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Due Diligence refers to the process of appraising, assessing and evaluating business risk with analysis of cost benefit which is involved in Merger & Amalgamation. It is like trying to find a switch to put on the light when in entering a dark room. The decision to merge or amalgamate has to be based on considered opinion, which can be formed only after scanning of information and records available. Due Dilligence embraces the assessment process to judge the benefits vis-à-vis the troubles that will be faced in post merger scenario. The process of due diligence cannot be sidestepped in Mergers and Acquisitions.

Due Dilligence is a broader term than financial audit. In financial audit, the auditors are mainly concerned so far as the material accuracy of the financials and its presentation in the form of statements with a view to provide true and fair picture of entity’s financials. The due diligence process goes beyond the books of account maintained by the entity and involves analysis of actions of entity – assessment of problems faced by the entity, impact of legal cases, tax assessments, hidden liabilities etc. The due diligence process includes review of cash flows – past and future, status of tax assessments and its financial impact, valuation of assets, digging out hidden liabilities after an independent assessment, assessment of viability, review of technical feasibility, assessment and analysis of information technology security systems etc. In short, it encompasses –

1. Review of Commercial viability

2. Review of Financial liability

3. Review of Tax Assessments

4. Review of Legal cases

5. Review of Manpower Resources

6. Review of compliance of laws

The due diligence process is a team work consisting of chartered accountants, lawyers, valuers having expertise in their own field. The assessment, review, analysis, scrutiny and examination under due diligence process involves specialization and application of mind which goes beyond fact finding exercise i.e. mere checking of records available. The Chartered Accountants play a major role in due diligence process and no meaningful due diligence would be complete without their participation. The team, which has been, assigned the task of due diligence follows the following steps: -

1. Identification of the purpose of Merger and Acquisition.

2. Review and Study of past Business operations.

3. Study of Information System within the organization.

4. Collection of Documents.

5. Assemblage of Key Information from Management and Independent sources.

6. Allocation of review responsibilities amongst team members.

7. Compilation of findings of team members.

8. Assessment of findings.

9. Preparation of due diligence report.

Due Dilligence Checklist

Step 1 – Collection of Documents/Information from Management

1. Memorandum & Articles of Association of the entity.
2. Financial Statements consisting of Balance Sheet, Profit & Loss Account, Schedules, Cash Flow Statement, Notes to Accounts, Auditor’s Report and Director’s Report for last 3 years or 5 years.
3. Projected Business and Income Scenario.
4. Foreign Collaboration Agreements.
5. Technical Collaboration Agreements.
6. Intellectual Property Rights – Copyrights, Patents & Trade Marks
7. Pending Litigation details with estimated financial liability
8. Licenses, quota rights etc.
9. Government Approvals including Environmental clearances
10. Correspondence with Government Authorities
11. Marketing Network Details with feasibility studies
12. Brand and Goodwill Valuation
13. Internal audit Reports
14. Tax Assessments and Tax Audit Reports for last 3 or 5 years
15. Loan Agreements and Charge Certificates
16. Corporate Guarantees given
17. Lease Agreements
18. Shareholding Details
19. Technical Feasibility Reports
20. Pending Contracts/Orders in hand
21. Internal Control Systems and Processes
22. Statement of Inventory for last 3 or 5 years
23. Dealership and franchisee Agreements
24. Employee Contracts
25. Payroll Liability
26. Status of Statutory Dues including Labour Dues
27. Titles and ownership of Property and Assets
28. Status of Contingent Liabilities
29. Sales and Purchase Agreements
30. Pricing Policy
31. MOU’s and Shareholders’ Agreements
32. Joint Venture Agreements
33. Subsidiary and Associate Company Details and financials
34. Warranty Agreements
35. Insurance Policies
36. Cenvat Credit on Capital Goods
37. ESOP’s and Sweat Equity Shares
38. Segment Information
39. Information Technology Systems
40. IT Security Measures
41. Minutes of Board and Committee Meetings

Step 2 – Assemblage of Information from Independent Sources

1. Industry Data
2. Independent Search of Title Deeds
3. Market Reports and Studies
4. Customer Reports
5. Product Feasibility Report
6. Past Litigation Record and Orders
7. Prosecution of Company and Directors for offences for non-compliance of laws
8. Procurement of certified copies of Financial Statements and other documents
9. Search Report for Charges and Mortgages
10. Credit Report from Bankers/Financial institutions

Step 3 – Review of Documents/Information

1. Over valuation of Assets
2. Under Valuation of Liabilities
3. Hidden Liabilities
4. Product warranties/claims
5. Financial Liability arising out of Pending Litigation
6. Guarantees/Comfort Letters/Letters of Credit given
7. Statutory Dues Liability including Interest and Penalty
8. Non-recoverable Assets
9. Bad and Doubtful Debts
10. Likelihood of accrual of contingent liabilities
11. Over valuation of Intangible Assets
12. Technological Obsolescence
13. Tax liabilities in future
14. Status of Labour Management Agreements with reference to retrenchment
15. Slow-moving, Non-moving & Obsolete Inventory
16. Valuation Method of Inventory
17. Compliance of various Laws
18. Compliance of Accounting Standards
19. Intellectual property Restrictive Covenants
20. IT security measures
21. Identification of Items not disclosed
22. Correctness of financial figures
23. Quality of Management and Leadership
24. Research and Development Programmes
25. Market Reputation
26. Governance policies

Source: nirc-icai.org