Due Diligence of Company

Due diligence refers to the process of reviewing and documenting legal, financial, and compliance aspects of the company. The investor checks the regulatory and process compliance, specifically before an investment or funding.

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What is the due diligence of a company?

Due diligence is generally conducted by investors to check for regulatory and process compliance by the company regularly. 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 compliance aspects of the company are usually reviewed and documented. It is the process of examining all the material facts of a deal or a contract before a legal contract is signed by both parties. It is not just limited to the buyers; even the sellers can perform due diligence on the buyer. Due diligence consists of factual, background, legal, and accounting checks. This is done to ensure that there are no surprises after a deal is done.

Broadly speaking, there are 3 types of due diligence-

Business due diligence

It looks into the quality and business prospects of an investment and the parties involved therein.

Legal due diligence

It looks into the legal issues/aspects and regulatory aspects involved in intra-corporate and inter-corporate transactions.

Financial due diligence

It validates financial, operational, and commercial assumptions taken by the company. This process also involves a complete review of audit practices, accounting policies, internal controls, and tax compliances of the target company.

The findings obtained from the process of due diligence are summarized in a report termed as the due diligence report.

Benefits of conversion from PLC to OPC

Limits Director's Liability
Businesses often need to borrow money. With sole proprietorships, proprietors are personally liable for all the debt. So if it cannot be repaid by the business, the proprietor would have to sell his/her car, house or jewellery to do so.
Continuous Existence
If a promoter were to operate as a sole proprietorship, rather than an OPC, the business would come to an end with his/her death. Since an OPC has a separate legal identity, it will pass on to the nominee director and, therefore, continue to exist.

Important aspects of a due diligence report

Certain important aspects of a due diligence report are as follows-

  • Monetary Aspect: The report should rely on certain important financial data and precise ratio analysis to understand the entire picture related to the target company.
  • Viability: The business and financial plans of the target company should be studied thoroughly to assess the viability.
  • Personnel aspects: The report should make a thorough assessment of the credibility and capability of the people operating the company.
  • Environmental aspects: No business can separate itself from the environment around it. Therefore, it is important to study the environment and its overall impact on the company concerned.
  • Technological aspects: Assessing the technology available to the company at a given point of time is another important part of the due diligence process. Such an assessment would help a great deal to decide the future course of action.
  • Liabilities: The report should take into account any existing and potential liabilities (including regulatory issues, pending litigations, and so on) the company may come across.

Documents Required

The following documents are required for successful completion of the due diligence process in India-

  • 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

What are the steps of the due diligence of a company?

The due diligence process of a company consists of the below-mentioned steps-

Assessment of MCA Documents

The due diligence process of a company begins at the Ministry of Corporate Affairs (MCA). On the website of the Ministry of Corporate Affairs, the master data about a company is made publicly available. Further, with the payment of a small fee, all documents filed with the Registrar of Companies are made available to everyone. 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
  • Authorized 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

FAQs on Due Diligence of Company

Yes, it is appropriate to know if the legal compliances made by the Company are up to date, before entering into a shareholder’s agreement with the Company.

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