Conducting due diligence in India

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?

How to find a reliable distributor in India?

Successfully exporting to India is not done without an agent or distributor. After all, such a partnership provides access to local market knowledge and a sales team with a ready-made network. But how do you find a reliable Indian distributor with whom you can conquer the Indian market? Consultancy firm IndiaConnected offers five tips for European entrepreneurs to find a suitable Indian business partner.

1. Find a good distributor in India through your network

Formal avenues almost never lead to a suitable business partner in India, so it is important to leverage your network to find a reliable distributor. Start by networking in your home country with entrepreneurs already operating in India or through organizations and agencies with experience in India. From that starting position, you can then expand your network with working visits to India.

2. Build a personal relationship

Once you have found a potential distributor in India, it is very important to put time and energy into building a good personal relationship. This does not yield immediate business benefits, but this is vital in India to achieve a successful partnership. For example, invite the Indian distributor or business partner to Europe. If he is willing to invest time and money in a trip to Europe, this is a clear and positive signal: the potential business partner is professional and has serious interest.

3. Find out how influential the Indian business partner is

India is a country of hierarchy and networking. Therefore, the network and social background of your potential distributor is very important for the extent to which the business partner can operate successfully. Try to find out what kind of reputation the company has in India, how influential the distributor and/or family is and whether there are good contacts with the (local) government.

4. Doing business in India with the whole family

It is important to realize that you are not only working with your Indian business partner, but also with its family. Therefore, show interest in the Indian distributor's family and, if possible, try to establish a relationship with them as well so that you know what interests are involved in the background. On no account turn down an invitation to the business partner's home for dinner or to go along to a cousin's wedding. These are important moments when a relationship of trust takes shape. On the other hand, people in India also expect openness in return regarding your private life. This is often one of the best parts of doing business in India.

5. You don't have a deal until money is in your account

In India, a signed contract has much less value than in Europe. Therefore, start small: send a sample or a small trial shipment. If the potential partner is willing to pay for this, that's a strong, positive signal and you can start building on the collaboration.  

"India has been a great success for me".

'Oh no huh, I shouldn't go to India after all,' thinks Aert van der Goes when he stumbles upon that country in his search for a producer of field hockey goalie protection. Three years later, his opinion has turned 180 degrees. "I asked my Indian partner to become a shareholder," he says.

Finished goalkeeper outfit

When the daughter of Aert van der Goes sees the goalie outfit provided by her Breda field hockey club, she almost loses the desire to play goalie. Tattered, smelly material, and that too in three colors that clash. "That's not the way to make it attractive to play goalkeeper," Van der Goes realizes, but inquiries at the field hockey club reveal that field hockey goalie clothing is expensive: there's no other way. But it can be done differently, thinks Van der Goes, who played goalkeeper himself in his youth. He conducts market research and finds that the niche market for field hockey goalie outfits is dominated by a manufacturer from New Zealand, which makes good but also very expensive material. Van der Goes, an entrepreneur at heart, smells opportunity.

Only place in Asia

In his search for a producer, Van der Goes stumbles upon the town of Jalandhar in the Indian state of Punjab in 2015. "Oh no huh," he thinks, "not India after all." Poverty, chaos, diarrhea, filth: the preconceptions haunt his mind. But there is little else to do. Jalandhar seems to be about the only place in Asia where goalkeeper outfits are made. Through the Internet, he contacts a producer he can meet at Schiphol Airport just a week later. "The guy happened to have to be in Europe on business. He was already active in Europe, supplying simple legguards (large foam leg guards) to an American party under private label." 

From the beginning, I resolved not to be too stubborn with this company and to bring in experts in time.

No culture shock

Although things clicked between the two, Van der Goes engaged IndiaConnected in 2015. "From the beginning, I resolved not to be too cocky with this company and to bring in experts in time," he says. In September 2015, he travels to India for the first time. That working visit pleasantly surprised him. "At the airport in Delhi, I was neatly met in the middle of the night by a driver with one of those signs with "Mr. Aert van der Goes" on it. The hotel was beautiful and the people giant friendly. The next day I explored the city and feasted my eyes. Delhi is a busy metropolis, but it wasn't a culture shock for me."

Professional factory

In Amritsar, the nearest airport from Jalandhar, two days later Van der Goes meets IndiaConnected Associate Bhupinder Bansal who has organized a comprehensive program for him. Together they visit potential manufacturers in and around Jalandhar. The factories turn out to be of very varying levels. Van der Goes: "We saw a professional factory where up to four hundred people work, but also small producers where people sit on the floor gluing legguards together. In general, the working conditions in the factories I saw were not as bad as the media usually portray. During that first working visit I got a good idea of the possibilities of manufacturing in India."

During my first working visit, I got a good idea of the possibilities of manufacturing in India."

Long-term working relationship

Six months later, Van der Goes travels to Jalandhar again with Bansal by his side. Bansal, whose command of Punjabi in addition to excellent English, supports him during negotiations with the producer with whom Van der Goes has the best feeling. "The director of the party I have partnered with has the same vision of the market as I do. That is important when you want to establish a long-term working relationship. Especially since we really started developing our product together. The product we have now is 50% from their quiver and 50% from mine." 

Ennobled tailors

So what does the factory look like? "It's messier than I would like," Van der Goes acknowledges. "It's manual labor, so the continuity of production requires constant attention. I regularly spend a few days on the shop floor myself to insist on quality. This is going better and better. Although our employees do not speak English, they are not unskilled people. They are a kind of refined tailors who work with foam materials. It is specialized handiwork and there is a shortage of that in India as well. The working conditions are therefore relatively good. The education of the employees' children, for example, is paid for by the company." 

Co-shareholder

After three years of development, Van der Goes is ready to scale up. "In 2019 we are going to triple our production capacity. Our producer is investing in this. I have also asked him if he would like to become a co-shareholder of Black Bear Goaly Armor. It's just not there yet, because his father-in-law still has a big finger in the pie. That is a disadvantage of doing business with family businesses. Meanwhile, our mutual trust is fortunately high. This is evident from his willingness to invest to expand production. In the future we will further secure our cooperation, perhaps by making him a co-shareholder in my company."