{"id":1246,"date":"2026-09-05T11:44:48","date_gmt":"2026-09-05T11:44:48","guid":{"rendered":"https:\/\/www.lawctopuslawschool.com\/blog\/?p=1246"},"modified":"2026-09-05T11:44:50","modified_gmt":"2026-09-05T11:44:50","slug":"legal-due-diligence-for-banking-transactions","status":"publish","type":"post","link":"https:\/\/www.lawctopuslawschool.com\/blog\/legal-due-diligence-for-banking-transactions\/","title":{"rendered":"Legal Due Diligence for Banking Transactions: A Practical Guide to Process, Checklists and Red Flags"},"content":{"rendered":"\n

This blog\/article is written by Simran Sabharwal, Learning and Editorial Manager at Lawctopus Law School<\/em><\/p>\n\n\n\n

Imagine a bank is considering to lend INR 100 Crores to a large multi-national company that appears financially sound. The balance sheet shows manageable debt, the business is profitable and the company shows substantial land that it can offer as a security against the loan.<\/p>\n\n\n\n

At a first glance, the transaction appears to be straightforward.<\/p>\n\n\n\n

However, during legal due diligence, the picture can change completely. A review of the company\u2019s existing financing arrangements may reveal that it has already availed multiple loans with some of its assets already charged in favour of existing lenders.<\/p>\n\n\n\n

Therefore, a lender\u2019s counsel cannot rely solely on the company\u2019s balance sheet or general google search. <\/p>\n\n\n\n

The main aim of undertaking legal due diligence in a banking transaction is to check the company’s existing financial obligations, identify restrictions that can affect the proposed financing and ensure that the proposed transaction can be validly entered into and implemented. <\/p>\n\n\n\n

The purpose of a legal due diligence report in a banking transaction can be understood through three practical questions: What does the company already owe? What restrictions apply to the company? What needs to be done before the new loan can be safely disbursed?<\/em><\/strong><\/p>\n\n\n\n

What is due diligence?<\/strong><\/h2>\n\n\n\n

Simply, suppose you are planning to buy a laptop. Prior to purchasing it, you would check its price, warranty, condition and specifications and compare it with other available options. You are essentially trying to understand what you are actually getting from the price you are paying.<\/p>\n\n\n\n

Legal due diligence works on similar principle. A lender is providing a substantial amount of money to a borrower. Prior to disbursing the amount, the lender needs to understand the borrower\u2019s existing financial position and identify anything that could affect repayment of the loan amount. <\/p>\n\n\n\n

As the lender\u2019s counsel, how do you assess the borrower\u2019s existing financial position and financing arrangements?<\/em> What documents should you request from the borrower and what should you check in those documents and how do you identify issues that could materially affect the proposed financing<\/em>?<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Image 1: Steps involved in a due diligence exercise<\/em><\/p>\n\n\n\n

Step 1: Draft a comprehensive requisition list<\/strong><\/h2>\n\n\n\n

The first step is to prepare a checklist that gives a complete picture of the borrower\u2019s existing and proposed financing arrangements. Essentially, while acting as the lenders\u2019 counsel your role is to prepare a comprehensive due diligence checklist and circulate to the borrower. <\/p>\n\n\n\n

The borrower reads and provides the requisitioned documents. The checklist should cover the following:<\/p>\n\n\n\n

    \n
  1. Description or chart stipulating the details of erstwhile financing availed by the borrower including the amount, tenor, interest rate and current status;<\/li>\n\n\n\n
  2. Copies of all the documents relating to all the financial facilities availed or planning to be availed by the company together with all the security documents;<\/li>\n\n\n\n
  3. Copies of charge forms (Form CHG-1,<\/a> Form CHG-9<\/a>) filed by the borrower with the Registrar of Companies for creation and registration of charges over its assets.\u00a0<\/li>\n\n\n\n
  4. Copies of Form CHG-4<\/a> evidencing the satisfaction of any charge; <\/li>\n\n\n\n
  5. Details of any breaches in relation to the Company’s financing agreements \/ debt securities; and<\/li>\n\n\n\n
  6. Details and agreements for existing borrowing or similar arrangements with any shareholder, promoter, director, officer or employee of the Company.<\/li>\n<\/ol>\n\n\n\n

