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Summarizing the Due Diligence Process in India

Narendra Kumar

| Updated: Jun 29, 2019 | Category: Due Diligence

Due Diligence

The Due diligence was already into action in the mid-fifteenth century but was formally introduced in the 1930s. Due diligence in India is generally performed by a company before any business sale, private equity investment, bank loan funding, etc., During this process, the financial, legal and compliance aspects of the Company are usually reviewed and documented. It enables a person to evaluate and understand a potential acquisition, partner, or buyer and make correct decisions henceforth. The main objective of carrying out the process of Due Diligence is a manual tool to check that the business you want to purchase is financially and legally sound and stable and to get ensured that you know all the essential facts of the Company. It enables organizations to investigate and obtain as much information as possible of which diligence is performed.

What is Due Diligence?

The meaning of due diligence is synonym with the word investigation and research. The term, diligent means to be attentive, hardworking, and thorough. Due diligence is the necessary care performed by an individual to avoid causing harm to other persons or property. It is more of an investigative work done for evaluating the assets and liabilities, and further looks into the potential commercial as well as the economic value of the Company or firm.

Need for Due Diligence

Due diligence is easy to understand on the surface, but it’s a pretty complex topic and shouldn’t be overlooked.

Due Diligence India

Impact of Due Diligence

Both the parties enter into a non-disclosure agreement prior to starting a business due diligence as sensitive financial, operational, legal and regulatory information would be divulged to the buyer during the due diligence process.

Helps the buyer take an informed investment decision and mitigate risks associated with a business purchase transaction.

Audit and Due diligence

Due diligence is all together with a different concept when compared with the auditing process. It is neither an audit nor a valuation of the target company. Due diligence does have standard procedures, and it overlaps with an inspection in purpose and method. The factor that distinguishes them is a thorough investigation that focuses specifically on crucial information that has been asserted to the buyer, often mainly via the financial statements.

Categorizing Due Diligence

Due diligence can be classified into four major categories:-

  • General Due Diligence

Diligence can be of any kind and can be performed by anyone a bit cautious with what he does. Like for example- when a person goes for a vacation in some hilly area or beaches, he will look into the weather/ temperature, kind of clothes required, places to visit, means of transport and any other relevant information, etc.

  • Due Diligence in business

In business, due diligence may be practiced when a company is thinking of merging, acquiring or coming together for partnership so that they can have a better picture of the Company’s shape in which they are dealing with.

  • Due Diligence in investment

While investing in properties, the person tries to avoid any loss, all kind of research is done as to where they are spending their money. The investor must gather the necessary information so that they can overcome any potential risks.

  • Due diligence in negotiation

When two parties or more are forming an agreement. Both parties must outline their expectations and understandings to fulfill the requirements of the given transaction. This outlining of clauses or aligning of opinions is, again, a form of due diligence.

In these cases, there will be an initial due diligence step where all risks are evaluated before establishing a deal with a company or person. There is always a pre-risk management analysis of the entity before any official agreements are made.

Financial Process

What are the types of Due Diligence?

There are following types of due diligence:

Administrative Due Diligence

Administrative Due Diligence is the aspect of due diligence that involves verifying related administrative things like facilities provided, rate of occupancy, number of people employed, etc.

It is required to keep a check at the various facilities owned or occupied by the seller and check if the finance departments capture all the operational costs.

It provides a clear picture that gives of the Buyers’ cost, which may incur if they plan to expand the target company further.

Financial Due Diligence

The financial due diligence strives to check whether the financials showcased in the Confidentiality Information Memorandum (CIM) are accurate or not. It targets to achieve the understanding of all the Company’s financials in toto, but it is not restricted to,

  • Audited financial statements of the previous three years
  • Un-audited financial statements
  • The Company’s projections and basis of such projections
  • Capital expenditure plan
  • Schedule of inventory
  • Debtors and creditors, etc.
  • Analysis of major customer accounts
  • Fixed and variable cost analysis
  • Analysis of profit margins
  • Examination of internal control procedures.
  • Company’s order book and sales pipeline to create better (more accurate) projections.

Asset Due Diligence

Asset due diligence generally consists of all the detailed schedule of fixed assets, their locations, physically and through documents, it consists of

  • All lease agreements for equipment
  • All the sales and purchases of significant capital equipment
  • Real estate deeds
  • Mortgages
  • Title policies, and
  • Use permits.

