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Due Diligence
What is Due Diligence?
Due diligence is a comprehensive verification process that involves investigating and auditing a potential investment opportunity or business deal or purchasing / leasing a property. It aims to confirm and validate all relevant facts, financial details, and any claims made during the investment or M&A process.
Consumer Seva excels in providing comprehensive due diligence services to guide clients through various facets of their investments. Covering financial, legal, operational, and commercial dimensions, our expert team ensures a thorough evaluation. Navigate your investment journey confidently with Consumer Seva. Get started today for a seamless due diligence experience tailored to your needs.
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Types of Due Diligence
Legal
Focuses on evaluating the legal aspects of the target company, including contracts, intellectual property, litigation, regulatory compliance, and potential legal risks.
Operational
Examines the operational aspects of the target company, such as its business processes, supply chain, technology infrastructure, and organizational structure.
What is requirement of Due Diligence?
- Verification of Information: Due diligence aims to inspect and verify the accuracy and authenticity of information presented during the investment or transaction process. This verification process helps ensure that the information being relied upon is correct and reliable.
- Detecting Defects and Risks: One of the main purposes of due diligence is to identify any potential defects, risks, or issues associated with the investment or transaction. By thoroughly examining the details, due diligence can help uncover any red flags that might lead to unfavourable outcomes.
- Gathering Comprehensive Information: Due diligence seeks to gather all relevant and necessary details and information about the investment or deal opportunity. This comprehensive information is crucial for making well-informed decisions and assessing the overall feasibility of the opportunity.
- Compliance and Standards: Conducting due diligence ensures that the investment or deal opportunity aligns with the applicable standards, regulations, and guidelines. This helps in ensuring legal compliance and mitigating potential legal or regulatory risks.
What is purpose of Due Diligence?
- Verification: Due diligence ensures that the information presented during an investment or M&A deal is accurate and reliable. It helps separate claims from reality and mitigates the risk of misinformation.
- Risk Assessment: It allows investors, bankers, and acquirers to assess the risks associated with the investment or deal. They can identify potential pitfalls, liabilities, and legal issues that might impact their decision.
- Informed Decision-Making: By conducting due diligence, investors and acquirers can make well-informed decisions based on a thorough understanding of the target company’s financial health, operations, assets, liabilities, and legal compliance.
- Transparency: Due diligence promotes transparency and accountability in business transactions. It ensures that both parties have access to accurate and complete information
What are the Key components of Legal Due Diligence?
The due diligence normally involves tracing of the title verification of the present and preceding owners, any encumbrance/ charges and state specific legislations impacting the transfer of the real estate property. For accomplishing this purpose, the following components are required to be examined in conjunction with the real estate property requirements-
Derivation of Ownership: The title ownership of a real estate property can be derived in the following manner:
- If the title of ownership of real estate property is obtained by virtue of sale or purchase, the beneficiary shall verify the registered sale deeds and the title documents of the preceding title ownership holders. Further, all the vested rights over the real estate property shall be alienated to the beneficiary.
- If the title of ownership of a real estate property is obtained by virtue of gift, one shall scrutinize the registered gift deed or any other relevant document to give effect to the transferability of the real estate property.
- If the title of ownership of a real estate property is obtained by virtue of a will or inheritance, the executors shall examine the will document as its conditions does not violate the statutory law in any manner and the order of a competent court authorizing legality of the will.
- If the title of ownership of a real estate property is obtained by virtue of lease, the transferee shall examine the lease deed, parties’ rights and compliance of all the obligations in regard to transferability of such property.
Authority to transfer the title of real estate property – It is incumbent upon the vendor to examine the flow of rights or authority in the executed instrument to legally transfer the title of property to the beneficiary or new owner. For this purpose, one has to examine the link documents, mutation and jamabandi records or khatiyan as the case may be. Further, the transferor shall be legally capable (not minor or unsound mind) to execute a binding contract regarding sale or purchase of the property.
Charges or Encumbrances over the real estate property – It is necessary to inspect the encumbrances/ charges (mortgage or lien), over the property to any bank or FI’s from the office of the Registrar of Charges of that particular jurisdiction by procuring an encumbrance or non-encumbrance certificate as the case may be, providing details of all the registered charges, depending upon the transaction. Further, if any charge over property is created by company, CHG-1 form filed with Registrar of Companies shall be inspected and encumbrance certificate shall be procured accordingly.
In case of equitable mortgage or mortgage by deposit of title deeds, the FI’s requires delivery (actual or constructive) of sale deed or conveyance deed. This is to verify the authenticity of the original title deeds and to safeguard FI’s interest by assuring non-existence of such unregistered mortgage.
Transfer within a particular category – In some States by virtue of their local state legislations, if the real estate property belongs to the ST’s, SC’s or other backward classes, it shall be transferred only to the similar tribes and not to general class. Additionally, while conducting due diligence exercise, the preceding title records of the property shall be examined in this regard and if any preceding title owner is found to be SC, ST or of other backward class, that real estate property shall be transferred to the Government at the very first instance.
Sub-lease for a specific purpose – In India, the Government provides the property to the lease holders specifically for agricultural purposes which can further be sub leased specifically for agriculture purpose. While performing due diligence exercise of the agriculture land, it is pertinent to verify the sub leases made in the transaction are not for any other commercial or residential purposes.
Development/ Construction over the property – While conducting the due diligence process, it is necessary to verify the legality of the construction/ development of the property in accordance with the state specific laws in their particular jurisdiction and the development agreement shall be executed. Further, the nature of property shall also be examined i.e. (agricultural or non-agricultural) and if the property is agricultural land, the Change of Land Use is required by that particular State Government.
Government approvals and authorizations – While performing due diligence process, it is pertinent to inspect and verify that all the approvals and authorization in relation to the transaction have been procured by the competent government authorities for building & industrial approvals, insurance policies, taxes, environment compliance etc.
Acquisition process– In India, the law of Land Acquisition restricts the alienation rights of the original owner. While conducting due diligence, it is pertinent to ensure that the real estate property is not under any acquisition process because if any transaction is executed on the property which has been acquired by the government, the transaction shall be treated as void ab initio and cannot be enforced legally.
Publication– To be on the safer side and to prevent himself from any unregistered transactions, the beneficiary may publish a notice in atleast two local newspapers, which will endorse the beneficiary’s bonafide title ownership, if any dispute is raised later.