Due diligence is the process of investigating and verifying a company's information to ensure compliance with relevant laws and regulations. It is a critical step in business transactions like mergers, acquisitions, fundraising, and investments, helping to identify and mitigate risks before making decisions.
A company has to fulfil the eligibility criteria for IPO as laid down by the NSE Emerge or BSE SME platform of stock exchanges of India as explained in chapter 1 of this e- book. After the eligibility assessment, due diligence process is started to identify any potential challenges.
Due diligence is a very important step for companies preparing for an IPO, ensuring compliance with legal, financial, and operational requirements. It involves assessing financial records, legal issues, operational risks, and more, with responsibility shared among various experts, including auditors, legal advisors, and the Merchant Banker.
The process, typically lasting 1 to 1.5 months, helps identify hidden risks, ensures transparency, and builds investor confidence. Promoters should prepare by engaging IPO advisors and organizing necessary documents. Any adverse findings during due diligence could delay the IPO unless the issues are promptly addressed. The process is essential not only for IPOs but also for private equity fundraising, mergers, and acquisitions, where thorough checks are vital for minimizing risks and ensuring compliance.
In this chapter, we would focus on the following type of due diligences and the requirement of information for each kind of due diligence:
Financial Due Diligence (FDD) is the process of analyzing a company’s financial performance, stability, and risks to help investors or buyers make informed decisions. It ensures transparency and provides a clear understanding of the company’s value before any investment, acquisition, or merger.
Key documents reviewed during FDD include financial statements, tax records, bank statements, debt agreements, customer and supplier contracts, asset details, and financial projections. These documents help assess profitability, liabilities, cash flow, and future growth potential.
By conducting Financial Due Diligence, investors can identify risks, uncover opportunities, and make confident, well-informed decisions that align with their goals.
Operational due diligence during the IPO process is a comprehensive review of a company’s internal processes, systems, and organizational capabilities to ensure operational readiness for becoming a publicly traded entity. Its purpose is to assess the scalability, efficiency, and compliance of operations, identify risks, and enhance investor confidence. Key areas include evaluating organizational structure, human resources, IT systems, internal controls, and operational efficiency. It also involves reviewing key contracts, risk management frameworks, corporate governance policies, and compliance with regulatory and ESG standards. This ensures the company is transparent, compliant, and operationally robust, supporting a smooth transition to public listing and instilling confidence in investors and regulators.
Legal due diligence in the IPO process is a thorough review of a company’s legal structure, contracts, and compliance to ensure it meets the regulatory requirements for becoming a publicly listed entity. Its role is to identify and address any legal risks, confirm ownership and rights over assets, and ensure that disclosures in the IPO documents are accurate and complete.
This builds investor confidence and minimizes the risk of regulatory or legal issues post-IPO. Key contents reviewed include corporate records, material contracts, intellectual property rights, pending litigation, regulatory approvals, employment agreements, statutory compliance, related party transactions, and policies on corporate governance.
The findings from legal due diligence are critical for preparing the Draft Red Herring Prospectus (DRHP) and addressing any queries from regulatory authorities.
Secretarial due diligence in the IPO process involves a comprehensive review of a company's compliance with corporate laws, governance frameworks, and statutory obligations to ensure readiness for public listing. Its role is to verify that the company has adhered to regulatory requirements, maintain proper documentation, and align with the governance standards expected of a publicly traded entity.
This helps identify and rectify non-compliances, mitigate risks, and enhance investor confidence. Key contents reviewed include board and committee compositions, minutes of board and shareholder meetings, filings with regulatory authorities, corporate governance policies, compliance with the Companies Act and SEBI regulations, shareholding structures, ESOP schemes, and disclosures related to promoters, directors, and key managerial personnel (KMPs).
The findings ensure that the company is compliant and prepared to meet ongoing obligations as a listed company.
Human resource (HR) due diligence in the IPO process is a critical review of the company’s workforce, organizational policies, and compliance with employment laws to ensure that HR practices are robust, transparent, and aligned with public company standards.
Its role is to assess the strength of the workforce, identify potential HR-related risks, and confirm that employee-related disclosures in the IPO documents are accurate. This builds investor confidence in the company's human capital management. Key contents reviewed include employee contracts, compensation structures, ESOP schemes, workforce demographics, succession planning, policies on prevention of sexual harassment (POSH), compliance with labor laws, key managerial personnel (KMP) details, and employee-related litigation.
The findings ensure that HR practices and policies are in place to support the company's long-term growth and compliance as a listed entity.
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