module_5_7_

LEGAL DUE DILIGENCE

CERTIFICATE COURSE

Page | 4

DEVELOPED BY

MODULE - 5

PROFESSIONAL DUE DILIGENCE

Undertaking an expensive and time consuming exist. The findings may lower the value of the
exercise like due diligence should have benefits business transaction for which due diligence is
attached to it otherwise it will be futile. This module conducted. Further, identification of risks at an
discusses those benefits. It also highlights certain earlier stage allows the company to take rectification
issues that are faced while conducting due diligence. measures instead of fighting a lengthy litigation.

5.1 BENEFITS OF PROFESSIONAL DUE Even if due diligence does not expose material risks,
DILIGENCE it can impact the valuation and price of a deal. It can
reveal such financial information or any other
Due diligence provides a true picture of a company information that can affect the price negotiated
through a structured investigative process. For earlier by the parties.
example, in an M&A transaction, the target may be
inherently biased and provide exaggerated forecasts 5.2 CHALLENGES OF PROFESSIONAL DUE
that are based on unrealistic growth assumptions. DILIGENCE
The acquirer may be biased about the synergies it
seeks to achieve with the target.i Due diligence Conducting a professional due diligence comes with
removes these biases. It gives the company that its share of challenges. Sometimes, the information is
orders due diligence sufficient knowledge about the either not available or the information that is
target company to use in further negotiations. All the available is not sufficient. This may be caused by non-
information aids the former to make an informed cooperative behaviour of the employees of the
business decision. company undergoing investigation. They may be
unwilling to share certain information. Sometimes, it
A major benefit of conducting a professional due may so happen that incorrect information is provided.
diligence is risk identification and mitigation. Due Since the information shared in a due diligence
diligence brings forth risks that one may not know to process is confidential and sensitive, there may be

Page | 2

multiple layers of scrutiny before it is released for
being reviewed. This may lead to a delay in
completing the entire process.
The above problems can be handled by asking precise
follow up questions in a polite and persistent manner.
To verify the information, independent checks can be
carried out with the relevant regulatory authorities.
In case such hurdles are faced in a due diligence
process, it is advisable to include necessary
disclaimers in the final due diligence report.ii
5.3 SAMPLE OF DUE DILIGENCE
The following is a sample due diligence report.iii It is a
highly abridged report with some of the heads that
have been discussed in this course. A detailed report
runs into many pages. It is important to note that the
report highlights its scope in the beginning and
mentions matters that are excluded from its purview.
It also carries a disclaimer.

Page | 3

Page | 4

Page | 4

Page | 6

Page | 7

Page | 8

Page | 9

Page | 10

Page | 11

Page | 12

i ‘M&A: The intersection of due diligence and available at

governance’ Deloitte, available at <https://www.icsi.in/Study%20Material%20Professional/

<https://www2.deloitte.com/us/en/pages/center-for- NewSyllabus/SACMDD.pdf>

board-effectiveness/articles/the-intersection-of-due- iii Obtained from

diligence-and-governance.html> <http://www.caaa.in/image/06_hbduediligenceunpro.pdf
ii ‘Secretarial Audit Compliance Management and Due
>

Diligence’ The Institute of Company Secretaries of India,

Page | 13