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Published by Enhelion, 2019-11-21 22:55:33





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In the previous modules, we looked at due diligence transaction. Having prior knowledge about the time
as a process involving various steps. This module in which the process is to be completed gives the
examines the various components involved in that team a clear idea to chart out strategies to complete
process. These include pre-due diligence work, due various review exercises in an efficient manner.
diligence teams and the roles that they perform in the
transaction, execution of due diligence, ordering and After preliminary discussions, measures are taken to
filing documents and the due diligence report. structure the process. Various documents- the ones
defining the scope of the due diligence and the ones
4.1 PRE-DUE DILIGENCE WORK to be reviewed- are obtained. The work is then
divided among the team members and they are told
Before the formal process starts, there are a number what is expected of them.
of interactions that take place with the client. These
cover a broad spectrum of pre-due diligence issues. 4.2 DUE DILIGENCE TEAMS AND THEIR ROLE
The parties involved indulge in an overview of the
transaction to cover all important and relevant issues A major facet of the entire process is the team that
pertaining to the transaction. conducts it. Usually, the team has a mix of people who
are responsible for three key areas of the
The first course of action is to clearly define the scope transaction- legal, accounting and business. A law
of due diligence. This includes the areas that are to be firm is usually expected to manage the legal aspect of
covered in the process, the manner of collection of the deal. However, it can take charge of more than
data, the due diligence report, etc. The next issue that one aspect provided it has the necessary expertise
should be discussed is the time frame. It is important and fully understands the responsibilities associated
to adhere to the timeline as finalized in the with it.i Depending on the transaction, the team
interactions since any delay in due diligence would should also consist of members who are well versed
cause a further delay in completion of the business with different aspects of the deal. For example, if the

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deal involves acquisition of manufacturing facilities, a identified at the preliminary stage itself, such as non
due diligence team should ideally consist of members –compliance of statutes, concealment of facts and
who have requisite knowledge about environmental, figures, non-compliance of terms of contracts or
health and safety regulations.ii An ideal team consists policies, lack of sufficient internal controls and
of lawyers, technical consultants, chartered contingent liabilities.iii
accountants and valuation advisors to look after
every aspect of the deal. 4.4 DETAILED DUE DILIGENCE

The dynamics of the team vary depending on its The process of due diligence has been discussed in
strength. Effective communication plays a key role, detail in the previous module. It involves examination
especially if the team is large. A point of information of a large volume of documents related to the
about one aspect of the transaction is likely to affect company. These documents relate to the company’s
other aspects. Hence, it is vital for team members to corporate structure, its statutory and regulatory
share their findings with each other. Having well- compliances, taxation, employees and property
defined roles within the team ensures that the owned by it. This stage determines the success of the
members are able to concentrate on their respective due diligence exercise. Thus, it has to be carried out
tasks and complete them in time. Besides reviewing with utmost sincerity in a meticulous manner.
documents, the team members interact with various
officials of the company and visit the premises when 4.5 DUE DILIGENCE REPORT
required. Communication with the company officials
and their own team members, thus, plays an integral Once the formal process is complete, the due
part in smooth execution of the process. diligence team prepares a report that contains the
findings of the process. It includes a summary of the
4.3 EXECUTING PRELIMINARY INVESTIGATION documents reviewed and the information collected.
The report may be a detailed one or a summary. A
The aim of conducting a preliminary investigation is widely accepted practice is to include an executive
to straight away identify issues that can have an summary at the beginning of the report to highlight
adverse effect on the transaction. This helps to save important findings of the process. Since the entire
money, time and other resources that are spent in a process of due diligence can be time consuming, it is
detailed investigation. Many critical issues can be important, especially for the team leader, to ensure

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that the report is completely as soon as the process is • Litigation involving the company, including
done. The importance of this report can be gauged proceedings before tribunals, quasi-judicial and
from the fact that decision of the company officials administrative authorities
who ordered due diligence are based on its findings.
• Contractual rights and obligations of the
Contents of the report: A due diligence report company
commonly has three sectionsiv-
• Compliance with environmental laws and
(i) Executive summary: This part contains critical regulations
points that can have a decisive impact on the
transaction. • Taxation issues
• Insurance cover of the company
(ii) Body: It contains the findings of due diligence
process and should ideally follow the order as The report uses distinct terminology to define the
given in the checklist or terms of due diligence outcome. The term ‘deal breakers’ refers to those
agreed at the preliminary stage. findings that expose non-compliance of the target
company. It also refers to criminal proceedings
(iii) Appendices: This section includes such against the company or its known liabilities. Those
documents that are relevant to pertinent issues. violations that may attract quantifiable penalties
thereby reducing the value of the company and
The due diligence report includes the following in its consequently, the business transaction, are referred
main body:v to as ‘deal diluters.’ Another term used in the report
is ‘deal cautioners’ which highlights existing non-
• Information about the company compliances which can be rectified but the company
• Directors of the company and their interests preparing to deal with the target company should
• Corporate capacity of the company act in a cautious manner. Very rarely does a team
• Share capital and shareholders submit a clean due diligence report when there are
• Assets of the company no violations. In such a scenario, the term ‘deal
• Information about its employees makers’ is used in the report.
• Compliance with employment and labour laws It is only after submission of the due diligence report
• Licenses and permits held by the company that a company goes ahead with its business plan.
• Intellectual property rights owned by the

company and those granted to third parties

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After the due diligence process is complete, a
certificate is issued stating that due diligence of the
company has been carried out by examining relevant
documents and whether the company is in
compliance with all the relevant laws and regulations.
In case of capital markets, a due diligence certificate
is issued as per the SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2018.
Schedule V of these regulations provide the format of
a due diligence certificate for different cases. Format
of a due diligence certificate given by a lead manager
in case of a public issue of securities is given below :

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i ‘Due Diligence in the Digital Age: A Look at Techniques, <

Ancient and Modern, for Investigating your Target and diligence.html>
Closing Your Deal’ ABA Section of Business Law (2008
iv ‘Due Diligence for Transaction’ Price Waterhouse

Annual ABA Convention, New York City) Cooper (PWC), available at

iiIbid. <>
iii ‘Legal Due Diligence’ International Financial Law
v IFLR (note 3).

Review (IFLR) [2001], available at

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