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What is Due Diligence for Startups in India?

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:
    1. TDS Return
    2. ITR Submission
    3. Submission of PF Returns and ESI Payment
    4. GST Return Submission
  2. Functional Components:
    • Quantity of Customers
    • Company Structure
    • Details about the seller
    • Services
    • Details about production
    • Count of workers
    • Details of machinery and equipment
    • Complying with the law:
      • 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.
  3. Due Diligence in HR (Human Resources):
    • Checklist for payroll
    • List of ESOP schedules & HR policies
    • Contact details for employees and other details
  4. Startup Accounting Compliance:
    • 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

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. Written By: Ishita Ramani
Email: [email protected], Mobile: +91 9643203209

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