Services

Due Diligence Services

Introduction:

The ancient maxim “vigilantibus et non dormientibus jura subveniunt” tells us that the law assists those who are vigilant and not those who sleep over their rights.

In an investment deal, once the Investor and Investee agree upon the terms of arrangement, the Parties usually sign a Term Sheet. Upon execution of the Term Sheet, the Investor should initiate Technical, Financial, Legal, and Tax Due Diligence by entering into a Non-Disclosure Agreement with the Investee Company.

To understand the concept better, one may refer to Chander Kanta Bansal v. Rajinder Singh Anand, (2008) 5 SCC 117, which elaborates the meaning of diligence and due diligence as the reasonable caution, care, and effort expected from a prudent person while making decisions.

While wide warranties and obligations are generally imposed on the Investee Companies to safeguard an Investor’s rights, the decision on whether to proceed with an investment is heavily influenced by the outcome of the detailed due diligence exercise.

Therefore, the Acquiree, Investee should also be adequately prepared for due diligence, which can be achieved by simple steps such as conducting a mock due diligence to highlight issues early and rectifying them before the actual process. This works like a “net practice” before a real cricket match.

Types of Due Diligence Services :

The Due Diligence is of various types as follows:

Business, Commercial and Technical Due Diligence:

This in-depth review comprises of scrutiny of constitutional documents, board minutes and reports, books of account, tax returns, invoices, purchase orders, payroll statements, statutory filings, owned and leased property agreements, employee lists and agreements.

Financial Due Diligence:

Financial Due Diligence comprises of verification of books of account, financial statements, business transactions, tax filings, assessments of both direct and indirect tax of the Investee Company. To gain the financial view of the Investee Company, financials and records of at least past three years are mandatorily scrutinized.

Legal Due Diligence:

The scope of Legal Due Diligence focuses on scrutinizing the contracts and agreements entered into by the Investor Company, its Intellectual Property Rights (IPR) protection, any outstanding or ongoing litigations of the Investor Company or its Founders or key management person.

Benefits of Due Diligence Services:

a) Risk Identification – A thorough due diligence exercise uncovers hidden liabilities such as pending litigations, regulatory non-compliance, adverse orders, and contractual irregularities. By identifying these risks at the outset, investors are able to avoid unforeseen financial and legal exposure after the transaction.

b) Informed Decision-Making – The process provides a complete picture of the company’s financial statements, legal obligations, tax compliances, and operational practices. This allows the investor to decide based on verified facts rather than assumptions or incomplete disclosures.

c) Negotiation Leverage – Due diligence findings give the Investor or Acquirer strong grounds to renegotiate valuations, stagger consideration payments, or restructure deal terms. Issues discovered can also be classified as conditions precedent (CPs) or subsequent (CSs), thereby safeguarding the investor’s position in the definitive agreements.

d) Regulatory Compliance – The review ensures that the investee or target company is in conformity with applicable corporate, tax, labour, environmental, and sectoral laws. This protects the Investor or Acquirer from statutory penalties and shields the transaction from challenges on grounds of illegality or regulatory default.

e) Transparency and Trust – Conducting due diligence enhances confidence between parties by ensuring that all material facts are disclosed and verified. This reduces the possibility of post-transaction disputes and demonstrates that the deal is being undertaken on fair and reliable terms.

f) Business Continuity – Beyond legal and financial aspects, due diligence examines operational systems, employee contracts, and organizational culture. This assists the investor in identifying integration challenges early, ensuring smoother transition and long-term sustainability of the business.

Process of Due Diligence Services:

The process generally involves the following steps:

The documents and information of the Investee Company are sought by the Investor. It is imperative that the Investee Company should be able to produce the data in as less time as possible, ideally within 2-3 days period.

The entire data of the Investee should be made available in digital form through drive/drop box. The data can be masked for better protection of Investee Company’s confidentiality. In addition to accessing the digital data, the Investor team may also seek access to the physical files, visit and inspection of office premises, go-downs etc.

Once the information and access are provided, the investor team carries out thorough review and search mainly by way of: Review of soft copies of the documents and mapping the same with original hard copies. Review and verification of hard copies of agreements, licenses, certificates, compliance documents etc. Interaction with Promoters, employees, vendors, clients and other stakeholders of the Investee Company. Visit to and inspection of the office premises, go-downs, manufacturing units etc. of the Investee Company.

Upon review and verification of the data, the issues are identified with respect to any errors, omissions, noncompliance, violations with respect to various transactions and activities undertaken by the Investee Company till date.

Once the issues are identified, the same can be broadly segregated into, Mitigable Issues Non-Mitigable issues.