Human Resources Due Diligence

Human resources due diligence is quite extensive. It includes numerous labor laws and policies. It may consist of the following:

  • Analysis of the total number of employees – It includes current positions taken, a number of vacancies, due to the retirement of all the employees, and the time period for serving the notice.
  • Analysis of current salaries, of all the employees including employees on a contractual basis, bonuses paid to the employees during the last three years, and years of service
  • All employment contracts with non-disclosure, non-solicitation clause, and non-competitive agreements between the Company and its employees.
  • HR policies made regarding annual leave, sick leave, and other forms of leave which are allowed by the Company.
  • Looking into all the employee problems if they persist. Such as wrongful termination, sexual harassment, discrimination between co-workers, and examining any legal cases pending with current or former employees
  • The potential financial impact of any ongoing labor cases, arbitration proceedings, or any grievance on the procedures.
  • Employees health benefits along with their insurance policies, if any
  • ESOPs and schedule of grants

Environmental Due Diligence

A check on the environment is required in the present day scenario. A company is required to adhere to all the major environment-related laws. If the Company does not comply with the related laws, the local authorities have the power to penalize the Company and in turn, cease to function by their orders. Hence, environmental audits play a crucial role for each property owned or leased by the Company one of the critical types of due diligence. These following points should be evaluated:

  • All the list of environmental permits, licenses, and validation
  • Copies of all notices and orders with the Environmental Protection Agency, state, and local regulatory agencies
  • Check if the Company is in compliance with the current rules and regulations
  • Look into all the contingent environmental liabilities or continuing indemnification obligations, which are required to be fulfilled.

Tax Due Diligence

Tax Due diligence refers to scrutinizing all the documents related to the tax liability, taxes of the Company, and to ensure their proper calculation with the available laws. In addition to this, the status of any tax-related pending cases is checked with the tax authorities.

All documents related to tax compliance, which includes verification and review of the following points:

  1. Copies of all tax returns like including income tax and sales tax for the past three to five years
  2. All the necessary information relating to any past or pending tax audits of the Company
  3. Documentation pertaining to NOL (net operating loss) or any unused credit carry forwards of deductions or tax credits
  4. Any critical, out-of-the-ordinary correspondence with tax agencies.

Intellectual Property Due Diligence

With the current changes in the competitive business environment, Intellectual Property (IP) rights are key elements that are required to maintain competition in the market. IP is a business asset, an integral part of the business process.  Almost every Company has intellectual property assets that they can use to monetize their business. These intangible assets are something that differentiates their product and service from their competitors, and may often comprise some of the Company’s most valuable assets. A few of the items that need to be looked at in a due diligence review are:

  • Forms and related documents for copyrights, trademarks, and brand names
  • Forms and related documents for patents and patent applications
  • Any pending documents which are required to be cleared
  • Any pending actionable or not actionable claims case by or against the Company regarding violation of intellectual property

Legal Due Diligence

Legal, due diligence is, of course, essential and typically includes examination and review of the following elements:

  • Copy of Memorandum and Articles of Association
  • Minutes of all the shareholders meeting over the previous three years
  • Minutes of Board Meetings along with attendance sheet and notices the last three years for a Company
  • Copy of share certificates (related with shares and debentures) issued to Key Management Personnel along with share transfer forms
  • Copies of all kind of guarantees to which the Company is a party with
  • Licensing or franchise agreements
  • All the material contracts, which include any joint venture, partnership agreements; limited liability Company, or operating agreements.
  • Copies of all loan agreements, related bank financial agreements, and all lines of credit of a Company

Customer’s Due Diligence

This type of Due diligence includes a closer look at the target’s Company and its customer base. In this process the following points are analyzed and examined:-

  • List of Companies top customers like the largest and total number of purchases from the Company. List of all the customers along with their assets.
  • Service-related agreements and insurance policies covering all the assets and capitals
  • Current credit policies which review the days’ sales outstanding metric (DSO) to assess the efficiency of accounts receivable
  • Customer Satisfaction Points and the related reports for the past three year
  • List, with explanations, of any significant customers lost within the past three to five years.
Due Diligence Process


There is no specific law related to this as it is more of a diligence process than compliance work. So, Very little information is available on the internet concerning this process. It’s a significant and crucial step which is required by any Company while investing and knowing the health of the Company. That also makes it even more important for entrepreneurs to get educated and try to master this part of the cycle. Checklists keep target companies informed about the next step. The process is usually curated and maintained by legal professionals who have the right amount of corporate and legal experiences.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

Business Plan Consultant

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