IPO Due Diligence
Review of Business structure, core functional areas and operations.
Assessing Market Maturity of IPO Candidate.
Statutory, Regulatory and Legal Compliance audit.
Analysis of Corporate Culture.
Overview of relevant employment contracts.
Analysis of Financial and Taxation Components and Reporting.
Identification of irregularities and potential opportunities.
Assessing historical and future growth projections.
What Is IPO Due Diligence?The conventional phrase “Due Diligence”, literally referred to as “Due Care” or “Due Attention” is popularly used in the corporate finance context to denote the overall audit of company activity, as well as separate audits of other components of business including Organisational analysis, legal, tax, financial, business affairs in preparation of a possible transaction. A thorough due diligence investigation is particularly important in the case of an initial public offering in view of the lack of a substantial publicly available information about the issuer. Thorough due diligence before an initial public offering provides significant defenses.
Objectives Of Due DiligenceThe due diligence process aspires to achieve the following:
- To assess the reasonableness of historical and projected earnings and cash flows;
- To identify key vulnerabilities, risk, and opportunities;
- To gain an intimate understanding of the company and the market in which the company operates such that the company’s management can anticipate and manage change;
- To set in motion the planning for the post-IPO operations.
Elements To Be ConsideredDepending on the purposes which the due diligence is ordered for, while at the same time retaining general and principal approaches, a due diligence procedure has its own peculiarities. While revealing hidden problems, various legal and technical angles have to be looked upon keeping in preview the long term vision of the organization. The elements under investigation or inspection would cover: —
- Compliance with applicable laws
- Regulatory violations or disciplinary actions
- Litigation and assessment of the feasibility of pursuing litigation
- Financial statements
- Assets – real and intellectual property, brand value etc.
- Unpaid tax liens and/or judgements
- Past business failures and consequential debt
- Exaggerated credentials/Fraudulent claims
- Misrepresentations or character issues
- Cross-border issues – double taxation, foreign exchange fluctuation, sovereign risk, investment climate, cultural aspects.
- Reputation, goodwill, and other intangible assets.
SCOPE OF SERVICES
Organizational Review and Analysis (Business Due Diligence)Firstly an organizational analysis is conducted which include assessment of the structure of the business, its transparency and controllability and also any unjustified cross holding or other structural drawbacks that may cause anxiety and decrease the business’s value are revealed and eliminated.
Legal Due DiligenceThe second aspect to be considered is legal issues arising during company activity. Legal due diligence covers the legal aspects of a business transaction, liabilities of the target company, potential legal pitfalls, and other related issues. Legal due diligence covers intra-corporate and intercorporate transactions. It includes preparation of regulatory checklists meeting with personnel, independent check with regulatory authorities etc. apart from document verifications. Besides, one shall detect basic encumbrances of significant property. The system of basic contractual and economic relations, as well as licenses and permits providing for the functioning of a business, is subject to consideration during legal due diligence.
Financial Due DiligenceThe third aspect of the report drawn by the results of due diligence is finances and taxes. One shall reveal the main issues related to financial flows, volumes of accounts receivable and payable, define cost and profit centers inside the group of companies, as well as the correct payment of taxes and risks related to possible claims on the part of management.
Documents Required For Due Diligence
Basic documents of the Company, like MOA, AOA, COI, etc.
Statutory Compliance documents
Documents pertaining to Promoters/Key Managerial Personnel/Directors/Committees/Organisation Chart.
Financial Projections of combined operations (existing + proposed) for 5 years.
Bankers to the Company – name & addresses.
Details of Loans, advances and Credits
Accounts for last 3 years and latest unaudited accounts.
Trends in profit ratios.
Associate/Group Companies’ concerns accounts for last 3 years.
Audited Balance Sheet, P&L Account for last 3 years of the promoter company (i.e. if promoter is a Co.)
Age-wise analysis of stocks, debtors, creditors and loans & advances given.
If names of any associates/related units are present in the debtors or parties to whom loans & advances have been given
Details of contingents liabilities including guarantees given by Co./directors.
Promoter’s contribution till date (supported by Auditor’s Certificate, if possible)
Current & proposed Shareholding pattern
Sanctions received by the issuer from bankers/institutions for debt financing in the project
Details on Litigation, Disputes, overdue, statuary dues, other Material development and tax status of Company & promoters.
Copies of IT returns of the Company along with copies of Assessment orders for last three years.
Copies of IT/Wealth tax returns of the promoters along with copies of Assessment orders for last three years.
Copy of documents for Collaborations/Marketing Tie-ups/Other Tie-ups if any.
NOC/Approval/Sanctions from State Government authorities as applicable.
Summary of Bad Debts experience for the last five years.
Details of Patents, Trademarks, Copyrights, Licenses etc., if any.
List of major customers/clients (attach copies of main pending orders).
Competitors & Market shares for Company’s products (with sources, wherever possible).
Sales arrangements, terms & conditions.
Other relevant documents pertaining to the nature and scope of organisation.
Providing business critical comprehensive understanding of the issuer and to identify risks at the earliest possible opportunity
We undertake inquiries into key issues with knowledgeable industry sources, government and regulatory bodies, and with other parties and individuals such as suppliers, customers, distributors and competitors in a legal and ethical manner.
We perform value added investigation and analysis and help decision makers to address risk
We make and provide intelligible and informed decisions to maximise the opportunities.
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