How to Conduct Legal Due Diligence in India?

 

How Companies Conduct Legal Due Diligence for Business Projects in India?

Whether it is a greenfield (new) project in India, an M&A or the establishment of a joint venture, due diligence on the target (land) or the acquired or joint venture is indispensable.

 

Considering that when the Indian party makes disclosures to Chinese investors, it is inevitable that there is an information tendency. Taking the Chinese companies (buyers) to acquire the shares of Indian companies (sellers) as an example, Indian companies often share information and information that is beneficial to them. Information is disclosed to potential buyers, and unfavorable information is not disclosed or less disclosed to buyers. This is true of the so-called "Wang Po sells melons, sells and boasts". Under the common law, there is a legal principle called "Caveat Emptor", which means that buyers need to be careful. That is, as a buyer, the buyer is legally presumed to be a "Sophisticated Buyer" and has the ability to identify various Information, at the same time, judge the risk and make a decision whether to proceed with the project. Therefore, it is very important to conduct due diligence and obtain relevant information.

 

The purpose of due diligence is to evaluate and quantify risks. Through the qualitative risk, we can ascertain whether the project can be launched, and the quantitative risk can solve the problem of increase or decrease in the consideration in the transaction.

 In addition to the risk elimination function, the results of due diligence can also be used in the next negotiation with the Indian side, as a very important negotiation weight to help Chinese investors achieve business goals such as reducing costs.

 

As mentioned in the beginning, generally when conducting joint venture projects, the sequence of due diligence, commercial negotiation, and drafting of joint venture agreement is the most ideal state to conduct due diligence first, and then conduct business after finding out the situation. The negotiation is at the same time as the drafting of the joint venture agreement. 

However, considering that there are various differences in the actual situation, it is often the case that these tasks are carried out at the same time or overlap. 

In practice, the author has also encountered the completion of commercial negotiations and the drafting of the joint venture agreement. When some people just started the due diligence case. Without the help of due diligence, some potential risk information of the counterparty company will not be known, the risk of joint venture projects will increase, and there is no information found in the due diligence as a support for the negotiation, and it may pay more in the negotiation, the price.

 

In a project before, a Chinese state-owned company plans to establish a joint venture with an Indian company in India. The two parties have been negotiating for a long time and have reached a consensus on the main commercial terms. 

The company will invest in cash and hold 51% of the shares, and the Indian company will use land use rights and part of the cash to invest in the remaining shares. The two parties have set a time for the chairman of the two parties to sign a joint venture agreement in India and announce it to the public. 

The corresponding arrangements such as visas, schedules, air tickets, and media have been completed. The cost of temporary cancellation is too great. 

However, at this time, foreign investors did not conduct company due diligence and land due diligence on the Indian company. Regarding this case, the author's opinion is that because the two parties have made corresponding arrangements and it is not convenient to cancel, but there is no due diligence to avoid some risks of future joint ventures. 

The final plan is that you can declare in the joint venture agreement , The results of the company due diligence and the land due diligence made in the later period shall be the necessary conditions for the joint venture agreement to take effect. This is, that the joint venture agreement is simply signed but not effective, and it will take effect after the problems found in the due diligence are fully resolved. Through this arrangement, the previous conflicts were subtly resolved.

 

Conducting Legal Due Diligence in India Infographics

Generally speaking, company due diligence reports mainly include the following aspects:

 

Due diligence on company-related matters in the past three years 

  • Serial number
  • Required information/documents
  • Note

 

Corporate information and important documents

 

1. Company organization chart and business introduction

 

2. Business license, proof of business start and related documents

 

3. Copy of the company's memorandum

 

4. A copy of the company's articles of association

 

5. Change of name or business objectives after the establishment of the company, as well as supporting company resolutions and filing records

 

Director

 

6. List of directors and detailed information after the establishment of the company

 

7. Record the appointment information and appointment documents of directors with the Companies Registry

 

8. Director Information Disclosure Form

 

9. If a director resigns or suspends his position, the relevant declaration materials for his resignation or suspension

 

10. Employment Agreement/Service Agreement

 

Equity information

 

11. Shareholder information from the date of company establishment to the date of due diligence

 

12. If the shareholder is a non-resident shareholder, the relevant Reserve Bank of India (India Central Bank) filing and declaration information and the central bank permit (if any) are required

 

13. If there is an equity transfer, provide relevant documents for the equity transfer

 

14. Share certificate issued since the date of company establishment

 

15. Warrant/bond holder (if any) and their details

 

Minutes/Resolutions

 

16. Minutes of Board Meetings, Minutes of Board Committees

 

17. Minutes of the shareholders meeting since the establishment of the company

 

18. Specific information on the resolutions obtained at the meeting in the form of Postal Ballot

 

