Company Due Diligence meaning:

Due diligence refers to an investigation or an audit performed usually before an acquisition, investment, business partnership or bank loan, etc, to check the compliance with financial, legal and environmental reports to validate the business. All such investigation and results of the audit will be summarized in a Due Diligence report.

Company due diligence for startups is most essential when the startups are in the funding round. Here we have consolidated the Company Due Diligence checklist that is to be ensured for compliance.

Due Diligence for a new company:

Any business must propose it’s various documents to the buyer or the banker before selling the company or applying for the loan for the due diligence processes. Due diligence purpose is to ease the buyer(investor) or the banker’s decision in funding/purchasing the company. Both parties must ensure the signing of a Non-Disclosure Agreement(NDA) before furnishing the confidential financial, legal and regulatory documents to the opposite party for the due diligence process.

Company/Business due diligence process:

1.Terms of due diligence:

The terms for performing the due diligence process are mutually agreed upon between the parties.

2.Due diligence-operations:

Data and records about the operation of the business are gathered and documented.

Eg: Customer validation, raw material, etc.

3.Due diligence-Finance:

Financial Data such as revenue, sales, profit, tax, assets, liabilities, etc, are collected, verified and documented.

4.Due diligence-Legal:

The legal documents and regulatory compliances are validated and documented.

Eg. Patents,tax payments, registrations etc.

5. Due diligence report:

The results of all the above processes are consolidated and shared with the buyer/banker and with the seller.

The buyer/banker may raise further queries on the process if any

Documents for company due diligence:

The following are the documents to be provided by the company for the company due diligence process.

  • Memorandum of Association
  • Articles of Association
  • Intellectual Property Registration or Application Documents
  • Certificate of Incorporation
  • Shareholding Pattern
  • Financial Statements
  • Tax Payment Receipts
  • Statutory Registers
  • Property Documents
  • Utility Bills
  • Employee Records
  • Operational Records
  • Bank Statements
  • Tax Registration Certificates
  • Income Tax Returns

A Company Due Diligence checklist with the list of documents to be reviewed is presented below

Documents of MCA:

To begin with the due diligence process, the data from the Ministry of Corporate Affairs is used. MCA provides the master data of all the companies publicly. All the documents filed with the registrar of companies(ROC) will be made available to anyone with the payment of a small fee. The documents which can be assessed through the MCA website are:

  • Company Information
    • Date of Incorporation
    • Authorised Capital
    • Paid-up Capital
    • Date of Last Annual General Meeting
    • Date of Last Balance Sheet
    • Status of the Company
  • Director Information
    • Directors of the Company
    • Date of Appointment of Directors
  • Charges Registered
    • Details of Secured Lenders of the Company
    • Quantum of Secured Loans
  • Documents
    • Certificate of Incorporation
    • Memorandum of Association
    • Articles of Association

In addition to the above documents, other documents like financial documents and various other compliance certificates can also be downloaded for review.

Articles of Association:

Article of Association will provide a detailed view of the class of shares and the voting rights of the investors. The article of association of a company may say the shares are not transferable. Make sure the shares are transferable.

Statutory registers of the company:

A private limited company are ascertained by the Companies Act,2013 to maintain various documentation related to Share transfers, share allotments, the board of directors etc,.The review of statutory registers are necessary to ensure the shareholding and directors.

Book of Accounts and Financial Statements:

All the financial statements of the company are checked and duly verified with supporting documents. Following are some considerations for due diligence:

  • Bank statements
  • Assets and liabilities
  • Cash flow information
  • All financial statements against transactional information

Tax review:

All the tax liabilities of the company to be reviewed in order to avoid any future mishappenings. There are various factors taken into account for the tax review and they are:

  • Income tax return filed
  • Income tax paid
  • Calculation of income tax liability by the company
  • ESI / PF Returns Filed
  • ESI / PF Payments
  • ESI / PF Payment Calculation
  • Service Tax / VAT Returns Filed
  • Service Tax / VAT Payments
  • Basis for Service Tax / VAT Payment Calculation
  • TDS Returns
  • TDS Payments
  •  TDS Calculations

Legal Aspects:

The legal due diligence involves the check of any liabilities and appeals to lawsuit/case/charges by the company. It is usually done by a Law professional.

  • Legal compliance of all the real estate properties owned by the company.
  • No objection from Secured Creditor for transfer of the company.
  • Verification of court documents and court filings.

Operational Aspects:

A complete understanding of the business model and its operation is acquired in this stage. It may also involve company visits, employee interviews, meet with board directors etc. The following criteria to be covered and documented.

  • Business Model
  • Number of Customers
  • Number of Employees
  • Production Information
  • Machinery Information
  • Vendor Information
  • Utilities

Various business models and operations demand various other factors to look into, which should be also considered while assessing the operational due diligence.

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Qualification: MBA
Company: Topfilings India Pvt Ltd
Location: Delhi, New Delhi, IN
Member Since: 21 Mar 2020 | Total Posts: 9
We are a team of CA, CS, MBA, LLB professionals who have more than 20 years experience in the field of Finance, Compliances, Legal and Accounts work with an objective of to provide our experiences and services at a very affordable cost to young and growing entrepreneurs View Full Profile

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June 2021