[India] Conducting due diligence: a short guide for foreign investors

Due diligence refers to the analysis done by investors before an acquisition, investment, or a partnership in order to identify if there are any risks or any concerns with the business. Due diligence is usually conducted in the case of mergers and acquisitions, partnerships, joint ventures, or an IPO. India Briefing offers this guide to conducting due diligence in India for foreign investors.

Due diligence provides the investors with complete background information on a business, such as liabilities, discrepancies, reputation, and financial situation of the business that helps investors make an informed decision. There are several types of due diligence including financial, legal, tax, HR and environmental to name a few. 

The purpose of due diligence is not to learn everything about the business, but to gather enough information to understand the business opportunity credibly. Essentially, due diligence performs a Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis to present a holistic view of the business to potential investing companies. 

Conducting due diligence in India 

Simply put, due diligence helps foreign companies decide if they should go ahead with their investment or financial deal, or negotiate terms and conditions further, or withdraw their interest from the deal. 

Due diligence in India is recommended for all businesses especially in case of a joint venture. Ideally, while conducting due diligence in India, companies should review the following points: 

Personnel: The terms and conditions of employment, as well as the experience of the staff, should be reviewed. Also, review commercial management, including customer care, research and development, and marketing. 

Financial records: This should be one of the focus areas for any foreign company looking to invest in a business, company, or a joint venture. Investors should study the company books and records, accounting, and bookkeeping methods. It is important to understand the debt on the business, and the relationships with banks and lenders, as well as the past and project cash flow of the company. 

Services: Review the products and services offered by the business, with a focus on prices and how it compares to industry standards. 

Assets: Following a thorough study of the financial records, a review of company assets is another important focus area for foreign companies looking to invest in an Indian business. The lease and deeds that company has signed and the value of property and equipment should be verified while conducting due diligence. Review the company’s property and equipment, including IT systems and technology. 

Business operations: Through due diligence, get an understanding of the company’s location, inventories, suppliers, management, customer relations, and insurance policies. 

Legal: Pending or ongoing litigation can hamper a company’s value and reputation. Therefore, investors should review the company’s litigation, contracts, orders, and environmental issues. 

Since India presents a complex economic, regulatory, and legal landscape for doing business, it is essential that foreign companies conduct due diligence when they plan to trade with an Indian company. 

It should be verified that the business is what it appears to be. This is easily identifiable in the preliminary stage of due diligence; however, in some cases more in-depth due diligence may be needed. 

Scope of due diligence 

The scope of a due diligence check depends on the sector of the company. Like in the case of a manufacturing company, the key focus of the due diligence assessment will be around the licenses and approvals obtained by the business, and their operational and environmental compliance. 

While the due diligence focus might differ from sector to sector, every process includes evaluation of the company’s financial and legal situation. 

Based on the investor’s request, a due diligence assessment to check if the company was involved in bribery or corrupt practices can also be conducted. 

Usually, the scope of due diligence revolves around reviewing the following documents: 

• Corporate records and filings with the Registrar of Companies (RoC) to check if the company is in compliance with the provisions of the Companies Act, 2013; 
• Foreign exchange filings with the Reserve Bank of India (RBI) to ensure that any prior investment was in compliance with the applicable laws; 
• Material contracts with customers, suppliers, and lenders to understand the key terms; 

• Licenses, registrations, and permits obtained by the company for its operations, and to check their compliance with the applicable laws; 
• Pending or ongoing litigation involving the company, including proceedings or investigations by regulator; 
• Labour and employment documents such as agreement with employees to check if the company is in compliance with the applicable labour laws; 
• Check if the intellectual property of the company is valid and registered; and 
• Ancillary documents, including the ones related to information technology, and insurance policies obtained, among others. 

Due diligence process and checklist 

The following documents are needed while conducting due diligence for any business or company: 

• Memorandum of Association; 
• Articles of Association; 

• Certificate of incorporation; 
• Shareholding pattern; 
• Financial statements; 
• Income tax returns and balance sheets; 
• Bank statements; 

• Tax registration certificates; 
• Tax payment receipts; 
• Statutory registers; 
• Property documents; 
• Intellectual property registration or application documents; 

• Utility bills; 
• Employee records; 
• Operational records; 
• Bank loans; 
• Audit paperwork; 

• Existing contracts with clients and staff; 
• Lease agreements; and 
• Partnership agreements. 

Please note that these are only some of the documents that are needed during the due diligence process. The due diligence process can be exhaustive and extensive. 

To start, data can be downloaded from the Ministry of Corporate Affairs (MCA) website, including the company’s financial information and corporate filings with the ministry. 

With a small fee, access to all documents filed by the company with the Registrar of Companies are also available. Here are some of the documents that can be gathered from the ministry’s website: 

• Details of incorporation of the company; 
• Certificate of incorporation; 
• Authorized and paid-up capital of the company; 
• Date of last annual general meeting; 

• Information about the directors of the company; 
• Secured loans against the company; 
• Memorandum of Association; and 
• Articles of Association. 

Due diligence is not restricted to understanding the finances of the company, but also includes an assessment of its operations, intellectual property rights, tax and regulatory compliance, legal situation, and the company’s HR processes. 

The process of conducting due diligence usually takes about four to six weeks, but the process might take longer if the investors have any specific requests.

This article was first published by India Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in  China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to info@dezshira.com for more support.   

