Due diligence is the investigation or exercise of care that Investor is expected to take before entering into Shareholders Agreement. It can be a legal obligation, but the term will more commonly apply to voluntary investigations.
It is an investigation, audit, or review performed to confirm the facts of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party. For individual investors, due diligence often means studying annual reports, SEC filings, and any other relevant information about a company and its securities. The objective is to verify the material facts related to the purchase of the investment, as well as to understand whether the investment fits an individual’s return requirements, risk tolerance, income needs, and asset allocation goals.
Other areas that would most likely be explored include:
This would be expected to consider areas such as:
The Due Diligence report helps one understand how the company plans to generate additional earnings (monetary as well as non-monetary). It serves as a ready reckoner for understanding the state of affairs at the time of purchase/sale, etc.
- Memorandum of Association of the company
- Articles of Association of the Company
- Certificate of Incorporation
- Registered Office Proof
- Shareholding Patterns
- Financials of the Company
- Bank statements of the Company
- PAN Card of the Company
- TAN Card of the Company
- Statutory Registers
- Intellectual Property Registration Proofs
- Copies of all the License/ Registration acquired by the company
- Employee Records
- Income Tax Returns
- TDS Returns
- Material Agreements
- Any misconduct or inspection order copy
Selection of type of Due Diligence required
Preparation of Questionnaire
Calculation of time frame required for Due Diligence
Collection of material information from the Target Company
Analysis of the information gathered
Interaction with the management of the company and its personnel
Preparation of the Due Diligence Report
Discussion of the Report with the management of the company
Finalization of the Due Diligence Report
Issuance of the Due Diligence Report.
Law does not mandate the Due Diligence process before making any investments so it is the complete wish of the investor to conduct the Due diligence in order to satisfy himself.
Legal Due Diligence covers the legal aspects like employment agreements, Intellectual Properties, labour laws, corporate laws. Financial Due Diligence covers the investigation of items mentioned in the financial statements of the company.
Any employee of the investor firm or third party agencies having detailed understanding of finance and legal matters and conduct this Due Diligence exercise.
The Due Diligence report helps the investor to understand the compliance health of company along with accuracy of financials being submitted in pitch deck.
Due Diligence requires independence so ideally it should not be the employee or auditor of investee company.
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