- Quantify, do not just list. A finding of unfunded gratuity is a number, and it belongs in the price or the escrow rather than in a risk register.
- Plan retention early for the people the deal depends on, since the diligence period is when they update their CVs.
- Keep the data protection position clean. Employee data shared into a data room is personal data, and it should be minimised, anonymised where possible, and covered by the notice given to employees.
The first hundred days after
- Harmonise carefully rather than quickly. Equalising terms upward is expensive and equalising downward is a change to conditions of service with its own notice requirements.
- Do not lose service dates in the system migration. Continuous service dates decide gratuity and notice, and reconstructing them later from two systems is a recurring source of disputes.
- Reconstitute the internal committee, grievance mechanism and any statutory committees for the new structure rather than assuming the old ones carry over.
- Re-register where establishments change name or entity, and re-file where required.
- Communicate what is not changing as clearly as what is. Uncertainty drives the attrition, not the changes themselves.
- Track attrition against the retention assumptions in the deal model, since the model usually assumed a number that nobody has revisited.
What the Industrial Relations Code, 2020 replaced
3 enactments stand repealed under s. 104, in force 21 November 2025.
- Trade Unions Act, 1926
- Industrial Employment (Standing Orders) Act, 1946
- Industrial Disputes Act, 1947
Across all four labour Codes, 29 enactments stand repealed. A policy or handbook that still cites one of them by name is describing rules that no longer exist.
Statutory reference
- Act
- Industrial Relations Code, 2020
- Section
- Industrial Relations Code, 2020: the position of workers on transfer of an undertaking, including entitlement to notice and compensation as on retrenchment unless the prescribed conditions are met, typically continuity of service, terms not less favourable, and the transferee's liability for compensation computed as if there had been no interruption; standing orders and their application to the transferee; the continuing effect of settlements and awards. Code on Social Security, 2020: gratuity, continuous service, and the transfer of provident fund accounts; liability for contributions including in respect of contractor workers. Code on Wages, 2019: the definition of wages and the one-half proportion rule at section 2(y), which drives contribution exposure in a structure review. Digital Personal Data Protection Act, 2023: employee personal data disclosed in a data room. In force 21 November 2025
- Key limits
- In a business transfer, employment does not automatically follow the assets and transferring workers may be entitled to notice and compensation unless the statutory conditions for continuity are satisfied. Accrued gratuity and contractor non-compliance transfer as real liabilities. Verify the transfer of undertaking conditions, the gratuity continuity position and the contractor exposure before agreeing a structure or a price. Under notification G.S.R. 843(E) dated 13 November 2025, sections 3 to 17 - the grounds for processing, notice, consent, the general obligations of a data fiduciary and all of the data principal rights - take effect eighteen months from that date, on 13 May 2027. Only the definitions and the Data Protection Board and penalty machinery are in force now. Separately, processing for employment purposes runs on the section 7(i) legitimate use and not on consent, and the erasure duty in section 8(7) yields where retention is necessary for compliance with any law, which is the position for statutory payroll and register retention. The reference is historical and already framed as repealed: it records that the contract labour threshold rose from twenty to fifty. The 1970 Act has never been fetched or read, and its blocked record states that its repeal is known from s. 143 of the OSH Code alone, which is not sufficient to restate what it said.
Frequently asked questions
What does HR due diligence cover?
Employment terms, statutory compliance, accrued liabilities and contractor exposure. In Indian transactions the items that most often surface late are unfunded gratuity, accumulated leave encashment, provident fund arrears and the compliance position of contractor workers.
Do employees transfer automatically in a business sale?
No. In a business or asset transfer employment does not follow the assets automatically, and transferring workers may be entitled to notice and compensation unless the statutory conditions for continuity are met. In a share purchase the employer does not change and contracts continue.
What is the biggest hidden liability?
Usually accrued gratuity that is unfunded, followed by contractor non-compliance that transfers as principal employer exposure. Both are quantifiable during diligence and both belong in the price or the escrow rather than in a risk register.
What happens to continuous service after a transfer?
It has to be settled explicitly, because it drives gratuity eligibility and notice entitlement for every transferring employee. Deciding it after completion, from two sets of records, is materially harder and is a recurring source of disputes.
Can we put employee data in the data room?
With care. Employee data is personal data, so it should be minimised and anonymised where the analysis allows, and the disclosure should be consistent with the notice employees were given about how their data is used.
How Engage supports a transaction
Engage reconciles headcount against the payroll and statutory registers rather than against a spreadsheet, so the three numbers a diligence exercise compares come from one system. Continuous service dates, accrued leave balances and gratuity exposure are reportable at a date, and service dates survive a change of entity instead of being reconstructed afterwards.
See Engage HR software