Applicability of AI in Due Diligence Process of Mergers and Acquisitions: An Exploratory Study

Abstract

This paper examines who should be held legally liable in India when an AI-supported due diligence tool fails to detect a critical risk during a regulated merger or acquisition. Indian advisory firms increasingly use generative AI for contract review, red-flag reporting, and financial analysis during due diligence, yet the legal framework governing its use has not kept pace with this rapid adoption. It asks whether Indian law clearly assigns responsibility for such failures, or whether accountability is lost between different areas of law.

The study addresses four categories of applicable legal rules: the duty of care of directors under Section 166(3) and the non-excludable liability of registered valuers under Section 247 of the Companies Act, 2013; warranty and indemnity provisions in Indian share purchase agreements under the Indian Contract Act, 1872; common law principles on professional negligence; and disclosure and valuation requirements under the SEBI Takeover Code, including the SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2025. It then compares the Indian position with the graded-liability approach in India's AI Governance Guidelines, 2025, and the European Union's Product Liability Directive, 2024/2853.

The paper finds that Indian law is not silent on the issue, but the framework is fragmented: each rule addresses only a small facet of the problem, and none specifies the extent of human oversight required for AI tool outputs to meet the prevailing standard of care. Even the EU's Product Liability Directive, often cited as a model reform, fails to resolve this, since it excludes pure economic loss suffered by corporate claimants — precisely the loss this paper addresses. The paper recommends a contract-based AI liability allocation clause for due diligence engagement letters, a targeted SEBI circular applying existing Regulation 16C to due diligence certification, and clearer standards of practice from India's professional regulatory bodie

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