Unique Characteristics of Due Diligence in India

Due diligence essentially performs a Strengths­ Weaknesses-Opportunities- Threats (SWOT) analysis of possible business opportunities. It involves the holistic assessment of a business opportunity undertaken by interested parties in the business, including prospective buyers and partners. The activity entails an assessment of all relevant business information, such as assets and liabilities in the company’s past and present, and evaluate the financials of the business.

A SWOT analysis in India is tailored according to the specific requirements of interested parties. The companies interested in the due diligence examination compile a checklist of required information. This information may be accessible through the records at Indian public (government) offices, and in some scenarios, the involved companies may need to provide specific information that is unavailable publicly. In addition, business plans and other documents such as payroll data and employment contracts are also reviewed if deemed necessary by the interested parties. Due diligence of a wider scope often also involves procuring information from external sources, including customers, suppliers, industry experts and market research firms.

Due diligence reveals considerable information about possible business opportunities. However, it does not reveal all information related to a business opportunity. The purpose of due diligence is not to learn everything about a business, but rather, to learn enough to assess the business opportunity credibly. Due diligence thus becomes a tool to mitigate risks and to aid sound decision making.

Due diligence in India

India presents a complex economic, regulatory, and legal landscape for doing business. Consequently, the success of a business venture in India is dependent on a company’s ability to traverse the Indian business landscape. A company’s success is in turn linked to the risk management and mitigation strategy that it undertakes. It is in this regard that due diligence becomes a powerful tool that companies may utilize when dealing with Indian businesses. Due diligence ensures that a company is able to manage the risk prior to entering into a business transaction.

  • A company that plans to trade with an Indian company should verify that the business is what it appears to be. This is vital in India, where several companies sprout up every day with the sole motive of duping prospective clients and businesses. For example, in April 2016,pretend chit-fund companies (institutions which promote low interest rates and lend money for houses and other purchases) were found to have cheated depositors out of U.S 12.2 billion (Rs 800 billion). This indicates a mala fide intent in the transaction, and while such cases might be easier to identify in the preliminary stages of due diligence, some scenarios require more in-depth exploration of the business.
  • The scenarios that require extended due diligence include identifying potential deal destroyers”. This involves studying Indian companies’ financial health, including their track record of bin payment their creditworthiness, and their standards of compartmentalization and international regulatory and statutory requirements. Due diligence of this nature is particularly important in India, where the tax regime is extremely fragmented and companies often deal with business entitles from other states within India that have different payment norms and taxes.
  • A company that wants to collaborate with an Indian company often needs to perform extensive due diligence in comparison to trading with one. The nature of the transaction while trading, including selling and purchasing goods and services, acts as an inherent check on the risks. This requires that a foreign company undertake all aspects of due diligence required for trading with Indian companies, such as a thorough assessment of legal scope to check compatibility. In addition, companies should procure information that aids in the valuation of assets and in negotiating price concessions. Finally, the due diligence should verify that the proposed business transaction complies with the mandated investment and acquisition criteria.
  • The process of conducting due diligence in different countries differs significantly, though they seek to achieve very similar ends.
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