Financial Due Diligence is required in any kind of investment or business dealing with mergers and acquisitions (“M&A”), or issuing new stocks, and any other transaction which involves risk and for which reasonable care must be taken before getting into an agreement. There is always a risk while investing, so the Company needs to be aware with the background and a proper scrutinization of all the documents is required for the same. This systematic process of financial due diligence aids the buyers to get ensured that all of them are on the same page in the same sense. This protects the entity from heedless harm to the either party throughout a transaction.
Why Due Diligence is required?
A financial due diligence is required so that the entity is well aware of all the essential considerations like:
and Ownership – Research on who runs the Company, if it
is still run by its founders?
– Looking into how large and volatile is the Company and market. A comparative
analysis on both of them is required.
Competitors and Industries – Research and compare the margins
of competitors for a better understanding of the target Company
Sheet Analysis – This helps in analyzing the
debt-to-equity ratio. Is the Company in too much debt?
Profit and Margin Trends – If there are there any recent
trends in the figures which may be rising, falling, stable.
– Understand industry-wide and Company-specific risks. Checking if there are
any outstanding risks and trying to predict any unforeseeable risks in the
history/options and Possibilities – How long has the Company
been trading? For a short- term or long-term? Has there been a steady stock
– What are the profit estimates for the future?
Who performs a Due Diligence?
The financial due diligence is performed by any person who has a fair idea of finance and related laws prevailing in India.
What all documents are required for Due Diligence?
due diligence examines the economic condition of the business. You’ll look for
consistency among accounts, assets, and liabilities. You’ll also look at
historical trends, projections, and tax risks.
Copies of minutes of the meetings of the Board of Directors, committees of Directors, and shareholders/members, including copies of notices of all meetings, copies of all written consents along with attendance sheet for the same should also be required. All these documents provided should be signed, sealed and dated.
Statutory registers as maintained by the Company under the Companies Act, 1956 and Companies Act 2013. The Statutory registers maintained can either be a hard copy or a soft copy. If the register is a soft copy, a screenshot of the same should be provided. If the register is a hard copy, a scanned copy for the same shall be uploaded.
All filings made with the relevant Registrar(s) of Companies up to date along with Payment Challans, including incorporation forms. The stamp duty for all the challans should to paid.
Copies of Form-24AA (1956 Act) or Form MBP-1 (2013 Act) – A Director has to disclose his interest in the firm MBP-1 to the Company in the first board meeting of the Company.
Copies of Directors’ declaration under Section 274(1)(g) of the Act (1956 Act) or Form DIR-8 (2013 Act). Companies Act, 2013- Every Director of the Company shall inform the concerned Company about his disqualification under sub-section (2) of Section 164, if any, in Form DIR-8 before he is appointed or re-appointed in the Company.
Copies of all Form 22A towards shareholders consent for calling any general meeting on a shorter notice. The notice for the same should also be provided.
Copies of Directors’ declaration under Form DIR-8 (2013 Act). According to the Section 164, read with Rule 14 of appointment and qualification of Director Rules 2014, every person appointed as Director or reappointed as Director has to give declaration in form DIR 8 that he is not disqualified as per section 164(2) of companies act. Further it is not required to file DIR 8 in every financial year.
List of all cities and countries in which the Company has or contemplates undertaking business operations, either directly or through other parties
Details of any debentures/Warrants or any other security issued- Date of execution of these documents along with debenture bongs and other documents are required.
Copies of Board meeting, AGM and EGM minutes completed and executed- According to Condonation of Delhi scheme, 2018(General circular no 16/2017 dated 29th December 2017, it says that all the Companies registered under Companies Act 2013(or its precedent Act) are inter- alia required to file their Annual Financial statements and Annual return with the Registrar of Companies and non- filing of such reports is an offence under the said Act. Under Section 162(2) of the Act read with Section 167 of the Companies Act.
Changes the Founding team, along with details of all agreements, communication and filings relating to such changes – A Company can intimate changes among Managing Director, Directors, Manager and Secretary of a Company by filing e-Form DIR-12 with Registrar of Companies (ROC) within 30 days (Event date + 30 days) from the date when such change takes place.
Share capital- With share capital, the amount a Company reports on its Balance sheet only accounts for the total amount initially paid by shareholders. The Company must specify the total amount of equity it wants to raise and the base value of its shares, called the par value. The total par value of all the shares a Company is permitted to sell is called its authorized share capital.
Table showing summary of authorized, issued and paid-up capital
Samples of share certificates, options and any other outstanding securities, if any
Any agreements and other documentation (including related permits) relating to repurchases, redemptions, exchanges, conversions or similar transactions involving the Company’s securities
Share Transfer forms if any executed
Agreements containing veto rights, rights to appoint nominee Directors, pre-emptive rights, voting rights, right of first refusal or other preferential rights to acquire securities and any waivers or assignment of such rights.
Changes to the Founding team, along with details of all agreements, communication and filings relating to such changes made to any persons for allotment of shares or options.
Professional Tax Registration- The Professional Tax Registration number as per the registrations done by them