What is due diligence?
What is due diligence- Investors generally exercise due diligence to verify regulatory and operational compliance by the company on a regular basis. The company’s due diligence is generally performed before any private equity investment, selling business, bank loan financing, etc.
In this process, the legal, financial and compliance aspects of the company are usually reviewed and documented. It is essentially the process of examining all material facts of a transaction or contract before the parties sign a legal contract. It is not limited only to buyers, so sellers can conduct due diligence on the buyer. Due diligence consists of facts, backgrounds, legal and accounting controls. This was done to ensure no surprises after the completion of the deal.
Documents required for due diligence
Good news! Just some basic documentation. Just see the checklist below:
• Company charter documents
• Notices, Attendance Sheets and Board Meeting Minutes
• Notices, attendance sheets and general meeting minutes
• Legal records
• Legal agreements implemented by the company
• RBI related documents
Assessment of MCA Documents
Most of the company’s due diligence begins with the Ministry of Corporate Affairs. On the website of the Ministry of Corporate Affairs, key data about the company is made public. Furthermore, with a nominal fee, all documents deposited with the Registrar of Companies are available to anyone. This information is verified from the MCA website first in general. The information and documents collected in this step include:
• Date of Establishment
• Authorized capital
• paid Capital
• Date of the last annual general meeting
• Date of last balance sheet
• Company status
• Company Managers
• Date of appointment of managers
• Details of secured lenders of the company
• The amount of secured loans
• Certificate of incorporation
• Foundation note
• Assembly materials
In addition, the Company’s financial information and other deposits with the MCA relating to various aspects of the Company may be downloaded and reviewed. A review of company documents can provide a good overview of the company to the person doing the due diligence.
Evaluation of trade union materials
It is necessary to review the materials associated with the company during the due diligence process to identify the different classes of shares and voting rights. Materials associated with the Company may restrict / restrict the transfer of the Company’s shares. Therefore, the provisions relating to affiliation should be examined wisely to ascertain the procedures for transfer of shares.
Evaluate the company’s legal records
Under the Companies Act, 2013, a private limited company is required to maintain various legal records related to the transfer of shares, shares, board meetings, etc. Next, the legal records of the company should be reviewed to obtain and verify the information related to the manager and shares.
Evaluating the book of accounts and financial statements
Companies are required to keep a book of accounts along with detailed transaction information under the Companies Act 2013. Detailed financial transaction information should be reviewed and verified against the financial statements prepared by the company. The following are some of the relevant issues during the business due diligence process:
• Check bank statements
• Verify and evaluate all assets and liabilities
• Check cash flow information
• Check all financial statements against transaction information
Assessment of tax aspects
The tax aspects of the company should be carefully examined during the due diligence process. This helps to ensure that there are no unexpected / unexpected tax liabilities created on the company at a later date. The following aspects relating to the tax side of the company should be verified:
• Income tax return provided
• Income tax paid
• Calculation of tax liability for income by the company
• ESI / PF returns provided
• ESI / PF payments
• ESI / PF payment account
• Goods / services tax / VAT returns provided
• VAT / service payments
• Calculation basis of VAT / Service / VAT payment
• TDS returns
• TDS payments
• TDS accounts
Assessment of legal aspects
A full legal review of the company must be carried out by a legal practitioner to determine whether there are any legal proceedings pending / incomplete, and claims by or against the company and its respective liability. Furthermore, the following aspects must be verified during due process:
• Due diligence for all real estate properties of the company.
• There is no objection from the secured creditor to the company’s transfer.
• Check court documents and court filings, if any
Assessment of operational aspects
It is important to have a thorough understanding of business processes, business model and operational information during the process. The review of operational aspects should be comprehensive, including on-site visits and staff interviews. The aspects to be covered and documented in the review of operational aspects are:
• Business model
• Number of Employees
• Number of clients
• Production information
• Seller information
• Information goddesses
• The facilities
Questions and answers about due diligence of the company
1. Is it necessary to conduct due diligence before investing?
Yes, it is appropriate to know the legal compliance made by the company to date before entering into a shareholder agreement with the company.
2. How to deal with non-compliance, if any?
Don’t worry, we will provide solutions on a case-by-case basis.
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