Due diligence refers to the analysis done by investors before an acquisition, investment, or a partnership in order to identify if there are any risks or any concerns with the business. Due diligence is usually conducted in the case of mergers and acquisitions, partnerships, joint ventures, or an IPO. India Briefing offers this guide to conducting due diligence in India for foreign investors.

Due diligence provides the investors with complete background information on a business, such as liabilities, discrepancies, reputation, and financial situation of the business that helps investors make an informed decision. There are several types of due diligence including financial, legal, tax, HR and environmental to name a few. 

The purpose of due diligence is not to learn everything about the business, but to gather enough information to understand the business opportunity credibly. Essentially, due diligence performs a Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis to present a holistic view of the business to potential investing companies. 

Conducting due diligence in India 

Simply put, due diligence helps foreign companies decide if they should go ahead with their investment or financial deal, or negotiate terms and conditions further, or withdraw their interest from the deal. 

Due diligence in India is recommended for all businesses especially in case of a joint venture. Ideally, while conducting due diligence in India, companies should review the following points: 

Personnel: The terms and conditions of employment, as well as the experience of the staff, should be reviewed. Also, review commercial management, including customer care, research and development, and marketing. 

Financial records: This should be one of the focus areas for any foreign company looking to invest in a business, company, or a joint venture. Investors should study the company books and records, accounting, and bookkeeping methods. It is important to understand the debt on the business, and the relationships with banks and lenders, as well as the past and project cash flow of the company. 

Services: Review the products and services offered by the business, with a focus on prices and how it compares to industry standards. 

Assets: Following a thorough study of the financial records, a review of company assets is another important focus area for foreign companies looking to invest in an Indian business. The lease and deeds that company has signed and the value of property and equipment should be verified while conducting due diligence. Review the company’s property and equipment, including IT systems and technology. 

Business operations: Through due diligence, get an understanding of the company’s location, inventories, suppliers, management, customer relations, and insurance policies. 

Legal: Pending or ongoing litigation can hamper a company’s value and reputation. Therefore, investors should review the company’s litigation, contracts, orders, and environmental issues. 

Since India presents a complex economic, regulatory, and legal landscape for doing business, it is essential that foreign companies conduct due diligence when they plan to trade with an Indian company. 

It should be verified that the business is what it appears to be. This is easily identifiable in the preliminary stage of due diligence; however, in some cases more in-depth due diligence may be needed. 

Scope of due diligence 

The scope of a due diligence check depends on the sector of the company. Like in the case of a manufacturing company, the key focus of the due diligence assessment will be around the licenses and approvals obtained by the business, and their operational and environmental compliance. 

While the due diligence focus might differ from sector to sector, every process includes evaluation of the company’s financial and legal situation. 

Based on the investor’s request, a due diligence assessment to check if the company was involved in bribery or corrupt practices can also be conducted. 

Usually, the scope of due diligence revolves around reviewing the following documents: 

• Corporate records and filings with the Registrar of Companies (RoC) to check if the company is in compliance with the provisions of the Companies Act, 2013; 
• Foreign exchange filings with the Reserve Bank of India (RBI) to ensure that any prior investment was in compliance with the applicable laws; 
• Material contracts with customers, suppliers, and lenders to understand the key terms; 

• Licenses, registrations, and permits obtained by the company for its operations, and to check their compliance with the applicable laws; 
• Pending or ongoing litigation involving the company, including proceedings or investigations by regulator; 
• Labour and employment documents such as agreement with employees to check if the company is in compliance with the applicable labour laws; 
• Check if the intellectual property of the company is valid and registered; and 
• Ancillary documents, including the ones related to information technology, and insurance policies obtained, among others. 

Due diligence process and checklist 

The following documents are needed while conducting due diligence for any business or company: 

• Memorandum of Association; 
• Articles of Association; 

• Certificate of incorporation; 
• Shareholding pattern; 
• Financial statements; 
• Income tax returns and balance sheets; 
• Bank statements; 

• Tax registration certificates; 
• Tax payment receipts; 
• Statutory registers; 
• Property documents; 
• Intellectual property registration or application documents; 

• Utility bills; 
• Employee records; 
• Operational records; 
• Bank loans; 
• Audit paperwork; 

• Existing contracts with clients and staff; 
• Lease agreements; and 
• Partnership agreements. 

Please note that these are only some of the documents that are needed during the due diligence process. The due diligence process can be exhaustive and extensive. 

To start, data can be downloaded from the Ministry of Corporate Affairs (MCA) website, including the company’s financial information and corporate filings with the ministry. 

With a small fee, access to all documents filed by the company with the Registrar of Companies are also available. Here are some of the documents that can be gathered from the ministry’s website: 

• Details of incorporation of the company; 
• Certificate of incorporation; 
• Authorized and paid-up capital of the company; 
• Date of last annual general meeting; 

• Information about the directors of the company; 
• Secured loans against the company; 
• Memorandum of Association; and 
• Articles of Association. 

Due diligence is not restricted to understanding the finances of the company, but also includes an assessment of its operations, intellectual property rights, tax and regulatory compliance, legal situation, and the company’s HR processes. 

The process of conducting due diligence usually takes about four to six weeks, but the process might take longer if the investors have any specific requests.

This article was first published by India Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in  China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to info@dezshira.com for more support.