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.
The following documents are required for due diligence: -
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:
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.
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.
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.
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:
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:
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:
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: