Financial Due Diligence :
There is a process of assessing a target company’s financial health during the due diligence process. An understanding of the buyers position is crucial to the buyer’s understanding of the target company’s position.
What is the purpose of Financial Due Diligence?
- To protect the interests of the target company, it is essential to conduct financial due diligence.
- If there have been any problems in the target company, it is important for the buyer to be aware of them.
- It is important to notice that carrying out financial due diligence will provide potential investors and shareholders with confidence in the company.
- According to the due diligence standards prescribed in India, the buyer should adhere to the protocols on financial due diligence.
- In such a scenario, it would keep the buyer informed of the compliance measures that have been taken by the buyer.
Legal Framework for Financial Due Diligence in India :
In India, the Companies Act 2013 governs the subject of financial due diligence and is applicable to companies. In India, there are laws governing financial due diligence including SEBI, Income Tax Act, Banking Act, and RBI Act.
Due Diligence Procedures :
1.Starting of transaction :
A due diligence provider will collect certain information at the start of the transaction. It is generally a third party who is involved in the transaction to carry out the due diligence. There are usually a number of third parties involved. They could be a management consultant, a law firm, a chartered accountant, or an investment bank.
Before beginning the due diligence process, the following must be accomplished:
- The first step you should take is to secure the background information on the target company.
- It is imperative that the employees participating in the due diligence activity undergo proper training.
You will need to send out a Due Diligence Questionnaire (DDQ) to the seller or company that will be responsible for collecting the necessary financial information. You will be required to communicate with third parties, such as government departments, chartered accountants, and external advisors in connection with this endeavor.
2. Data management :
After completing the financial due diligence process, the second type of process is data management. In order for a due diligence exercise to be successful, data management is crucial. In other words, management of data is the exchange of information between departments in the company. After this exchange takes place, the data is stored in the servers. The information that is stored in server rooms must be backed up frequently on a regular basis.
For a proper management of data, the following must be carried out:
- I am a person who receives e-mails and electronic documents.
- Data rooms (server rooms) are used to store documents.
- The server room should be regularly backed up on information that is present in it.
Investigations and findings of due diligence :
In the event that financial due diligence yields information that needs to be verified by various authorities, information obtained by financial due diligence needs to be cross-checked and investigated. As well as the Ministry of Corporate Affairs (MCA), the Securities and Exchange Board of India (SEBI), Income Tax Departments of the Government of India, Chartered Accountant of the organization, and Chartered Accountant of the company would also be involved.
Among the items that would be included in a Financial Due Diligence Investigation are:
- A detailed analysis of the documents that were submitted including audited financial statements, statements of assets and liabilities of the companies, and any loans that were given to them.
- Clarifying any matter that needs clarification whenever required- Issues occurring within the financial findings need to be addressed with the competent authorities.
- In addition to inquiring with other authorities, it is recommended that the consultant who is engaged by a third party independently verify the team’s financial accounts and the party’s financial transactions.
- If any inconsistencies are found, clients should be informed.
Checklist for Due Diligence :
It is vital that you follow the following checklist when conducting a Finance Due Diligence Report:
Criteria for Business :
- A list of the projects which the business is taking on might include information on the projects that the business is taking on.
- Here are some strategies that can be implemented to finance the above.
- The loans were taken.
- The organization’s business structure can be summarized as follows.
- The company decided to take advantage of seed financing options available to it.
- This organization employs a large number of people.
- Please find below some information about our Financial Team.
- Please find enclosed the following information regarding the recruitment of the CA.
Company incorporation documents:
- Documents pertaining to the Articles of Association (AOA) and Memorandum of Association (MOA).
- In addition, the company will provide you with information about various members of the organization’s financial team (individuals who are responsible for the financial functions of the company).
- Optimal valuation method of the intangible property of a company. Information on the intangible property of the company will be given. It is anticipated that the company’s intellectual property will include trademarks, copyrights, and patents owned by the company.
- Here is some information about:
- Audits of the company’s financial statements, as well as unaudited financial statements.
- The names and contact information of the target company’s cost accountants.
- Details regarding the company’s auditors.
- Any sort of reports that may be used such as those relating to internal controls, finance, cash inflows and outflows, etc.
- The company’s CARO report.
- Key performance indicators (KPI) for the company.
- Product data, product categories, product cost, and manufacturing cost.
- In the event that an internal audit has been conducted on the target company, you should request a copy of the report.
- If the target company has undergone a quality assessment, the report.
- The management has announced that the audit committee has been appointed.
- Any subsidiaries of the parent company should provide information on accounting procedures they follow.
- Other companies with whom we enter into future contracts. Agreements that you enter into with the company, including investment agreements.
- It is a good idea to prepare a copy of the details such as the DIN number of directors, as well as the data on the PAN and TAN cards of the company.
Using the Profit and Loss Statement, the following information has been derived:
- The revenue earned by the company is provided in the following table.
- There are numerous types of agreements that comprise the deals between the partners and shareholders of a company. The revenue generated by these agreements is the revenue of the company.
- During the current financial year, the company had raised invoices on the products it produced.
- In the past five years, we have broken down the sales of the company according to its product line.
- An agreement between the target company and a vendor or third-party supplier which necessitates the signing of a contract.
- The company will provide you with information about the current and upcoming bills that it will raise.
- We are providing the employees with information regarding the salaries that they are receiving.
- Provide information concerning the lease agreements the company has entered into in order to lease its premises.
- For professional services provided to the target company, the target company is charged fees.
- Research and development costs and marketing costs.
The Balance Sheet contains the following information:
- Assets and liabilities of the company.
- In this report, we will examine the fixed assets, tangible assets and intangible assets of the company.
- It is very important that depreciation be applied to both movable and immovable machinery in an equally effective way.
- The company received the following amounts in cash and advances.
- The following is some information about the company’s receivables.
- Following are loans, mortgages, and advances made by the company. In case the company has taken loans in the past, information on the term for maturity of the loan and the interest that must be paid on the loan should be presented. There should be a distinction between secured and unsecured loans and borrowings.
- It is important to know whether the company takes any forms of deposits. It is also important to include information about the nature of the loan taken and the purpose of the loan if the company takes out term loans.
- Related Party Transactions – means the shareholder or Director of a company entering into a transaction on behalf of that party. It is mandatory for all businesses to notify the related party transactions as per the companies act, 2013.
- It is the company’s responsibility to provide you with any type of guarantee you need.
- Shareholding patterns in relation to the company and their shareholders are shown in the following table. In terms of the company’s shareholders, the following contributions are shown. Please provide information about any Employee Stock Option Plans (ESOPs) offered by the company.
- Find out if there are any foreign subsidiaries or branches of the targeted company. Whenever such an event occurs, careful attention should be paid to maintaining compliance according to the requirements of the Foreign Exchange Management Act, 1999.
- It is important for businesses to be aware of the tax implications of their products and services, such as direct taxes, indirect taxes, and good and services taxes (GSTs).
- Describe the operation of the employee pension plan, the statutory pension plan, as well as any professional taxes payable by your company.