APURVA AGARWAL

PartnerUNIVERSAL LEGAL

The Institute of the Company Secretaries of India

February 15, 2008

2

Meaning of Due Diligence

• There is no legal definition of the term "due diligence".

• Simply put it is a detailed investigation of the affairs of a company.

3

Meaning of Due Diligence

It is the process of carrying out an investigative analysis of the financial, legal and operating activities of an entity in connection with a proposed transaction that would result in a significant change in the ownership or the capital structure of the entity.

4

Aim of the Due Diligence Process

Identify problems within the business, particularly any issues which may give rise to unexpected liabilities in the future.

5

Ingredients of a successful Due Diligence

• Must be unbiased

• Should be carried out by independent professionals.

• Requires the management’s co-operation

• Done with a positive attitude

6

Purpose of Due Diligence

1. Assess the reasonableness of historical and projected earnings and cash flows;

2. Identify key vulnerabilities, risks and opportunities;

3. Understanding the company and its market

7

Purpose of Due Diligence

4. Setting in motion planning for post-IPO operations

5. Highlight changes required in the company’s tax, legal, corporate or shareholding structures

6. Check whether the Company has complied with all the laws

8

Need for Due Diligence in IPO’s

• Going public increases the number of shareholders.

• Board performance subject to closer scrutiny.

• Institutional investors look for increases in share prices,achievement of profit targets and dividend pay-outs.

9

Need for Due Diligence in IPO’s

• Investors require assurance of a system of strategic planning and budgeting,financial reporting and management information

• The SEBI disclosure requirements are met through the due diligence process

10

Key Areas of Focus

1. Financial statements – to ensure their accuracy

2. Assets - confirm their value, condition existence and legal title

3. Employees – identification and evaluation of the key movers

4. Sales strategy – analyzing the policies and procedures in place

11

Key Areas of Focus

5. Marketing – what is driving the business and is it effective?

6. Industry in which the company operates – understand trends and new technologies

7. Competition – identify the threats

8. Systems – how efficient are they? Are upgrades required?

12

Key Areas of Focus

9. Legal and corporate and tax issues – is the shareholding structure robust? Are there any tax issues which need to be resolved?

10. Contracts and leases – identify what the risks and obligations are;

11. Suppliers – are they expected to remain around?

12. Intellectual Property - protected and to what extent?

13

Legal Issues

1. Licenses and Permissions

2. Litigation

3. Real Estate and Moveable Property

4. Company Law

5. Employees, Consultants, Labour Relations

6. Environmental Permissions

14

Gap Analysis

The due diligence helps identify areas where the company exhibits weaknesses

Eg: It may highlight deficiencies in the company’s management structure or an inefficient tax structure.

Therefore pre-IPO due diligence process will result in a gap analysis between the present status of the company and the company that should be floated.

15

Filling in the Gaps

Gaps identified assist the directors in:

1. divesting of non-core, non-profitable activities.

2. critical analysis of the control, accounting and reporting systems

3. critical appraisal of key personnel.

4. identify the value drivers of the company

16

Consequences of Misrepresentation in Offer

Documents

• Civil liability under S. 62 of the Companies Act, 1956 for misstatements.

• Liability is in the form of compensation to any person who has sustained loss or damage due to such misstatement.

17

Persons liable under S. 62

• Every director holding office

• Every person named in the offer document as a director or a proposed director

• Every promoter of the Company

• Every other person who has authorized the issue of the prospectus

18

Criminal Liability

• S.63 of the Companies Act, 1956 provides for punishment in the form of imprisonment and fine upto Rs. 50, 000/- for any untrue statement.

19

Persons Liable under S. 63

Any person who has authorized the issue of the prospectus except:

• An expert who has given his consent to have his statement recorded in the prospectus

• Auditor, legal advisor, attorney, solicitor, banker or broker who has given his consent to include his name in the offer document in any capacity.

20

ANY QUESTIONS

?????

21

THANK YOU

22

Universal Legal Advocates

5th floor, Kimatrai Building

77/79, Maharshi Karve Road,

Mumbai-400002

Ph: + 91 22 22034293-95 Fax: + 91 22 22039845

Email: apurva@universallegal.firm.in