    The purpose of sharing a requisition list is that in order for you to analyse the individual documents first, you should know what financing arrangements actually exist. Therefore, for a preliminary review, you should ask for the complete financing documents including the facility agreement or loan agreement.<\/p>\n\n\n\n

    Step 2: Prepare a financing snapshot<\/strong><\/h2>\n\n\n\n

    Upon receiving the documents requisitioned above, prepare a simple financing chart capturing the following details:<\/p>\n\n\n\n

      \n
    1. Name of borrower;<\/li>\n\n\n\n
    2. Name of lender;<\/li>\n\n\n\n
    3. Type of facility;<\/li>\n\n\n\n
    4. Tenure of the loan;<\/li>\n\n\n\n
    5. Sanctioned amount;<\/li>\n\n\n\n
    6. Date of agreement; and<\/li>\n\n\n\n
    7. Current status as on date.<\/li>\n<\/ol>\n\n\n\n

      The snapshot will make the review process much easier. Additionally, the snapshot will help the lender to understand the overall debt profile of the borrower without having to read every financing document from scratch.<\/p>\n\n\n\n

      Step 3: Key clauses to note in a financing document<\/strong><\/h2>\n\n\n\n

      Open a loan agreement and review the following key clauses:<\/p>\n\n\n\n

        \n
      1. Prepayment Clause:<\/strong> The prepayment clause sets out whether the borrower can repay the whole or part of the loan before the maturity along with any penalty or premium. You should verify whether prepayment is permitted and highlight the applicable prepayment penalty or premium payable by the borrower.<\/li>\n\n\n\n
      2. Negative covenant:<\/strong> This clause stipulates the actions that the borrower cannot undertake without taking the existing lender\u2019s consent. For example, an existing financing may restrict the borrower from taking additional debt. This could directly affect the proposed financing. So, you should check the negative covenants clause thoroughly and identify the restrictions on additional borrowing, creation of security and other material transactions.<\/li>\n\n\n\n
      3. Security:<\/strong> \u00a0It identifies the assets charged in favour of the existing lender and nature and ranking of that security.1<\/a><\/sup> The asset proposed as collateral for the new loan can already be charged to another lender. You need to identify the secured assets, secured amount, nature of security and ranking.2<\/a><\/sup><\/li>\n\n\n\n
      4. Events of Default:<\/strong> This clause sets out the circumstances which if occurred will constitute an event of default under the financing documents. You should review the events of default relating to non-payment, breach of covenants, insolvency, misrepresentation, cross-default and other material events, and assess the consequences triggered by the occurrence of such events.<\/li>\n<\/ol>\n\n\n\n

        Further, as a lenders\u2019 counsel, you should also examine the loans, guarantees and security provided by the company to other entities.<\/p>\n\n\n\n

        Step 4: Identify the red flags<\/strong><\/h2>\n\n\n\n

        Once the financing documents are reviewed, the next step is to identify the issues that could affect the proposed transaction. A red flag is a key issue that mandatorily requires further action before the lender proceeds with disbursement. The following can be considered as red flags in financing transactions:<\/p>\n\n\n\n

          \n
        1. Requirement of existing lender consent:<\/strong> If the financing documents restrict the borrower from incurring additional indebtedness without the prior consent of the existing lender, this should be flagged. Any proposed additional financing would require the borrower to obtain the requisite prior written consent from the existing lender.<\/li>\n\n\n\n
        2. Existing security over proposed collateral:<\/strong> If the asset proposed to be provided as security for the new facility is charged in favour of erstwhile lender, it should be identified and flagged.<\/li>\n\n\n\n
        3. Unregistered charge:<\/strong> If the financing documents contemplate the creation of security, however such security has not been registered, this should be flagged and highlighted as an issue.<\/li>\n\n\n\n
        4. Outstanding charge:<\/strong> If the borrower states that an existing financing has been repaid fully, however, the corresponding charge continues to appear as open or outstanding on the MCA portal, it is a red flag.<\/li>\n\n\n\n
        5. Event of default:<\/strong> If the borrower has breached any existing financing document and such breach constitutes, or may constitute, an event of default, the consequences of such breach should be assessed.<\/li>\n<\/ol>\n\n\n\n

