While investing in a foreign country, investors often do an analysis to see whether entering to that particular market (country) would attract any risks. It is especially the case while entering into partnership with Indian nationals, in case of mergers and acquisitions, or starting a joint venture etc. Due diligence helps investors take informed decisions as it discloses the background information about the any liabilities, discrepancies but also gives a picture of the reputation of individuals and their financial situation to establish whether the information already known is credible or not.
Due diligence is very important if investors are new to a market. Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis can provide a holistic view to potential investing companies. This way, foreign companies can decide whether to go ahead with an investment or withdraw from a deal.
As far as due diligence in India is concerned, it is recommended that it is done by all businesses, especially in case of a partnership or a joint venture. While conducting due diligence in India, companies should consider the following points (source: india-briefing.com):
Personnel: The terms and conditions of employment as well as the experience of the staff should be reviewed. Also, review commercial management, including customer care, research and development, and marketing.
Financial records: This should be one of the focus areas for any foreign company looking to invest in a business, company, or a joint venture. Investors should study the company books and records, accounting, and bookkeeping methods. It is important to understand the debt on the business, and the relationships with banks and lenders, as well as the past and project cash flow of the company.
Services: Review the products and services offered by the business, with a focus on prices and how it compares to industry standards.
Assets: Following a thorough study of the financial records, a review of company assets is another important focus area for foreign companies looking to invest in an Indian business. The lease and deeds that company has signed, and the value of property and equipment should be verified while conducting due diligence. Review the company’s property and equipment, including IT systems and technology.
Business operations: Through due diligence, get an understanding of the company’s location, inventories, suppliers, management, customer relations, and insurance policies.
Legal: Pending or ongoing litigation can hamper a company’s value and reputation. Therefore, investors should review the company’s litigation, contracts, orders, and environmental issues.