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What is Due Diligence?

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

In this process, the legal, financial and the compliance aspects of the company are usually reviewed and documented. It is basically the process of examining all the material facts of a deal or a contract before a legal contract is signed by both the parties. It is not just limited to buyers, even sellers can perform a due diligence on the buyer. Due diligence consist of factual, background, legal and accounting checks. This done to ensure that there are no surprises after a deal is done.

Documents Required for Due Diligence

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

Assessment of MCA Documents

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

Company Information
  • The date of Incorporation
  • Authorised capital
  • The paid up capital
  • The date of the last annual general meeting
  • The date of the last balance sheet
  • Status of the company

Director Information
  • The directors of the company
  • The date of appointment of directors

Charges Registered
  • The details of secured lenders of the company
  • The quantum of secured loans

  • The certificate of incorporation
  • The memorandum of association
  • Articles of association

In addition 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. The review of MCA documents of the company would provide a good overview of the company to the person performing the due diligence.

Assessment of Articles of Association

It is imperative to review the articles of association of a company during the due diligence process to establish the different classes of equity shares and their voting rights. The articles of association of a company can restrict/limit the transfer of shares of a company. Therefore, the articles of association should be studied judiciously to ascertain the procedure for transfer of shares.

Assessment of Statutory Registers of Company

Under Companies Act, 2013, a private limited company is required to maintain various statutory registers relating to the share transfer, share allotment, board meetings, board of directors, etc., Therefore, the statutory registers of a company must be reviewed to obtain and validate the information pertaining to the directorship and the shareholding.

Assessment of Book of Accounts and Financial Statements

Companies are required to maintain the book of accounts along with detailed transaction information by the Companies Act, 2013. The detailed financial transaction information must be audited and verified against the financial statements that are prepared by the company. Some of the matters relevant during 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

Assessment of Taxation Aspects

The taxation aspects of a company must be thoroughly checked during the due diligence process. This helps to ensure that there are no unforeseen/unexpected tax liabilities created on the company in a future date. The following aspects relating to the taxation aspect of a company must be checked:

  • The income tax return filed
  • The income tax paid
  • The calculation of the income tax liability by the company
  • ESI / PF returns filed
  • ESI / PF payments
  • ESI / PF payment calculation
  • The GST/service tax / VAT returns filed
  • The GST/service tax / VAT payments
  • Basis for the GST/service tax / VAT payment calculation
  • TDS returns
  • TDS payments
  • TDS calculations

Assessment of Legal Aspects

A complete legal audit of the company has to be performed by a legal practitioner to establish if there are any pending/incomplete legal actions, suits by or against the company and the liability in each. Further, 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 company.
  • Verification of the court documents and the court filings, if any

Assessment of Operational Aspects

It is important to acquire a thorough understanding of the business operations, business model and operational information during the process. The review of the operational aspects must be all-encompassing including the site visits and employee interviews. 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
  • Utilities

FAQs on Due Diligence of Company

Yes, it is appropriate to know the legal compliances made by the Company upto date before entering into Shareholders agreement with the Company.
No worries, we will provide the solutions on case to case basis.

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