          Based on the above review and analysis, the findings are collated and set out in a due diligence report to highlight the key legal issues. Thereafter, such a due diligence report is shared with the lender who takes a call on whether to proceed with the transaction. <\/p>\n\n\n\n

          A good due diligence report should not simply reproduce the contents of the loan agreements. While acting as the lender\u2019s counsel, your objective should be identifying such issues which can actually affect the lender\u2019s rights or ability to continue with the transaction.3<\/a><\/sup><\/p>\n\n\n\n

          But reading about due diligence is one thing<\/strong> and being able to actually prepare a due diligence report is another. <\/p>\n\n\n\n

          If you are serious about building a rewarding legal career and practical M&A and due diligence skills, then explore the Lawctopus Law School\u2019s Mergers & Acquisitions course<\/strong><\/a> and become industry-ready from day one.<\/p>\n\n\n\n

          If you are still confused about the right career path for yourself, then call us at +91 93596 84056<\/strong>\u00a0for a free counselling session or write to us at\u00a0courses@lawctopus.com<\/a>\u00a0<\/strong>for personalised career advice.<\/p>\n\n\n\n

          References<\/strong><\/h2>\n\n\n
          1. The Companies Act, No. 18 of 2013, INDIA CODE (2013), Section 77, https:\/\/indiankanoon.org\/doc\/92217420\/<\/a>. \u21a9\ufe0e<\/a><\/li>
          2. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, No. 54 of 2002, INDIA CODE (2002). \u21a9\ufe0e<\/a><\/li>
          3. Recording of Charges under the Companies Act-India<\/em>, LEXOLOGY (May 30, 2022), https:\/\/www.lexology.com\/library\/detail.aspx?g=df157361-aff0-4fa1-b0dc-c77b4dc68e7b<\/a>. \u21a9\ufe0e<\/a><\/li><\/ol>\n\n\n

            About the Author<\/strong><\/p>\n\n\n\n

            Simran Sabharwal is a Gold Medallist in Business Laws from RGNUL, Punjab, and a former Associate at Khaitan & Co. She is currently a Learning and Editorial Manager (Corporate Vertical) at Lawctopus Law School, where she teaches corporate law and practical commercial drafting.<\/em><\/p>\n\n\n\n

            <\/p>\n","protected":false},"excerpt":{"rendered":"

            This blog\/article is written by Simran Sabharwal, Learning and Editorial Manager at Lawctopus Law School Imagine a bank is considering to lend INR 100 Crores to a large multi-national company that appears financially sound. The balance sheet shows manageable debt, the business is profitable and the company shows substantial land that it can offer as […]<\/p>\n","protected":false},"author":10,"featured_media":1250,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"footnotes":"[{\"content\":\"The Companies Act, No. 18 of 2013, INDIA CODE (2013), Section 77, https:\/\/indiankanoon.org\/doc\/92217420\/<\/a>.\",\"id\":\"49b7e542-35e8-4aa2-a169-82f4eba73718\"},{\"content\":\"The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, No. 54 of 2002, INDIA CODE (2002).\",\"id\":\"b26d3c49-3410-413c-b519-1d6e235314e0\"},{\"content\":\"Recording of Charges under the Companies Act-India<\/em>, LEXOLOGY (May 30, 2022), https:\/\/www.lexology.com\/library\/detail.aspx?g=df157361-aff0-4fa1-b0dc-c77b4dc68e7b<\/a>.\",\"id\":\"acc23e72-1bad-428b-8409-02928dc74009\"}]"},"categories":[85],"tags":[],"class_list":["post-1246","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-lls-magazine"],"_links":{"self":[{"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/posts\/1246","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/comments?post=1246"}],"version-history":[{"count":4,"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/posts\/1246\/revisions"}],"predecessor-version":[{"id":1251,"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/posts\/1246\/revisions\/1251"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/media\/1250"}],"wp:attachment":[{"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/media?parent=1246"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/categories?post=1246"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lawctopuslawschool.com\/blog\/wp-json\/wp\/v2\/tags?post=1246"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}