Due diligence is generally conducted by investors to check for regulatory and process compliance by the company regularly. Due diligence of a company is generally performed before any private equity investment, business sale, bank loan funding, etc.
In this process, the legal, financial, and compliance aspects of the company are usually reviewed and documented. It is the process of examining all the material facts of a deal or a contract before a legal contract is signed by both parties. It is not just limited to the buyers; even the sellers can perform due diligence on the buyer. Due diligence consists of factual, background, legal, and accounting checks. This is done to ensure that there are no surprises after a deal is done.
Broadly speaking, there are 3 types of due diligence-
Business due diligence
It looks into the quality and business prospects of an investment and the parties involved therein.
Legal due diligence
It looks into the legal issues/aspects and regulatory aspects involved in intra-corporate and inter-corporate transactions.
Financial due diligence
It validates financial, operational, and commercial assumptions taken by the company. This process also involves a complete review of audit practices, accounting policies, internal controls, and tax compliances of the target company.
The findings obtained from the process of due diligence are summarized in a report termed as the due diligence report.
Documents Required for Due Diligence
The following documents are required for successful completion of the due diligence process in India-
- Charter documents of the company
- Notices, Attendance Sheets & Board Meeting Minutes
- Notices, Attendance Sheets & General Meeting Minutes
- Statutory Registers
- Legal Agreements executed by the Company
- RBI Related documents
Assessment of MCA Documents
The due diligence process of a company begins at the Ministry of Corporate Affairs (MCA). On the website of the Ministry of Corporate Affairs, the master data about a company is made publicly available. Further, with the payment of a small fee, all documents filed with the Registrar of Companies are made available to everyone. This information from the MCA website is generally verified first. The information and documents gathered in this step include:
- The date of Incorporation
- Authorized capital
- The paid-up capital
- The date of the last annual general meeting
- The date of the last balance sheet
- Status of the company
- The directors of the company
- The date of appointment of directors
- The details of secured lenders of the company
- The quantum of secured loans
- The certificate of incorporation
- The memorandum of association