1. A Study Circle Meeting on “Due Diligence - A practical approach” Saturday 15th day of April, 2017
Due Diligence -Objective
Due Diligence - Process
Due Diligence – Practical Approach
International Entities
Case study

2. Due Diligence Objective Investments – Venture Capital, Private Equity
Collaboration – creating long term corporate relationship.
Corporate Actions – Merger, Acquisition, Takeover
Large Debt Transactions

3. Due Diligence Objective
Initial Public Offer, Follow on Public Offer, Rights issue, Employee stock option plan (ESOP’s), Preferential allotment
Setting up business units in India or abroad
Setting up joint ventures
Compliance of listing agreement
Bank/statutory requirement

4. Due Diligence Objective Outsourcing arrangements
Technology and product licensing
Technology sharing
Distribution agreements

5. Due Diligence Objective
To confirm financials, relationship with banks, financial discipline, housekeeping, Tax discipline, creditors, debtors etc.
Customer base and relationship – Customers are retained or customer base is shifted frequently
Contracts – Quality and quantity
Manpower status

6. Due Diligence Objective To assess market standing of the business
Goal is to make the investment decision easy
Decision should be informed decision
Help to understand existing potential, future opportunities and threats associated with a particular business

7. Due Diligence Objective
To confirm facts before investment decision. Remember fraudulent dealings are not straight
To determine market capitalization of the target company.
Ownership pattern
To understand why promoters wants to disinvest? Whether there is threat of changing legal provision, local problems etc.
Whether local body is against a business?
Pollution control orders.
Mining, deforestation etc

8. Due Diligence Process Finalization of agencies Scope of every agency
Time Limit – Need tight control
Non Disclosure Agreement
Kick off meetings
Lawyers, CA and CS – Their competence, previous experience and time commitment. Understanding of the company objective.

9. Due Diligence
Process
Pre diligence – Signing Letter Of Intent, Non disclosure agreement, Engagement letter
Deal breakers
Deal diluters
Deal cautioners
Deal makers
Lawyers, CA and CS – Their competence, previous experience and time commitment. Understanding of the company objective.

10. Due Diligence Process Finalize the process Identify internal resources
Monitoring is very crucial
Place of due diligence – can make or break the process
Who will lead the process?

11. Due Diligence Process Financial due diligence Legal due diligence
Commercial due diligence
Human resources
Operational resources

12. Due Diligence Process Financial due diligence
Housekeeping can enhance enterprise value
Discipline in payment of taxes, filing of returns and assessment in time
Balance sheet quality – e.g. levels of receivable, payables, disputed amounts, stock, investments

13. Due Diligence Process Legal due diligence
Analysis of contracts and other documents
Evaluate any hidden legal hazards
Examine existing lawsuits exist
Ensure that there is no hidden information regarding lawsuits

14. Due Diligence Process Human Resources Processes followed by HRD
Evaluate the quality of HR
Identifying the qualifications
Verify technical ability and working initiative.
Focus on senior management personnel and key staff
Interview with senior staff members

15. Due Diligence Process Operational Due Diligence
Evaluate firm’s business model
Future potential
Examine existing market standing
Information regarding competition and it’s correct evaluation

16. Due Diligence Process Technology due diligence
Intellectual property due diligence
Environmental due diligence
Information security due diligence
Ethical due diligence

17. Due Diligence Process Preparation of data room Virtual or physical
Advantages of virtual data room
Savings in cost, time
Comfort to buyer, seller
Availability of information at any time
Multiple access, Easy to set up, Secured, Efficient but no personal interaction

18. Due Diligence Process Check list information
Providing information and solving the queries
Understanding pain points
Data can be collected from various sources
Avoid self contradiction in data

19. Due Diligence Process Understand the queries correctly
Provide information on need to know basis
Involve optimum resources
Provide Training to the staff before commencing DD activity
Set time limit

20. Due Diligence Process Unity of command is important
Withstand pressure of interested parties
Focus is must
Term sheet finalization – basis of future transaction
Shareholder’s agreement
Amendment in AOA
SEBI notification dated 4 January 2017 SEBI 4 JAN 2017.pdf
No employee including key managerial personnel or director or promoter of a listed entity shall enter into any agreement for himself or on behalf of any other person, with any shareholder or any other third party with regard to compensation or profit sharing in connection with dealings in the securities of such listed entity, unless prior approval for the same has been obtained from the Board of Directors as well as public shareholders by way of an ordinary resolution:

21. Due Diligence Common issues in Due Diligence
Application of accounting standards
Contingent liabilities
Related party transactions
Doubtful ownership of assets
Tax payments

22. Due Diligence Common issues in Due Diligence
Verification of contracts with the customers
Insurance policies – period and adequacy of cover obtained
Group company business model – whether there is totally unrelated businesses, whether promoters have bandwidth and competency in handling those businesses

23. Due Diligence Follow up work
Proposed resolutions for corporate financial risk which are discovered in the course of financial investigation
Work out Financial feasibility of investment model
Financial forecast of investment returns
Financial risk evaluation of investment program.

24. Due Diligence Follow up work
Evaluate financial and internal audit system. Suggest appropriate professionals
Financial management system
Internal control system

25. Due Diligence Follow up work Pre-transaction Asset Valuation Review
Cooperate with assets valuation work;
Connecting with valuation firms, ensuring favorable asset evaluation results;
Constructive suggestion regarding important issues of asset valuation

26. Due Diligence End objective Reach optimum price point
Ensure Legal protection
Ensure commercial viability
Ensure continuity of business contracts
Capitalise the hidden potential of business
Secure maximum profits
Valuation multiples

27. Due Diligence Check list 12.1 Check list due diligence INT.pdf
Check list 22.2 Preliminary Legal DD Checklist.doc
Check list 32.3 Sample check list.doc

28. Due Diligence Practical approach Withdrawal of deal
Adjusting the valuations
Solving of problems uncovered during due diligence process
Identification of areas where warranties and representations are required
Bridge the gap between existing and expected
To enhance confidence of all stake holders

29. Due Diligence Practical approach Close the deal without delay
Clarity on deliverables including fund flow
Formalities during fund flow
Compliances after receipt of funds
Keep it in mind this is not the last transaction

30. Due Diligence Practical approach Induction of directors
Adoption of new MIS requirements
Must work towards good corporate governance
Overall beneficial for the organization
Take a view where it is heading

31. Due Diligence International deals Try to understand the culture
Perfect homework is must
Handle the intermediaries with care
Speed is the essence of the process
Do not show over enthusiasm
Do not take things for granted

32. Due Diligence Case study
Private equity investments – auto component industry - astronomical valuations – painful experience
Manufacturing company – deal based on wrong valuations – MD faced the consequences – forced to resign and lost control over the company
Service industry – agreed to give heavy returns – after the agreed period promoters faced the pressure

33. Due Diligence Case study
Smooth transaction in selling of auto component company – reasonable expectations on returns and indemnification – build in safeguards – good team work
HR intervention was done in proper way
If the promoters are interested in personal gains at the cost of organization, DD process is more tricky and more care should be taken

34. Due Diligence
Thank you