European inbound investments in India’s mid-market: Unlocking value through financial due diligence

India's burgeoning mid-market represents a compelling frontier for European investors seeking robust growth and diversification beyond traditional strongholds. Fueled by a dynamic economy, a vast consumer base, and strategic government initiatives, this segment offers significant opportunities across a spectrum of industries. However, navigating the unique intricacies and potential pitfalls within this landscape necessitates a rigorous and insightful approach to financial due diligence (FDD). For European investors aiming to unlock sustainable value and mitigate inherent risks, a meticulously executed FDD is not merely a procedural step but a fundamental pillar for informed decision-making and successful market entry.

Key trends:

• Germany's Strategic Pivot to India Amidst China Diversification: Germany is demonstrably prioritizing stronger economic ties with India as part of a broader strategy to diversify its global dependencies, particularly reducing reliance on China. This shift has been formalized through the adoption of the "Focus on India" strategy paper by the German government in October 2024, which sets an ambitious agenda for expanding bilateral cooperation across trade, technology, skilled migration, and climate action. Chancellor Olaf Scholz's visit to New Delhi last year, accompanied by his cabinet, served as a high-profile affirmation of this new direction and resulted in a series of significant agreements. Prominent German corporations are actively pursuing expansion plans within India, drawn by the country's substantial market size, competitive operational costs, and improving infrastructure. 
• France's Strategic Focus on Aeronautics, Transport, and Clean Energy: France is strategically targeting investments in India's high-growth infrastructure and sustainable development sectors. French Trade Minister Sophie Primas has articulated a strong interest in India's aeronautical, transport infrastructure, and burgeoning clean energy industries. This focus aligns with France's expertise in these domains and its commitment to supporting India's ambitious infrastructure development agenda and its transition towards a greener economy. These investments are likely to bring technological expertise and foster collaborative growth.
• India's Trade Accord with European Free Trade Association (EFTA): The recently signed Trade and Economic Partnership Agreement (TEPA) between India and the European Free Trade Association (EFTA) comprising Switzerland, Norway, Iceland, and Liechtenstein, marks a historic step in strengthening India–Europe economic ties. Scheduled to take effect by September 2025, the agreement includes a binding commitment of $100 billion in investments from EFTA nations over the next 15 years, with the goal of generating one million direct jobs in India. Beyond tariff liberalization across over 82% of traded goods,  the pact emphasizes supply chain resilience, market access, and regulatory cooperation, offering significant tailwinds for mid-market businesses in sectors such as pharmaceuticals, biotechnology, machinery, and clean technology. For European investors, this deal provides a predictable and structured framework to participate in India’s long-term growth story.  
• Italy’s Strategic Deepening with India through the Joint Strategic Action Plan: Italy is significantly strengthening its economic and strategic engagement with India as part of a broader effort to diversify its global partnerships and tap into high-growth markets. This renewed focus was formalized through the launch of the Italy–India Joint Strategic Action Plan 2025–2029 in November 2024, which outlines a comprehensive roadmap for collaboration across advanced manufacturing, green technologies, sustainable mobility, and digital innovation.

Key considerations for mid-market FDD

Navigating mid-market transactions in India demands a tailored approach to Financial Due Diligence (FDD), acknowledging the distinct characteristics and inherent challenges of this dynamic segment. This necessitates a highly focused, efficient, and risk-aware FDD process. Key constraints that demand meticulous attention include:

• Financial Transparency & Reporting Issues:

1. Incomplete & Fragmented Financial Data: Mid-sized companies often grapple with poorly maintained financial records, inconsistent application of accounting standards, and a lack of readily available, consolidated data. This can obscure the true financial performance and position, making accurate valuation challenging.
2. Weak Accounting & Compliance Practices: Deficiencies in fundamental accounting practices, such as inadequate provisions for potential bad debts, the absence of formal actuarial valuations for employee benefits like gratuity, and the commingling of personal and business expenses, can significantly distort the financial picture.
3. Unintegrated Financial Systems: The prevalence of disparate accounting and Enterprise Resource Planning (ERP) systems that are not seamlessly integrated leads to data silos, reconciliation challenges, and an increased risk of errors, hindering the generation of reliable and timely financial reports.

