Finally figured out the issue. Here is how our environment is setup. We have two VGs on the server. rootvg and QAvg. DB2 binaries are installed in rootvg. Rootvg has the filesystesm like /opt/IBM, /usr, /var, /home, /opt etc. And all the containers and db2 database files are present under QAvg. While moving the database to a new hardware, our AIX team takes a mksysb copy of rootvg on the old hardware and pushes it to the new hardaware couple of days prior to the change. As the contents in rootvg are mostly all binaries they remain unchanged for shorter perioed. During the change, they unmount all the filesysystems and lvs under QAVG from older host and move it on to the new host.
In this scenario, one of the filesystem where db2 directory is present. I mean the place where sqldbdir, log control files are present was under rootvg and not under QA VG. Someone might have designed it wrongly when the server was newly created. So on the new box, these log control files were three days old as the mksysb copy was three days old. When everything is moved to new box and when we tried to activate the database, the database manager was looking for a log file based on the LSN present in the log control file and that was three days back and this caused database not to start and to produce log file errors in the db2diag.log.
After realizing that this directory is present under rootvg, we copied over all the files of that filesystem from the old server to the new server and everything started working fine.