Companies Registry Forms and Statutory Register

 

19. All statutory registers maintained by the company

 

20. Forms and vouchers filed by the company to the Companies Registry

 

Company Capital

 

21. Information sheet about the company’s legal capital, issued share capital and paid-in capital, etc.

 

22. Company’s equity issuance and transfer status

 

23. Share restriction transfer agreement (if any)

 

Company's foreign investment

 

25. Details of the company's foreign investment and filing and reporting with relevant authorities

 

Employee

 

26. The company's current total number of employees and information table (employee category and number)

 

27. Standardized terms for each type of employee employment agreement

 

28. List of key management and technical personnel and their terms of service and employment agreement

 

Intellectual property

 

29. Information about trademarks that the company has registered or applied for or is in use

 

30. Design related information that the company has registered or applied for or is using

 

31. Information about trade names used by the company

 

32. The company permits others to use the company’s patents, trademarks, trade names, copyrights, know-how, confidential information, formulas, etc.

 

33. Other intellectual property rights or rights owned or being used by the company

 

34. Concession agreements, agency agreements, distribution agreements, research and development agreements, etc. signed by the company

 

35. Inventions that are used by the company, have not yet applied for a patent, or have not yet been approved

 

36. Information about the company's ongoing litigation or opposition procedures related to intellectual property rights, and the matters that have been settled in the foregoing procedures

 

Company property

37. Company-owned, leased, and occupied real estate information

 

38. Relevant land deeds, leases or license documents of real estate owned or owned by the company

 

39. Important documents and information related to the real estate owned and occupied by the company, such as development planning information, notices from local authorities, notices of demolition, owners' disputes, etc.

 

40. Whether the company has violated planning, environmental protection, pollution control, central or local laws and regulations related to safety and health production standards, if any, relevant information needs to be included

 

41. Does the company have subletting, subletting and related agreements (if any)

 

42. Recent real estate value assessment (if any)

 

Financing and Lending

 

43. List and information of outstanding bank loans and liquid funds obtained from other financial institutions, signed loan agreements, and relevant supporting materials from banks and other financial institutions

 

44. List of information issued by the company or issued by the directors and shareholders of the company on the company assets as the subject matter of mortgage, charge, and guarantee

 

45. Information about loan or guarantee agreements signed between the company and other companies

 

46. As of the date of receipt of the due diligence checklist, the company's outstanding loan information from banks and non-bank institutions

 

47. For information on equity assets of other companies (except for company subsidiaries), the company needs to list relevant information such as investment quota, investment nature, business relationship with the invested company, specific transactions, etc.

 

Insurance

 

48. A detailed list and copies of important insurance policies, including the type of insurance, the amount of insurance subject matter, and insurance premiums

 

49. A copy of the insurance policy of key person insurance purchased by the company

 

50. Information on the extent and scope of compensation for directors and senior management’s liability insurance

 

51. Scope and description of employee compensation

 

52. Product liability compensation scope and description

 

Government Permit

 

53. Information or arrangements of relevant government licenses and permits that have been obtained or are applying for

 

54. Important correspondence, declarations and other information related to the central or local state government agencies

 

55. Lists and information of licenses, licenses, government consents, etc. that have expired, been revoked, cannot be updated, or may have the above consequences

 

56. For information on correspondence with the government and relevant authorities due to violations or non-compliance of the above licenses, permits, government consents, registration matters, etc.

 

57.  Detailed information about government inspections or investigations

 

Litigation

 

58. A summary of pending or potential litigation, disputes, arbitration matters at all levels of the central, state, and local levels, as well as relevant government accountability, investor claims and other related information, including:

 

(i) Statement of dispute

 

(ii) Potential loss or compensation amount

 

(iii) Information on the relevant agreements or arrangements in response to the letter and lawyer’s letter affecting the dispute

 

59. Documents and materials related to litigation settlement

 

60. Information on lawsuits or disputes arising from guarantees

 

61. Information on laws, arbitration awards, and judgments made by governments, arbitration institutions, courts, etc.

 

62. Information that may affect potential transactions such as pending litigation, arbitration, etc. involving company subsidiaries, company directors, etc.

 

63. Information on pending or potential litigation directed at the company’s shareholders that will have a significant impact on the intended transaction

 

64. The company’s public exposure information in the aforementioned litigation and arbitration cases

 

Competitor

 

65. Is there any information that has been investigated by relevant government agencies related to the anti-monopoly law, the anti-unfair transaction law, and the monopoly and restricted transactions prohibited in the company law?

