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Due Diligence of Company

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All You Need to Know About Starting a Company

What is Due Diligence?

Investors conduct a due diligence to ensurethe regulatory and process compliance of the company on a regular basis. Due diligence of a company will be generally conducted before any business sale, private equity investment, bank loan funding etc.

The financial, legal and the compliance related aspects of the company need to be reviewed and documented in the process of due diligence. It consists the process of investigating all the main facts of a deal or a contract before signing a legal contract.It is not just limited to buyers. Even sellers can also conduct a due diligence on the buyer.Factual, legal, background and accounting checks will be performed in a due diligence. It is done to ensure that there are no future complications after a deal is done.

Documents Required for Due Diligence

The following documents are required for due diligence: -

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

Assessment of MCA Documents

Due diligence of a company starts with the Ministry of Corporate Affairs. The Ministry of Corporate Affairs publish the master data about every company on their website to make it publicly available. Moreover, after paying a small fee, anyone can get access to all the documents filed with the Registrar of Companies. The information obtained from the MCA website is generally verified.

The following information and documents collected in this step are:

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

The person conducting the due diligence can also download and reviewthe financial information of the company and other filings with the MCA. By reviewing the MCA documents of the company, he woulddefinitely have clear overview of the company.

Assessment of Articles of Association

During the due diligence process, it is important to review the articles of association to establish the different classes of equity shares and their voting rights. The transfer of shares of a company can be restricted/limited by the articles of association. Therefore, it is necessary to study the articles of association to establish the procedure for transfer of shares.

Assessment of Statutory Registers of Company

Under Companies Act, 2013, a private limited company need to maintain various statutory registers which will have information related to the share transfer, share allotment, board meetings, board of directors etc. So, it is necessary to study and review the statutory registers of a company to validate all the information related to directors and shareholders.

Assessment of Book of Accounts and Financial Statements

All the companies need to maintain the book of accounts along with detailed transaction information by the Companies Act, 2013. The detailed financial transaction information has to be audited and verified against the financial statementsprepared by the company.Due diligence process consists of the following verification related to book of accounts and financial statements:

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

Assessment of Taxation Aspects

The taxationaspects of a company need to be reviewed thoroughly in due diligence process. It will help in making sure that there are no unpredicted tax liabilities in future. Due diligence process consists of the following verification related to taxation aspects of the company:

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

Assessment of Legal Aspects

A legal practitionermust perform a legal audit of the company tohave overviewof any pending legal actions, suits by or against the company and any liabilities.

Due diligence process consists of the following verification related to legal aspects of the company:

  • 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

Due diligence process must ensure a detailed understanding of the business operations, business model and operational information. The process of reviewing the operational aspects must be all-inclusivewith inclusion of site visits and employee interviews etc.

Due diligence process consists of the following verification related to operational aspects of the company:

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

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