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Due Diligence Of Company

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About Due Due Diligence Of Company

Due Due Diligence is generally conducted by investors to check for regulatory and process compliance by the company on a regular basis. Due diligence of a company is generally performed before any private equity investment, business sale, bank loan funding, etc.

In this process, the legal, financial and the compliance aspects of the company are usually reviewed and documented. It is basically the process of examining all the material facts of a deal or a contract before a legal contract is signed by both the parties. It is not just limited to buyers, even sellers can perform a due diligence on the buyer. Due diligence consist of factual, background, legal and accounting checks. This done to ensure that there are no surprises after a deal is done.

Documents Required

  • Charter documents of the company
  • Notices, Attendance Sheets & Board Meeting Minutes
  • Notices, Attendance Sheets & General Meeting Minutes
  • Statutory Registers
  • Legal Agreements executed by the Company
  • RBI Related documents


MCA Documents

Most of the due diligence of a company begin with the Ministry of Corporate Affairs. On the website of the Ministry of Corporate Affairs, the master data about a company is made publicly available. Further, with payment of a small fee, all documents filed with the Registrar of Companies is made available to anyone. This information from the MCA website is generally verified first. The information and documents gathered in this step include:

Company Information

The date of Incorporation

Authorised capital

The paid up capital

The date of the last annual general meeting

The date of the last balance sheet

Status of the company

Director Information

The directors of the company

The date of appointment of directors

Charges Registered

  • The details of secured lenders of the company
  • The quantum of secured loans


  • The certificate of incorporation
  • The memorandum of association
  • Articles of association

In addition to the above, the financial information of the company and other filings with the MCA pertaining to various aspects of the company can be downloaded and reviewed. The review of MCA documents of the company would provide a good overview of the company to the person performing the due diligence.

Articles of Association

It is imperative to review the articles of association of a company during the due diligence process to establish the different classes of equity shares and their voting rights. The articles of association of a company can restrict/limit the transfer of shares of a company. Therefore, the articles of association should be studied judiciously to ascertain the procedure for transfer of shares.

Statutory Registers of Company

Under Companies Act, 2013, a private limited company is required to maintain various statutory registers relating to the share transfer, share allotment, board meetings, board of directors, etc., Therefore, the statutory registers of a company must be reviewed to obtain and validate the information pertaining to the directorship and the shareholding.

Book of Accounts and Financial Statements

Companies are required to maintain the book of accounts along with detailed transaction information by the Companies Act, 2013. The detailed financial transaction information must be audited and verified against the financial statements that are prepared by the company. Some of the matters relevant during the business financial due diligence process are:

  • Verification of the bank statements
  • Verification and valuation of all the assets and the liabilities
  • Verification of the cash flow information
  • Verification of all the financial statements against transactional information

Taxation Aspects

The taxation aspects of a company must be thoroughly checked during the due diligence process. This helps to ensure that there are no unforeseen/unexpected tax liabilities created on the company in a future date. The following aspects relating to the taxation aspect of a company must be checked:

  • The income tax return filed
  • The income tax paid
  • The calculation of the income tax liability by the company
  • ESI / PF returns filed
  • ESI / PF payments
  • ESI / PF payment calculation
  • The GST/service tax / VAT returns filed
  • The GST/service tax / VAT payments
  • Basis for the GST/service tax / VAT payment calculation
  • TDS returns
  • TDS payments
  • TDS calculations

Legal Aspects

A complete legal audit of the company has to be performed by a legal practitioner to establish if there are any pending/incomplete legal actions, suits by or against the company and the liability in each. Further, the following aspects must be checked during the legal due diligence:

  • Legal due diligence for all the real estate properties of the company.
  • No objection from a secured creditor for the transfer of company.
  • Verification of the court documents and the court filings, if any

Operational Aspects

It is important to acquire a thorough understanding of the business operations, business model and operational information during the process. The review of the operational aspects must be all-encompassing including the site visits and employee interviews. Following are the aspects that must be covered and documented in the operational aspects review:

  • Business model
  • Number of employees
  • Number of customers
  • Production information
  • Vendor information
  • Machinery information
  • Utilities


Valuation Multiples

Now it's time to get to the nitty-gritty of price-to-earnings (P/E) ratio, price/earnings to growth (PEGs) ratio and price-to-sales (P/S) ratio and the like, for both the company and its competitors. Note any large discrepancies between competitors for further review. It's not uncommon to become more interested in a competitor during this step, but still look to follow through with the original pick.
P/E ratios can form the initial basis for looking at valuations. While earnings can and will have some volatility (even at the most stable companies), valuations based on trailing earnings or on current estimates are a yardstick that allows instant comparison to broad market multiples or direct competitors. Basic "growth stock" versus "value stock" distinctions can be made here, along with a general sense of how much expectation is built into the company. It's generally a good idea to examine a few years' worth of net earnings figures to make sure most recent number (and the one used to calculate the P/E) is normalized, and not being thrown off by a significant one-time charge or adjustment.
Investors in real estate sometimes examine the cost to replace a building as compared to the value of the entire property. Not to be used in isolation, the P/E should be looked at in conjunction with the price-to-book (P/B) ratio, the enterprise multiple, and the price-to-sales (or revenue) ratio. These multiples highlight the valuation of the company as it relates to its debt, annual revenues, and balance sheet. Because ranges in these values differ from industry to industry, reviewing the same figures for some competitors or peers is a critical step.
Finally, the PEG ratio brings into account the expectations for future earnings growth, and how it compares to the current earnings multiple. In some areas this ratio may be less than one, while in others it may be as much as 10 or higher. Stocks with PEG ratios close to one are considered fairly valued under normal market conditions.

Balance Sheet Exam

Many articles could easily be devoted to just the balance sheet, but for our initial due diligence purposes, a cursory exam will do. Look up a consolidated balance sheet to see the overall level of assets and liabilities, paying special attention to cash levels (the ability to pay short-term liabilities) and the amount of long-term debt held by the company. A lot of debt is not necessarily a bad thing, especially depending on the company's business model. But what are agency ratings for its corporate bonds? And does the company generate enough cash to service its debt and pay any dividends? Some companies (and industries as a whole) are very capital intensive, while others require little more than the basics of employees, equipment, and a novel idea to get up and running. Look at the debt-to-equity ratio to see how much positive equity the company has going for it; you can then compare this with the competitors to put the metric into better perspective. In general, the more cash a company generates, the better an investment it's likely to be.
If the "top line" balance sheet figures of total assets, total liabilities and stockholders' equity change substantially from one year to the next, try to determine why. Reading the footnotes that accompany the financial statements and the management's discussion in the quarterly/annual report can shed some light on the situation. The company could be preparing for a new product launch, accumulating retained earnings or simply whittling away at precious capital resources. What you see should start to have some deeper perspective after having reviewed the recent profit trends.

Frequently Asked Questions

Yes, it is appropriate to know the legal compliances made by the Company upto date before entering into Shareholders agreement with the Company.

No worries, we will provide the solutions on case to case basis.


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