10 Feb 11 Due Diligence – An essential activity for risk aversion

Narayan Murthy could not have been more correct when he said, “India will become the country of choice…It’s already starting to happen“  (Forbes, 2000). Joint ventures, merger and acquisition or other forms of strategic partnerships with Indian companies have become desired options for foreign players to gain a foothold in the Indian market. But how can you be sure that your partner is not duping you and is completely honest about its credentials? It is imperative to check financial and legal capabilities and competitiveness of your partner.

Applying the initial screening criteria for partner selection may bring out unlisted companies as potential partners. Information about the bigger ones maybe easily available from published sources, but it is difficult to gauge the exact potential, background, legal status and goodwill of smaller companies (especially those operating in under documented sectors in the country). How do you do it if you are not based in India or there is only limited information available on public domain about your partner? In such a situation, hiring a local due diligence expert is highly desirable. A local due diligence expert will have knowledge about which government agencies to approach to obtain information about the company in question and what could be the other possible avenues through which the credentials of the company can be verified. Due diligence is all the more essential if the company in question is a small or medium sized enterprise.


A local expert helps you check on the ground reality


Truth about the company’s financial situation can be unearthed by looking at its filings with the Registrar of Companies. Agreed, that this can be done easily by someone based out of India as well. So where does the need for a local due diligence expert arise from? There is no questioning the fact that the company’s reputation, business ethics, relationship with suppliers and vendors, management and its scale of operations are equally important. This is where the local expert will essay an important role. A local expert will help you check on-the-ground reality of your potential Indian partner.  We were once involved in researching a company and found that it did not have a physical existence and was present only on paper. This would not have been possible if we had not done on-the-ground research by hiring a local associate.

Being a local, your expert can comfortably establish a connect with the concerned vendors or customers and extract important pieces of information about the prospective partner, which otherwise is nearly impossible to get from published data. A local expert will also be helpful in physically verifying the presence of a company’s facilities and reality behind its proclaimed scale of operations. He can even have one-to-one discussions with some of the employees. These conversations can give deeper insights into the company’s operations. Our due diligence team prevented a motorcycle manufacturer from entering into a fraudulent deal. Its prospective partner was an Indian distributor who had misrepresented its sales figures and scale of operations. We found this through interviews with employees, suppliers and vendors of the concerned firm. We also verified the scale of operations. An intensive background search also revealed that the promoters were involved in criminal cases.


Don’t forget background checks and litigation status

The due diligence process would be incomplete without doing a check on the litigation status of the company and verifying the background of the company’s senior management. Such background searches can be conducted by getting in touch with government authorities such as the Serious Fraud Investigation Office, Company Law Board, Competition Commission of India, consumer cells and local police stations among others. The due diligence activity also gives an idea about the company’s political clout.


Due diligence in India is quite tricky and helps in filling the gaps in information which occur due to non-availability of data about unlisted companies. Even if information is available, due diligence can help you verify its authenticity. It can help you identify activities which could eventually result in shelving the deal. Or on the other hand, the positive results could make you more confident about your partnership.

Mariam Ahmed

Mariam was a senior research analyst at ValueNotes.

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