• Absence of High-Quality Sell-Side Advisors

1. Poorly Structured Financial Presentations: Many mid-market businesses lack experienced financial advisors to support them during M&A processes, resulting in financial presentations that are incomplete, inconsistently formatted, or misaligned with investor expectations. This undermines deal quality, delays understanding, and increases investor skepticism.
2. Lack of Proactive Risk Identification: Inexperienced sell-side representation often leads to critical issues such as working capital distortions, undisclosed liabilities, or inconsistent accounting treatments going unflagged, which can significantly affect valuation and deal confidence.
3. Inefficient Negotiation Process: Without skilled advisors, companies struggle to prepare robust deal materials or engage effectively with buyers. This leads to mismatched expectations, avoidable disputes, and longer transaction timelines.

• Governance & Structural Weaknesses:

1. Family-Run Business Complexities: The prevalence of family-owned businesses introduces unique governance challenges. Informal decision-making processes, a lack of independent oversight, and the prevalence of related-party transactions can create opacity and potential conflicts of interest, requiring careful scrutiny.
2. Unsecured Loans & Related-Party Transactions: Loans extended by key management personnel (including CEOs and MDs) or other related parties without formal documentation, interest rates, or repayment schedules pose significant financial risks and necessitate thorough investigation to understand their terms and potential impact on the company's financial stability.
3. Appointments Without Proper Documentation: The appointment of directors or senior management, particularly relatives, without formal appointment letters or clearly defined roles and responsibilities raises concerns about professionalism, accountability, and compliance with corporate governance norms.

• Operational & Supply Chain Inefficiencies:

1. Unstructured Vendor & Supply Chain Management: Inconsistent supplier relationships, a lack of formalized procurement processes, and significant reliance on parent entities or a limited number of suppliers for critical raw materials can create operational vulnerabilities and potential disruptions.
2. High Logistics & Inventory Costs: Weak physical inventory verification processes, coupled with inefficient warehouse management and logistics operations, can lead to inaccurate inventory records, increased carrying costs, and inefficiencies in order fulfillment, ultimately impacting profitability and cash flow.

• Concentration Risks:

1. Leadership and Staff Dependence: A high degree of reliance on a single individual, often the Managing Director, for key customer relationships, government interactions, and critical operational oversight creates significant business continuity risks. Similarly, the concentration of core functions like supply chain management or financial oversight within a small number of personnel can lead to vulnerabilities.
2. Customer & Revenue Concentration: A significant portion of revenue being derived from a limited number of key clients exposes the business to substantial financial risks if these relationships are jeopardized. Similarly, limited diversification of the vendor base can create supply chain vulnerabilities and pricing pressures.

• Market Positioning & Competitive Risks:

1. Limited Competitive Insights: Mid-sized firms often lack sophisticated market intelligence capabilities, making them more susceptible to unforeseen shifts in industry trends, emerging competitors, and evolving regulatory landscapes.
2. Niche Market Vulnerability: Many mid-market companies operate in highly specialized niche segments, which, while potentially profitable, can also be more vulnerable to market disruptions, technological advancements, and fluctuations in demand. This can lead to significant valuation volatility.

Role of financial due diligence in India’s mid-market M&A landscape

A thorough due diligence process is crucial to:

1. Bridge Information Gaps: While the target and its advisors are responsible for information quality, the FDD team may, given their inexperience, provide guidance such as standard templates and best practices to help ensure the financial data is well-structured and aligned with due diligence standards.
2. Uncover Hidden Risks through Extended Diligence: Go beyond financials to evaluate ESG-related exposures and reputational risks that may not be immediately visible on the balance sheet.

Due Diligence provides deeper insights into:

1. Regulatory and compliance risks such as GST non-compliance and ambiguous commercial arrangements, that may affect financial reporting, tax exposures, and deal structuring.
2. Customer diversification, assessing key dependencies, and quantifying potential downside scenarios in the event of customer loss.

Further, FDD professionals work closely with family-run businesses to enhance transparency around related-party transactions, formalize financial reporting structures, bridging the gap between investor expectations and traditional practices, facilitating smoother transactions.

India’s mid-market sector presents a compelling growth narrative for European investors, underpinned by robust economic fundamentals, supportive government policies, and an expanding consumer base. However, realizing the full potential of these investments necessitates a keen awareness of the regulatory landscape, the nuances of financial transparency, and potential operational inefficiencies.

By embracing a structured and comprehensive approach to financial due diligence, European investors can effectively mitigate inherent risks, strengthen governance frameworks within their target companies, and ultimately unlock sustainable long-term value in India’s dynamic mid-market.