DUE DILIGENCE CERTIFICATE
Saturday Brainstorming Thought (304) 06/12/2025
By:-Er. Avinash Kulkarni
9822011051
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer,
Rera Certified Consultant, Black Money Act Regd Valuer
A due diligence certificate is an official document certifying that a thorough investigation has been completed to verify information, ensure legal compliance and confirm that there are no significant issues before a transaction, investment or business deal
In the financial and real estate sectors, it confirms that all legal and regulatory requirements have been met and that all disclosures are accurate, providing confidence to buyers, investors or lenders
Key Aspects of Due Diligence Certificate
1) Financial and Legal Verification
It certifies that an issuer or company has met all legal requirements and that disclosures made in documents like offer documents or prospectuses are true, fair and adequate
2) Regulatory Compliance
It confirms that the subject of the certificate (eg a property, a company’s share issue) compiles with all relevant laws and regulations, such as those from SEBI (Securities and Exchange Board of India)
3) Summary of Findings
It often accompanies a more detailed due diligence report that summarizes the research and analysis conducted to determine the value and potential risks involved
4) Specific to the Context
The content and requirements for a due diligence certificate vary depending on the industry and the specific transaction
A) In Finance
It can confirm that intermediaries are registered, shareholders consent is obtained and that funds raised are managed appropriately
B) In real estate
It certifies that a property has undergone a physical and legal investigation to confirm it’s free from legal disputes and encumbrances
5) Confidence and Assurance
The certificate serves as a critical document to assure stakeholders that a diligent process has been completed, mitigating risks for those involved in the transaction
Common Uses of Deue Diligence Certificate
1) Mergers and Acquisitions
A prospective buyer conducts due diligence to determine the value of the target company and uncover any hidden liabilities or risks before finalizing the deal
2) Public Offers of Securities (IPOs, Rights Issues)
Lead managers and debenture trustees submit a due diligence certificate to regulatory bodies like SEBI to confirm compliance with all legal and regulatory requirements and ensure adequate disclosures in the offer documents
3) Real Estate Transactions
A due diligence certificate can confirm a property’s legal and physical status, ensuring it is free from disputes and complies with regulations
4) Third Party Vendor Management & Financial Compliance
Companies perform customers due diligence (CDD) or third party due diligence (TPDD) to comply with anti money laundering (AML), anti-bribery, and anti-corruption laws and assess the risks associated with new business partners or clients
Meaning of Due Diligence
1) There is no legal definition of the term due diligence
2) Simply put it as a detailed investigation of the affairs of a company
3) It is the process of carrying out an investigative analysis of the financial, legal and operating activities of an entity in connection with a proposed transaction that would result in a significant change in the ownership or the capital structure of the entity
Aim of Due Diligence Process
Identify problems within the business, particularly any issues which may give rise to unexpected liabilities in the future
Ingredients of a successful Due Diligence
1) Must be unbiased
2) Should be carried out by independent professionals
3) Requires the management’s cooperation
4) Done with a positive attitude
Purpose of Due Diligence Certificate
1) Assess the reasonableness of historical and projected earnings and cash flows
2) Identify key vulnerabilities, risks and opportunities
3) Understanding the company and its market
4) Setting in motion planning for post-IPO operations
5) Highlight changes required in the company’s tax, legal, corporate or shareholding structures
6) Check whether the company has complied with all the laws
Need for Due Diligence in IPOs
1) Going public increases the number of shareholders
2) Board performance subject to closer scrutiny
3) Institutional investors look for increases in share prices, achievement of profit targets and dividend pay-outs
4) Investors require assurance of a system of strategic planning and budgeting, financial reporting and management information
5) The SEBI disclosure requirements are met through the due diligence process
Key Areas of Focus for Due Diligence
1) Financial Statements
To ensure their accuracy
2) Assets
Confirm their value, condition existence and legal title
3) Employees
Identification and evaluation of the key movers
4) Sales Strategy
Analyzing the policies and procedures in place
5) Marketing
What is driving the business and its effectiveness
6) Industry
In which the company operates, understand trends and new technologies
7) Competition
Identify the threats
8) Systems
It’s efficiency and necessity of upgrades
9) Legal and corporate tax issues
Tax issues that need to be solved
Shareholding structure robust
10) Contracts and Leases
Identify what are the risks and obligations
11) Suppliers
Are they expected to remain around
12) Intellectual Property
Protected and to what extent
Legal Issues of Due Diligence
1) Licenses and Permissions
2) Litigation
3) Real estate and Movable Property
4) Company law
5) Employees, Consultants, Labour relations
6) Environmental Permissions
GAP Analysis
1) The due diligence helps identify areas where the company exhibits weaknesses
2) It may highlight deficiencies in the company’s management structure or an inefficient tax structure
Filling in the Gaps
Gaps identified assists the directors in
1) Divesting of non-core, non-profitable activities
2) Critical analysis of the control, accounting and reporting systems
3) Critical appraisal of key personnel
4) Identify the value drivers of the company
Consequences of Misrepresentation in offer documents
1) Civil liability under section 62 of the companies act 1956 for misstatements
2) Liability is in the form of compensation to any person who has sustained loss or damage due to such misstatement
Persons liable under Section 62
1) Every director holding office
2) Every person named in the offer document as a director or a proposed director
3) Every promoter of the company
4) Every other person who has authorized the issue of the prospectus
Criminal Liability
Section 63 of the Companies Act, 1956 provided for punishment in the form of imprisonment and fine upto Rs 50000 for any untrue statement
Persons liable under Section 63
Any person who has authorized the issue of the prospectus except
1) An expert who has given his consent to have his statement recorded in the prospectus
2) Auditor, Legal advisor, attorney, solicitor, banker or broker who has given his consent to include his name in the offer document in any capacity
Due Diligence Checklist
1) Collect the necessary documents
2) Check the legal aspects
3) Schedule as In-Depth financial analysis session
4) Create a risk management plan
5) Perform business model analysis and review plans
6) Final offering formation
