Due Diligence
Contributed by: Kanikka P Indi
Email id: Kanikka@simplybiz.in
Due Diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration relating to Finance, Legal, Compliance, Commercial etc., before arriving at any decision.
Due diligence is performed by Investors, Fund Managers, Acquirers that are proposing to either invest/acquire other Companies. It includes analyzing the strengths, weaknesses, opportunities and threats of not only the financials but also aspects of the proposed company including intangibles. For the Due Diligence exercise to be effective, the potential buyer needs to be clear of the objectives for acquiring the target company, as well as the value the investor/buyer is attempting to create with the investment/purchase. Hence, Due Diligence is a significant exercise before taking up any corporate action.
Importance of Due Diligence:
Let’s have a look as to why Due Diligence is gaining so much significance in today’s corporate world!!!
Due Diligence helps in acquiring an entity with the following benefits:
- Assess various compliance risks and liabilities in the Company.
- Makes business deal or transaction safer and profitable before finalizing the transaction.
- Prevent unexpected surprises, and take informed decisions that align with their goals and protect their interests.
Importance of Due Diligence in Corporate Actions:
Now that we have looked into an overall significance of Due diligence, lets sneak a bit into its role in various Corporate Actions.
- Mergers & Acquisitions – In case of Mergers & Acquisitions, it identifies potential synergies, evaluates the financial health, assets, liabilities, and legal compliance of the target company, assesses cultural compatibility and integration challenges to ensure a smooth transition of the merger.
- Joint Ventures – During joint ventures and partnerships, it evaluates strategic fit, identifies potential conflicts of interest and governance structures, it helps to mitigate risks and assesses the operational capabilities, and reputation of the partner organization.
- Funding – During Funding, it assesses the terms and conditions of the offering, including pricing, dilution, and investor rights and identifies regulatory compliance requirements and potential risks associated with the offering.
- Initial Public Offerings (IPOs) – During IPOs , it validates financial performance, governance practices, and compliance standards of the company, assesses market conditions and valuation to determine the offer price. It also provides transparency and assurance to potential investors and thus enhances credibility and confidence in the IPO.
- Asset acquisition– During asset purchases and sales, it helps in assessing the value and condition of assets being bought or sold, helps identify any encumbrances, liens, or legal issues associated with the assets, facilitates negotiations and ensures fair pricing based on the asset’s market value and potential.
Well!! It is impressive how a Due Diligence benefits during corporate actions and hence always needs an expert opinion.
Scope & Coverage of Due Diligence:
Due Diligence involves consideration of wide range of aspects like the information relating to financial, human resources, tax, environmental, legal matters, intellectual property matters etc. The broad coverage would include review & verification relating to:
- Compliance with applicable laws
- Regulatory violations or disciplinary actions
- Litigation and assessment of feasibility of a pursuing litigation
- Analysis of Financial Statements of a Company
- Assets of a Company including its intellectual property,
- Evaluating the brand value
- Unpaid tax liens
- Past business failures and consequential debt
- Exaggerated credentials or Fraudulent claims
- Misrepresentations, if any
- Cross-border issues including double taxation, foreign exchange fluctuations, sovereign risks, investment climate, cultural aspects etc
- Reputation, Goodwill and other intangible assets.
Corporate Secretarial Due Diligence:
A corporate Secretarial review & Due diligence for an Indian Private Limited Company typically covers the review of compliances under Companies Act & Foreign Exchange Regulations. An overview of the step by step procedure would be as under:
- Identifying the period of coverage & the laws applicable.
- Undertaking an inspection in the MCA Portal to review the filing status.
- Reviewing the secretarial documents of significant events or certified true copies of the transactions or resolutions, minutes and registers from the client which are not available through public inspection.
- Preparation of event chart capturing the details of all the forms filed with ROC and meetings held by the entity.
- Build a framework based on the corporate secretarial records on observation sheet and future action plan.
- Advise on the rectification of gaps which can be rectifiable or compoundable.
- Regularizing the compliances and sharing the update on the same.
- Maintaining of Dataroom of documents.
- Sharing a report on the observations, penal implications and the corrective actions undertaken/to be undertaken.
If you’re looking for any expert advisory and support on Due Diligence, then our product SimplyCorp is just meant for you. We have handled various assignments of Due Diligence and have gained considerable exposure on the important aspects to be considered in the process.
Please get in touch with Product Head – Vaishali Vohra at the mail ID vaishali@simplybiz.in or SimplyCorp@simplyBiz.in
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