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Due diligence is the process of systematically researching, analyzing and verifying the accuracy of financial and non-financial aspect of business at the time of Initial Public Offer , Merger and Acquisition ,Sanctioning of Loan, Investment in New Business, Venture Capital funding , Divestment.
These term due diligence originated in the business world, when the need to validate the financial statement was found. The main objective of the process is to reduce risk to a substantially low level and ensure that all stakeholders have a knowledge of the companies performance and its report card of the company is in the eyes of the stakeholder.
The process of due diligence involves the offering of securities for purchase, as in an IPO (initial public offering), specific corporate officers are responsible for the proper completion of the process, including the issuer, issuer’s counsel, underwriters, CFO and the brokerage firm offering shares. Because of the delicate nature and importance of such judgments to the prospects for the performance of a company’s equities in the public market, there is a strong emphasis on neutral, unbiased analysis of both the current financial state and future prospects of the firm in question.
The process of due diligence is not only followed while raising fund through IPO , in fact it is a continuous process in many of the companies, Banks are one of those institutions who regularly verify and take the due diligence of all the loan proposals which come to them. The process of due diligence in banks are very different . While submitting a loan proposal bank asks the business men or the customer to submit documents which shows their financial stability. In these case banks verify their financials through Income Tax Returns and analyze that wether the person has strong financial to return back the loan for which he has approached bank.
Another area where due diligence is widely used is Mergers and Acquisition. There are mergers and acquisitions of companies taking place every now and than. For the purpose of these companies are required to carefully analyses the business which they are acquiring so as to reduce the business risk. During the process of due diligence the due diligence specialist look after the financial and the non financial aspect of the business. He gives a thorough check on the background of the officials of the company who formed the company. During merger and acquisition the assets and liabilities along with contingent liabilities are taken over by the other business , so to reduce the chance of any kind of fraud the due diligence specialist looks after the business financials. The industry trend ,the companies performance in the given trend and reasons are the answers which the company can get only after the due diligence.
When a new idea evolve in the mind of the individual the first problem which he faces through is the financials to execute the idea. When the idea is been explained to the venture capitalist he takes a due diligence of the person who has idea in mind. Along with the due diligence of the individual he takes efforts on knowing the in and outs of the business .He verifies the future viability of the business and analyses it and than he finally comes at the conclusion how much to invest in the business. The same happens at the time of business expansion when the existing business wants to grow .