The Dutch translation of due diligence is 'with due care'. Unlike in the Netherlands, as a buyer you have no legal obligation to investigate in India. Nevertheless, it is crucial to extensively screen the background of the Indian party before engaging with your business partner. This is how you conduct thorough due diligence of an Indian company (Private Limited).

Due diligence in India

Due diligence is typically performed prior to the purchase of a business or investment in a business by the acquirer or investor. It is sometimes referred to as an audit, but a proper due diligence process goes beyond simply checking the financial statements.

Due diligence helps make the right decision and mitigate the risks associated with the business transaction. Both parties usually enter into a confidentiality agreement before a business due diligence is initiated, as sensitive financial, operational, legal and regulatory information is revealed during the due diligence process.

It is the responsibility of the seller of the company or the shareholder to provide the documents and information necessary to conduct due diligence. In India, it is no different. Typically, the documents listed below are required for conducting due diligence on a private limited. All these documents should be thoroughly reviewed by an expert in India to make an informed decision:

Review of MCA documents.

Much of a company's due diligence can be done with the help of the Ministry of Corporate Affairs (MCA). The MCA regulates business affairs in India through the Companies Act, 1956, 2013 and other related laws and regulations. All companies in India must file their financials and shareholder data with the MCA. These details (master data) of each company can therefore be accessed through the website the MCA.

The documents, before being filed with the MCA, are approved by the Registrar of Companies (ROC). For a fee, all documents filed with the ROC are made available. The information provided by the MCA is available for one day and is provided under the Right to Information Act. The information collected in this step includes the following, among others:

1. Financial statements;
2. Annual reports;
3. Legal proceedings against the director or company;
4. Lien on assets;
5. Any problem with non-compliance law/regulations.

These are mainly documents filed after September 16, 2006. Prior to this date, documents were submitted to the ROC in the physical form. These documents were kept in the respective ROC and are not accessible online. To inspect these documents, one must visit the respective ROC.

Reputation

In addition to legal information, it is wise to examine the company's reputation in the marketplace. How is the company generally known to customers, suppliers, employees and other stakeholders? Does the company have a good and reliable name in the market? Does the company have a good payment reputation? Has the company entered into other strategic collaborations before and how did they work out?

Apart from Indian companies' own websites (usually in English), the professional federation of the sector in which the company operates can be an interesting source of information for this purpose. There are also a number of important national business organizations in India, many of which have regional branches. The main ones are:

Confederation of Indian Industry (CII): www.cii.in
Federation of Indian Chambers of Commerce and Industry (FICCI): www.ficci.com
The Associated Chambers of Commerce of India (ASSOCHAM): www.assocham.org
Chamber of Commerce and Industry (PHD): www.phdcci.in

Finally, on the Credit Information Bureau (India) Limited (CIBIL) website, you can check the credit history of an individual, company or partnership. Any disputes/cases filed against the company can be checked and also whether they have ever been declared a wilful defaulter in the past.

Thinking about a merger, M&A or setting up a Joint Venture?

Partnering with an Indian company can be a great way to enter the Indian market. With a good Indian partner, you immediately have an extensive network, knowledge of the market and share the business risk. But there are legal rules and conditions attached to setting up such a partnership.

IndiaConnected helps companies realize mergers, M&A and joint ventures as a trusted advisor and sparring partner. We support parties throughout the entire process: from partner search to due diligence and negotiations.

Are you interested in finding a suitable partner in India? Or would you like to know more about what is required for an acquisition or joint venture?

Feel free to contact our experts here

What is the smartest way to finance your subsidiary or branch in India? This is often a thorny issue for European companies, partly due to Indian regulations. We have listed the various strategic options for you.

Start-up capital

The financing options for your Indian business depend on the legal form of your business in India. The most common legal forms are the Private Limited (Pvt. Ltd) and the Joint Venture (JV), with an Indian company as co-owner. At the time of incorporation, the capital the company will start with is determined by the number of shares issued.

The minimum start-up capital of an enterprise in India is set by law at INR 100,000 (EUR 1,200). Many companies choose to contribute this minimum start-up capital, but bringing in more capital at the outset can solve financing issues in the future. This is because bringing in working capital at a later stage is subject to more rules.

Working capital

Do you need working capital in India? A quick and easy way to raise working capital is to pre-invoice planned exports of products or services to the parent company. The subsidiary may invoice services it supplies or plans to supply in the near future (pre-invoicing) to the European parent company. An advantage of pre-invoicing is that it can quickly generate the necessary cash flow for the Indian company. In case of a joint venture with an Indian partner, financing through (pre)invoicing depends on the agreements between the two JV partners.

Loan for your Indian entity

Does your Indian subsidiary need capital to make investments in India? There are several options for this, but none of them are easy, quick or cheap. The subsidiary can take out a loan from the parent company in Europe, but this is only possible under a so-called External Commercial Borrowing (ECB) construction. Applying for an ECB is a bureaucratic and time-consuming process, but it has a big advantage: the interest rate on an ECB loan to an Indian party is based on LIBOR + a premium of up to 300 basis points.

Get all your financial affairs in order here

Financing through an Indian bank

Indian banks can also provide loans, but the extremely high interest rates rarely make this option attractive or feasible. Interest rates on credit from local Indian banks start at 10-12% and can easily rise above 15%. Only with a cash deposit as guarantee can a lower rate be negotiated in some cases. Apart from the sky-high interest rates, Indian banks routinely ask for collateral if you want to apply for a loan. To organise the paperwork with the bank, you need a local consultant. In addition, you pay the bank an administrative fee of 1% on average. At local banks, you can raise a maximum of EUR 1 to 2 million in this way.

If you need more capital, you can apply to several banks at the same time, which can provide a loan as a consortium. Of course, this only makes obtaining the loan more complex and expensive. In short, borrowing from an Indian bank is really only an option if the Indian branch's cash requirements are extremely high and there will be an almost certain and substantial return on investment by taking out the loan.

International development banks

What other options are there? For projects supported by the Indian government, you can turn to development banks such as IFC (World Bank) and the Asian Development Bank. Chinese banks may also be an option, although these often stipulate that the loan must be spent on products or services of Chinese (state-owned) companies.

Issue additional shares

Finally, it is also possible to raise finance by issuing additional shares in the Indian company. Increasing the share capital is a relatively sustainable, formal and institutionalised way to grow the Indian subsidiary. Moreover, it signals to the outside world that the parent company is serious about developing the services or products of the subsidiary in India.

There are two disadvantages to this route. Issuing new shares is a bureaucratic and time-consuming process and cannot therefore be arranged at short notice. In the event of acute cash flow problems, this does not offer any solace. Another possible disadvantage of increasing the share capital is that it may affect the ownership of the company, especially in JVs with Indian partners.

Want to know more about the best financing options for your business?

Conducting due diligence in India