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Compliance

How to prepare for a Due Diligence Audit

by Sanjeev Archak Sanjeev Archak No Comments

You’ve nailed the pitch, and now it’s time to focus on what investors will ask for once you’ve caught their initial interest. We have already covered the pre-funding and post-funding checklists. In this post we will try to guide you on how to prepare for a due diligence audit.

Once an investor has expressed interest in investing in a company, the deal will enter into a due diligence process. “Due diligence” is a term given to the investigation or audit of a potential investment. Throughout the due diligence process, investors look to confirm all material facts in regard to investment.

Investing in early stage companies is risky and conducting extensive due diligence can reveal problems with a company’s business early on allowing investors to identify the key risks associated with the investment.This will allow them to either develop a risk mitigation plan with the company or back out of the investment altogether.

Some investors conduct due diligence prior to issuing a term sheet, a nonbinding agreement used to propose the terms of an investment. However,most investors, especially when participating in more competitive deals, will issue a term sheet and then complete due diligence. For those deals, successful due diligence results in the legal paperwork being drafted and the investment round closing.

A due diligence (DD) check list is divided into:

  1. Financial DD
  2. Legal DD

Financial Due Diligence

Financial DD covers all aspects of business with a financial perspective covering books of accounts, taxation,  A typical Financial DD check list is reproduced below:

Particulars DD Requirements
Accounting Records, documents and MIS Access to  Accounting package
List of books, records, documents, registers maintained
Sample copies of cash and bank vouchers
Bank reconciliation statements
Monthly MIS
Borrowings Detail of all secured/unsecured loans/working capital debt/ loan from shareholders/ directors & relatives loans
Purpose of loan
 Sanctioned amount, disbursement date/ schedule
Balance confirmations from lenders
Financials / Returns / Assessment status Audited Financial statements
Internal audit report
Tax audit report
Transfer Pricing report
Copies of notices / inspection / orders from VAT / Service Tax / Income Tax authorities
Status of assessments
Key Contracts / Agreements Agreements/ contracts with customers and relevant amendments/addendums as application
Details of Patents/Trademarks Nature of intellectual property – codes generated, physical machinery invented, new formulation, etc.
Ownership of patents
Research and development strategies
Fixed Assets Fixed assets register
Details of intangible assets
Capitalization Policy – Tangible and Intangible Assets
Debtors Age-wise analysis of debtors
Breakdown of provisions and bad debts
Creditors Age-wise analysis of creditors
Payroll / Renumeration Consolidated payroll register
PF / ESI / PT payment Challans and returns

Legal Due Diligence

Legal DD  covers foreign exchange regulation, company law compliance’s,labor law compliance’s.A typical Legal DD check list is reproduced below:

Particulars DD Requirements
Shareholder Details List of all current shareholders including addresses and numbers of shares owned
Share Certificates
Details of the Directors Name of all the directors, appointment of directors, resignation of directors
Board and General Meeting Minutes Copies of Board Minutes
Copies of Annual General Meeting and Extra Ordinary General Meeting Minutes
Private Placement Offer Issue Letters
Record of Offer Letter
Filings with the ROC
Annual Return filed with the ROC Forms filed with the ROC
Charge created on Assets Filings with the ROC
Incorporation documents MoA(Memorandum of Association) and AoA (Articles of Association)
Certificate of Incorporation
Register of Members Register of members
Register of Debentures holders
Loans/Investments/ Guarantees and Securities Register of Contracts
Register of Loans
Register of Investments

A sample DD check list can be found here. Founders and the team have to devote time and energy to the DD audit. Typically, a VC team will be using the gathered diligence materials to write a note to enable investment decision.

So if you are raising money and want help with due diligence audits get in touch with our experts at Integra Books.

7 Different Funding Options for Startups in India

by Sanjeev Archak Sanjeev Archak No Comments

For an entrepreneur to pivot their business models and explore untapped opportunities, funding becomes the inevitable step. Apart from choosing the right entity for registering your startup business and going through the cumbersome process of following the various regulatory compliance’s, getting your startup funded is an important aspect that needs significant time and effort.

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Pre-Funding Compliance Checklist for Startups in India

by Sanjeev Archak Sanjeev Archak No Comments

Typically, most modern startups today seek some sort of funding after they’ve been set up. While we have huge respect for companies that bootstrap, raising funds from investors has become quite common these days and often a necessity as well. But in most cases, startup founders are so involved in the process of raising funds that they forget to look at the mandatory compliances and due-diligence processes that are involved before and after fundraising. Today we’ll take a look at the pre-funding compliance checklist for startups in India.

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Ways to File an Appeal under GST

by Sanjeev Archak Sanjeev Archak No Comments

Previously, we spoke about the various Anti-Profiteering rules under GST Law. Today we will be talking about the ways of filing an appeal under GST regime.

Laws, in general, impose two kinds of obligations. The first obligation is related to tax and the second obligation is related to the procedure. Any registered taxpayer’s compliance with these two types of obligation is put to check by the various officers of the law.

Sometimes this entire process might lead to certain situations of non-compliance which further leads to a dispute between the taxpayer and the concerned tax officer. To put these disputes in check, there are appeal mechanisms set in place.

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Operational and Compliance Relaxations for Startups, Section 8 Companies & Government Companies

by Sanjeev Archak Sanjeev Archak No Comments

The Ministry of Corporate Affairs in its continuous effort to boost the startup ecosystem has made some operational and compliance relaxations for Startups, Section 8 Companies and Government Companies.

In its notification dated 13th June 2017, the MCA has made some amends to its initial notification under G.S.R. 464(E) dated the 5th June 2015 published in the Gazette of India, Extraordinary, Part-ll, Section 3, Subsection (i).

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Labour Law Compliances Made Easy

by Sanjeev Archak Sanjeev Archak No Comments

In their continuous efforts of improving the business environment of the country, the government of India has taken necessary steps to ease the nature of doing business. The Government has been keenly observing the initiatives and benchmarks set by the ‘Doing Business Project of the World Bank.’

Launched in 2002, the Doing Business project provides objective measures of business regulations and their enforcement across 190 economies and selected cities at the subnational and regional level.It looks at domestic small and medium-size companies and measures the regulations applying to them through their life cycle.

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Mandatory ROC Compliances For Private Limited Company

by Sanjeev Archak Sanjeev Archak No Comments

Any private limited company registered in India and successfully operating their business needs to follow the various compliances laid down by the Companies Act, 2013. Failure to adhere to these ROC compliances and regulations would lead to lawsuits and penalties that could severely damage your business and harm the brand that you have worked so hard for.

Following the various ROC Compliances not only makes you a legal entity as per the government norms but also makes you trustworthy for your investors, shareholders, and customers. Read more