Conducting Due Diligence on an Indian Company

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By Ankit Shrivastava and Chris Devonshire-Ellis, Dezan Shira & Associates India Practice

Sept. 16 – Due diligence is used to examine and assess a business opportunity. The term itself describes a general duty to apply care in any transaction, and examines details into all relevant aspects of the past, present, and predictable future of the business of a target company.

While it sounds like an impressive legal term, due diligence really translates into basic rational success factors such as “thinking things through” and “doing your homework.” The good news is – it doesn’t have to be expensive.

There are two main reasons for conducting due diligence:

When trading with an Indian company

  • Verification that the business is what it appears to be
  • Identify potential “deal destroyer” defects in the target and avoid a bad business transaction
  • Track records in paying bills, creditworthiness and supplier worthiness

When partnering with an Indian company

  • Same as above, but also including:
  • Examination of legal scope for compatibility purposes
  • Gain information that will be useful for valuing assets, defining representations and warranties, and/or negotiating price concessions
  • Verification that the transaction complies with investment or acquisition criteria

Accordingly, due diligence examinations can in large be structured to the interested party’s specific requirements.

Companies requesting due diligence usually create a checklist of needed information. This may be available from the various Indian public records offices, or if more detailed, may need the management of the target company to arrange some of the information. Financial statements, filed accounts, basic credit checks and checks of legal status, ownership, directors and scope of business can all be readily accessed.

Beyond this, and especially for partnering in projects or joint ventures, business plans and other documents should be reviewed. Additionally, interviews and site visits can be conducted. More thorough research can also be conducted with external sources – including customers, suppliers, industry experts, trade organizations, market research firms, and so on.

The quantity of due diligence one conducts is based on various factors, including prior experience, the size and frequency of business transactions, the likelihood of closing a transaction, tolerance for risk, time constraints, cost factors, and resource availability. It is impossible to learn everything about a business, but it is important to learn enough such that you lower your risks to the appropriate level and make good, informed business decisions.

There are certain items which are necessary to check in a company, its subsidiaries and joint ventures, and others. Not all of these may be needed for basic checks, but we do provide a complete service upon the items required:

  • Corporate book/records
  • Financial information
  • Employee material
  • Contingent liabilities
  • Contract, agreement and other agreements
  • Proprietary rights
  • Plant, property and equipments
  • Insurance
  • Sales and marketing

Underneath the corporate book/records above, there are various sub sections as follows:

Charter and by-laws:

  • Original certificate of incorporation of the company and all amendments thereto
  • By-laws of the company, and any amendments
  • Charter and by-laws of each wholly or partially owned subsidiary of the company and of any joint venture involving the company or any of its subsidiaries
  • Closing record books for any material corporate transactions (e.g. reorganization into holding company structure, joint ventures, etc.)
  • Other relevant legal documents governing the organization and management of the company

Minutes of meetings and unanimous written consents (since date of incorporation) of the company, any of its subsidiaries and any joint venture involving the company or any of its subsidiaries, of the following:

  • Shareholders
  • Board of directors
  • Executive committee
  • Audit committee
  • Any other committees
  • Specific authorizing resolutions
  • Material (including financial projections), if available, distributed to the Board of Directors, or any committees thereof, in connection with the most recent meetings of the board or such committees

Officer and director questionnaires prepared in connection with the most recent proxy statement of the company.

Shareholders

  • Shareholder list and other stock records
  • Any shareholder agreements, voting trusts, proxy agreements, escrow agreements or similar arrangements
  • Any stock purchase agreements with shareholders
  • Any agreements relating to preemptive rights or other preferential rights of shareholders
  • Any agreements restricting the sale or other disposition of capital stock
  • Any agreements or plans concerning outstanding or proposed stock options, warrants or rights, including any employee stock ownership plans
  • Any agreements relating to registration rights of shareholders
  • Any trust agreements or other documents if shares are held in fiduciary capacity

Qualifications and registrations

  • List of jurisdictions where qualified as foreign corporation or licensed to do business
  • Any other material governmental qualifications, registrations, business licenses, permits, authorizations, exemptions or security clearances, including those pursuant to Federal or state antitrust, environmental, nuclear regulatory, public utility or public service or securities laws and regulations

Reports to Shareholders

  • Annual reports
  • Quarterly and special interim reports since most recent annual report

By following a combination of the above criteria, and thus designing your own “need to know” list, we can provide the relevant details regarding a company established in India. Such data is important when defining the suitability of suppliers, creditors, or partners in business in India.

Dezan Shira & Associates can provide due diligence services on companies in India. The practice maintains five offices in India and can be reached at india@dezshira.com. Please also visit the practice at www.dezshira.com.

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