 

66. Information on oral or written agreements, arrangements, etc. between the company and one or more competitors

 

Accounting and tax

 

67. Copy information of the company's annual report, company accounting books, audit reports, etc.

 

68. A copy of the company's balance sheet

 

69. Copy of company income tax statement

 

70. Information on tax deductions, exemptions and special arrangements obtained by the company from relevant tax authorities

 

71. Information on tax incentives, tax holidays, etc. obtained by the company from tax authorities

 

72. Unresolved or potential legal issues affecting the transaction between the company and the tax authority

 

73. The company's existing tax reports, pending claims, etc.

 

74. Information on possible tax burdens due to deferred taxes

 

75. Information on circular transactions or ongoing matters that may affect future tax burdens

 

Agreement

 

76. List and copies of major contracts signed by the company so far

 

Trade related Matters

 

77. List of major trade matters carried out by the company so far

 

78. Orders signed or executed in the name of the company, bidding

 

79. List of the company's main customers in India or overseas

 

Miscellaneous

80. Other documents or information related to the company or its affiliated companies that need to be disclosed in consideration of the intended transaction

 

81. Other important documents and information related to existing shareholders that may affect the expected transaction

 

The mall is like a battlefield. There is a famous saying in the business community that "choosing a counterparty is choosing trading risks." Although there is an old saying that "wealth and wealth are sought in insurance", the most rational business person still hopes to minimize risks as much as possible. 

Therefore, due diligence came into being, which is responsible for discovering risks, resolving risks, revising prices, and assisting in negotiations and decision-making. 

Legal Due Diligence in India by Businesses


However, after conducting due diligence, it does not mean that the transaction can rest easy, because due diligence has the following limitations, which will be amplified to a certain extent in the case of overseas transactions:

1. Limitations of the scope of due diligence

 The author gave a list of due diligence above. In most real business transactions, it is impossible for the surveyed party to provide all the above information to the surveying party because it is impossible for any seller to allow the buyer to Due diligence is conducted in the form of "copying home", not to mention that the seller is worried that the buyer is only using the transaction as an excuse. 

After obtaining all the information, it may cause information leakage and other potential risks. Therefore, even if the seller has all the above information, the seller It may not be easy to tell. Either the seller did have some information lost due to various reasons, so it could not be provided to the buyer.

 Regarding this limitation, investors can use limited information to restore the full picture of the transaction as much as possible with the help of their own team and external consultants. Of course, this requires investors to have very strong business insight. 

As long as the risks found do not belong to the "Deal breaker" risk that can veto the entire investment project with one vote, other risks can be protected through legal and financial arrangements. Of course, different investors have considerable differences in the definition and acceptance of risk. This requires specific case analysis.

 

2. The urgency of due diligence

 Generally speaking, the trading time is limited, and the longer the time is, the greater the possibility of "excessive branches" or other risks. Therefore, it is very important for investors to complete the due diligence efficiently and obtain the most valuable information.

 

3. The inclination of the information disclosure party

 For the party who is obliged to disclose information in due diligence, there are various motives to prompt them to provide some tendentious documents. Therefore, it needs to attract investors' attention. However, for many asset and license investigations, if there is something, there is something, and if there is not, there is nothing, either black or white. Of course, whether such information is true and effective still needs to be checked by professionals such as lawyers and accountants.

 

Conclusion

In addition to the risks mentioned above, after the due diligence is done, there will generally be a time lag before the transaction is settled. Investors also need to pay close attention to the dynamic changes in risk during this period. 

After all, due diligence reflects a certain cut-off point and previous risk dynamics. This also requires investors to calculate the time, such as through a detailed schedule to achieve the efficient connection of various parts, not to spend a lot of money to do the full adjustment, but the delay in the middle is longer, resulting in long nights and dreams.

 

 

[1] Please note that the items listed in this template of the due diligence list are not exhaustive, and there are possibilities for additions, deletions and changes for different items. This is only used as an example in this book.

 

[2] Chinese investors can decide whether the scope of due diligence data should be provided in the past three, five years or other time according to the actual situation of the project.

 

[3] Key Person Insurance Key Man Insurance or Key Person Insurance generally refers to the insurance purchased by the company for those holders of significant technology or intellectual property rights that are of great significance to the company’s development. Importantly, the risk of this kind of insurance confrontation is the loss to the company caused by the sudden death, incapacity, etc. of these people. Generally, it is a fixed amount of compensation, not compensation for the death or incapacity of such people. Expected or possible economic benefits.

 

[4] "Tax Holidays" refers to tax holidays, which refer to the tax holiday provided by the government to enterprises.

 

[5] Of course, there will be a relevant confidentiality agreement signed before due diligence, and the buyer will also use this to urge the seller to disclose as much as possible. However, once the buyer receives the sensitive information and abuses it, although the buyer can invoke some compensation clauses or dispute settlement clauses in the confidentiality agreement to protect their own interests, no one wants to invest time and money in a "remedy" way To protect their rights.

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