Introduction

Due diligence is an inquiry or audit conducted before a transaction, such as an acquisition, investment, business partnership, or bank loan, to guarantee compliance with financial, legal, and environmental reports in order to register a company in India. The outcomes of all these inquiries and audits will be collected into a Due Diligence report. For startups in India, conducting due diligence about the company is important during the investment stage. To guarantee compliance, we have put together a list of company due diligence requirements for startups in India.

What is Due Diligence for Startups in India?

Due diligence is usually completed by a business before the sale of the company, a private equity investment, the funding of a bank loan, and others. The company’s financial, legal, and compliance issues are usually examined and recorded during the due diligence process. In general, business due diligence is carried out before an investor or acquirer buys an entity or makes an investment in a company. The buyer must obtain the records and data required to do due diligence on the business from the seller of the business or shares.

Due diligence helps the buyer reduce the risks involved in a business purchase deal and make an informed investment decision. Both parties generally sign a non-disclosure agreement before starting the company’s due diligence process because the buyer will get confidential operational, financial, legal, and regulatory data during the process.

What are the types of Due Diligence for Startups in India?

The following are the types of due diligence for startups in India:

1. Due Diligence in Tax Filing

To make sure that a company doesn’t face any unexpected tax obligations down the road, the taxation areas of the business must be closely examined during the due diligence period. The following areas of a company’s taxation need to be looked into:

• TDS Return
• ITR Submission
• Submission of PF Returns and ESI Payment
• GST Return Submission

2. Functional Components

It is important to get an in-depth understanding of the company strategy, business operations, and operational information during the due diligence process. All operational elements, including personnel interviews and site visits, need to be carefully examined. The operational aspects evaluation has to address and record the following:

• Quantity of Customers
• Company Structure
• Details about the seller
• Services
• Details about production
• Count of workers
• Details of machinery and equipment

3. Complying with the law

This is done in order to evaluate the company’s legal and regulatory risks. At times, the hardest and most time-consuming activity is complying with the law. Compliance with the Ministry of Corporate Affairs is mostly responsible for this. It comprises the following analysis:

• AOA and MOA Preparation
• Documents relevant to the company’s funding arrangements.
• Copies of litigation against the corporation that are pending or have already been filed.
• Major contracts, such as the ones seen in partnerships, joint venture agreements, and other agreements.
• If any, equipment leases were signed.
• The business has signed real estate contracts.
• Board meeting minutes for the following three financial years. Every register belongs to the business.
• A list of the directors and other influential managers, along with their phone numbers.

4. Due diligence in HR (Human Resources)

Due diligence on the part of HR involves knowing the country’s hiring contract system, labor laws, labor relations, regulatory structures, work culture, and industry norms. In monetary terms, the labor, or human side, of a business has both cost and value.

• Checklist for payroll
• List of ESOP schedules & HR policies
• Contact details for employees and other details

5. Startup Accounting Compliance

Every company is obligated by the Companies Act, 2013 to maintain a book of accounts and complete transaction data. Therefore, it is necessary to audit and verify detailed financial transaction data in comparison to the company’s financial reports. The following are a few things to think about when conducting companies’ financial due diligence:

• Validation of a financial statement
• Every asset and liability needs to be evaluated and confirmed.
• Information about cash flow must be confirmed.
• Every financial statement is examined in comparison with transactional data.

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Final Thoughts

This article discusses the essential requirements for Indian startups. To avoid facing legal repercussions, companies, startups, and other business structures must commit to MCA compliance rules. In addition to the previously stated legal requirements, startups also need to file specific event-based legal documents.