Due Diligence Note

Due Diligence
1. Due diligence: meaning
When a buyer acquires a company, the buyer inevitably acquires the repute of the company.
The buyer requires being cognisant of the legal state of the company and the potential risks
that may surface in relation to the company in the future. Therefore the requirement of due
diligence.
Due diligence is a process of thorough investigation, collection and analyzation of data of a

particular business/ company for identifying all essential truths and potential liabilities to
enable the buyer to make an informed decision of the legal risks.
2. Objective of due diligence
The objective of due diligence is to assess the potential benefits and risks of selling or buying
another business or assets. The diligence focuses on the following key aspects of the
business/assets
i. Status
At the beginning of a legal due diligence, Advocates/Tax consultants/Advisors are

seeking to understand the present status of the business. This includes reviewing
documents, policies, processes etc seeking clarifications for verifying compliance
with applicable laws.
Determining status helps to value a company and find ways to potentially improve
that value by taking corrective action/s to the extent possible.
ii. Consequences
The legal advisors/tax consultants must identify non compliances, material issues,
potential risks and litigation/s if the proposed transaction is consummated.
3. Due diligence: Process
A legal due diligence investigation takes place in three stages.
1. Preparation
2. Investigation & Scope
3. Findings
i. Preparation
This stage of the due diligence is to set priorities. Due diligence is often limited by time and
budget pressures. It's important to prioritize what information is relevant and essential.
ii. Investigation & Scope

The most time-consuming part of the process is investigation or collecting/gathering data
During this stage, a questionnaire with a detailed list of documents is prepared and circulated
to the company for commencing the due diligence process. The list of documents requested is
likely be more documents than are actually necessary. However this is necessary for creating
a full picture, which means being thorough in gathering data.
A team of lawyers review all documents, seek clarifications, discuss key findings with the
company. The findings post receipt of clarifications from the company, will formulate a legal
analysis for determining whether or not to proceed with the proposed transaction.
Scope of due diligence depends on the sector in which the company operates. For e.g. if a
company is engaged in the services sector, the material agreements entered into by it, would
be important. On the other hand if a company is engaged in manufacturing sector, the
licences and approvals obtained by the company, operational and environmental compliances,
will comprise key elements of the due diligence.
Normally the scope of a legal due diligence includes review of:
a. the corporate records and filings maintained or made with the registrar of companies
to ensure compliance with the provisions of the Companies Act;
b. foreign exchange filings (if applicable) made with the RBI to ensure that any prior
investment was in compliance with the applicable laws;
c. material contracts with customers, suppliers, lenders, etc, or in relation to real

property, to understand the key terms, and any restrictions, requirements of consent,
intimation or otherwise that are relevant for the proposed transaction;
d. licences, registrations and permits obtained for the conduct of operations to ensure
their validity and sufficiency, and to evaluate their compliance with the requirements
under the applicable laws;
e. pending or threatened litigations involving the company, including proceedings or

investigations by regulators;
2
f. labour and employment-related documents, including agreements with employees,
and policies adopted to evaluate compliance with the requirements under the
applicable labour laws;
g. Intellectual Property (“IP”), to ensure that the IP critical to the business is duly
registered;
h. related-party transactions, which form a key aspect of the legal, financial and tax due
diligence process in India;
i. ancillary documents, including those pertaining to information technology, and

insurance policies obtained in connection with the business, etc. and
j. investigations in relation to bribery, corrupt practices, anti-money laundering etc.
Sellers do not usually provide due diligence reports to prospective buyers. However, in the case of an
acquisition through an auction or bid process that involves multiple bidders, the seller may provide a
vendor due diligence report to the bidders.
Even in such cases, reliance by the bidders on the due diligence report provided by the seller is
negotiated. However, with respect to key issues identified in the vendor due diligence report, areas in
which the information is inadequate or areas that are important to the bidder, the bidder may conduct
a confirmatory due diligence exercise of its own, or may request further information from the seller.
Findings
The findings of a due diligence are reviewed on completion of the investigation. The due diligence
findings will be presented in a concise manner by summarising important aspects of all documents
reviewed, highlighting key issues, potential risk/s and recommending solution/s if any.

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Due Diligence

1. Due diligence: meaning

Due diligence is a process of thorough investigation, collection and analyzation of data of a

2. Objective of due diligence

At the beginning of a legal due diligence, Advocates/Tax consultants/Advisors are

3. Due diligence: Process

A legal due diligence investigation takes place in three stages.

2. Investigation & Scope

ii. Investigation & Scope

Normally the scope of a legal due diligence includes review of:

c. material contracts with customers, suppliers, lenders, etc, or in relation to real

e. pending or threatened litigations involving the company, including proceedings or

i. ancillary documents, including those pertaining to information technology, and

j. investigations in relation to bribery, corrupt practices, anti-money laundering etc.

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