What is Due Diligence and How It Is Performed in India?

Businesses in India conduct due diligence before getting involved in large-scale transactions or dealings at domestic and international levels. Check out this post to understand what this process is and how it is performed in India.

In the corporate world, due diligence is commonly associated with large-scale transactions or dealings, such as business sale, M&A, IPOs, company restructuring, bank loans, and private equity investment. In simple words, it is the process of auditing or investigating a potential deal before moving forward.

The primary aim of the due diligence process in India is to evaluate the liabilities, assets, and risks of a business so that the purchaser, investor, or lender is able to make an informed decision.

The extensive process involves reviewing or auditing all the vital aspects, including the finances, administration, assets, human resources, taxes, intellectual property, contracts, legal and environmental impact of a business. Here is a quick overview of how due diligence is performed in India-

How Is Due Diligence Performed in India?

The aspects of a business evaluated in the due diligence process vary between different deals or transactions, companies, strategies, and specific goals of buyers or investors. However, every due diligence shares a few similarities.

Here is a quick overview of a basic due diligence process-

Financial Analysis

In this step, the financial records of a company are thoroughly audited by legal and financial experts. This helps the buyer or investor ensure that the facts stated by the target company in their CIM (Confidential Information Memorandum) are accurate. The financial analysis also helps the buyer or investor gauge the health of the company’s overall finances and assets.

Document Inspection

The target company is asked to provide necessary documents which can help the buyer or the investor perform the audit. Surveys and interviews are also conducted with the seller company to thoroughly examine the facts mentioned in the company documents. All the information is then verified to ensure that the company follows correct business practices and legal compliances.

Offering Formation

After all the relevant documents and information are collected, teams and individuals collaborate to evaluate and share their findings. Professional analysts use the information for performing company valuation. Risk analysis is also performed to forecast risks associated with the target company or the transaction. This helps the buyer make the right offer to the target company.

Due Diligence Report

All the findings of the due diligence process are then used for creating the due diligence report. There are generally two types of reports- long-form reports and red flag reports. While the long-form report mainly involves information related to business compliance, the red flag report includes details about the potential risks of the deal or transaction.

Once the due diligence report is generated, it is shared with the target company, which confirms the report’s accuracy and completeness.

Performing Business Due Diligence in India

The due diligence process can be time-consuming, complex, and even expensive at times. Nevertheless, it is a critical aspect of making informed business decisions.

While some prefer conducting due diligence in-house, most businesses prefer working with reputed due diligence advisors. As professional advisors have vast expertise in this regard, they are better able to deal with complex diligence requirements across industries and countries.