Conduct due diligence in India

The Dutch translation of due diligence is ‘with due care’. Unlike in the Netherlands, you as a buyer have no legal obligation to investigate in India. Nevertheless, it is crucial to thoroughly screen the background of the Indian party before engaging with your business partner. For example, you perform thorough due diligence of an Indian company (Private Limited).

Due diligence in India

Due diligence is typically performed prior to the purchase of a business or investment in a business. It is carried out by the acquirer or investor. In fact, it is sometimes referred to as an audit. However, a good due diligence process goes beyond just checking the financial statements. Due diligence helps make the right decision and mitigate the risks associated with the business transaction. Both parties typically enter into a nondisclosure agreement before initiating a business investigation. This is because sensitive, financial, operational, legal and regulatory information is revealed during the due diligence process.

Due diligence Documents

It is the responsibility of the seller or the shareholder to provide the documents and information to perform due diligence. It is no different in India. Typically, the documents below are required to perform due diligence with a private limited company. All of these documents need to be thoroughly reviewed by an expert in India to make an informed decision.

Important documents for due diligence in India

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

MCA Documentation Review

Much of a company’s due diligence can be performed through the Department of Corporate Affairs (MCA). The MCA regulates business affairs in India through the Companies Act, 2013 and other related laws and regulations. All companies in India must submit their shareholder finances and details to the MCA. The master data of each company can therefore be consulted via the MCA website. These documents have been submitted by the registered companies, as a legal obligation and approved by the Registrar of Companies (ROC). All documents submitted to the ROC are made available for payment. The information provided by the MCA is available for one day and is provided under the Right to Information Act. The information collected in this step includes the following:

  1. Financial statements;
  2.  Annual reports
  3.  Legal proceedings against the director of the company
  4.  Right of lien on the assets
  5.  Any problem with the non-compliance with laws/regulations.

This mainly concerns documents submitted after September 16, 2006. Before this date, documents in physical form were submitted to the ROC. These documents were kept with the respective ROC and are not accessible online. Besides, to inspect these documents, one must visit the appropriate ROC.

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Reputation

In addition to legal information, it is wise to investigate the reputation of the company in the market. How is the company generally known to customers, suppliers, employees and other stakeholders? Does the company have a good and reliable name in the market? Does the company have a good payment reputation? Has the company previously entered into other strategic partnerships and how did that go? Besides the own website of Indian companies, the professional federation of the sector in which the company is active? These can be interesting sources of information. In addition, there are also a number of important national business organizations in India. These often have regional branches. The main ones are:

The Credit Information Bureau (India) Limited (CIBIL) website allows you to view the credit history of any person, company, or partnership. Any disputes or cases brought against the company may be checked on the website. In fact, you can also see whether they have ever been declared as a wilful defaulter in the past.

This article is translated from the original Dutch from our partner India Connected.