Due Diligence

DUE DILIGENCE

Due diligence is the process by which all the substantial facts of any contract or agreement or a deal are examined before a legal contract is signed by both the parties. Put differently, it could also mean verifying the accuracy of a statement. The term, due diligence can be used in a lot of contexts, but it is generally used in reference to business transactions such as mergers and acquisitions, joint venture, securitization etc.

The scope of due diligence typically depends on the nature of the transaction, proposed to be undertaken. It is not limited to the person who is buyer, but anyone even the seller can perform a due diligence on the buyer. It consists of background, legal, accounting and factual checks. The basic reason for doing such an exercise is to make sure that there are no such facts which remain untouched after signing of the deal. Companies also do due diligence when a business is looking to add a vendor, purchase commercial property or hire a new employee.

The information collected is reviewed so that a final decision is made. Either parties do due diligence after both the seller and the buyer have agreed in principle to a deal, but before signing the agreement which binds the parties. Due diligence also helps in understanding the reason for selling and buying the business. The information which is collected for taking a final decision is highly sensitive and confidential.

As part of the due diligence process, the party who is investing the money should also review the assets of the business, knowing exactly what's for sale will help the buyer in valuing the business accurately. Due diligence on any business is performed before purchasing a Company. Due diligence is an art of evaluation of a business transaction through various analysis.

Areas of due diligence:

  • IPO, FPO, Right issue, ESOPs, Preferential allotment
  • Takeovers and acquisitions
  • Setting up of business units in India and abroad
  • Compliance and listing agreement
  • Internal audit and depository participant
  • IDR, GDR
  • Legal due diligence
  • Compliance of listing agreement