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What is Due Diligence?

Due diligence is usually conducted by investors to check for regulatory and process compliance by the company on a regular basis. Due diligence of a company is usually completed before any private equity investment, business sale, bank loan funding, etc.

In this process, the legal, financial and the compliance features of the company are typically reviewed and documented. It is basically the process of scrutinizing all the substantial facts of a deal before a legal contract is signed by both the parties. It is not just restricted to buyers, even sellers can perform a due diligence on the buyer. Due diligence consists of accurate or factual, background, legal and accounting checks. This done to ensure that there are no hassles after a deal is done.

Important Documents Required for Due Diligence

For Due Diligence

  • Charter documents of the company.
  • Statutory Registers.
  • Notices, Attendance Sheets & Board Meeting Minutes.
  • Legal Agreements executed by the Company.
  • Notices, Attendance Sheets & General Meeting Minutes.
  • RBI Related documents.

Steps to be followed

1. Assessment of MCA Documents

Most of the due diligence of a company begins with the Ministry of Corporate Affairs. On the website, the master data about a company is made publicly available. Additional, with payment of a fee, all documents of the relevant company is filed with the Registrar of Companies is made accessible to anyone. This information from the MCA website is usually verified first. The information and documents gathered in this step include

  • Company Information
  • Director Information
  • Charges Registered
  • Documents like certificate of incorporation, memorandum of association and Articles of association

In accumulation to the above, the financial information of the company and other filings with the MCA pertaining to various aspects of the company can be downloaded and reviewed for due diligence

  • Assessment of Articles of Association
  • Assessment of Statutory Registers of Company
  • Assessment of Book of Accounts and Financial Statements:

Some of the matters relevant to the business financial due diligence process are:

  • Verification of the bank statements
  • Verification and valuation of all the assets and the liabilities
  • Verification of the cash flow information
  • Verification of all the financial statements against transactional information

2. Assessment of Taxation Aspects

The following aspects relating to the taxation aspect of a company must be checked

  • The income tax return filed
  • The income tax paid
  • The GST/service tax / VAT returns filed
  • The GST/service tax / VAT payments
  • Basis for the GST/service tax / VAT payment calculation

3. Assessment of Legal Aspects

The following aspects must be checked during the legal due diligence:

  • Legal due diligence for all the real estate properties of the company.
  • No objection from a secured creditor for the transfer of the company.
  • Verification of the court documents and the court filings, if any

4. Assessment of Operational Aspects

Following are the aspects that must be covered and documented in the operational aspects review:

  • Business model
  • Number of employees
  • Number of customers
  • Production information
  • Vendor information
  • Machinery information

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