Doing solid due-diligence for a private equity investment – here are the key steps

PrivateEquityLawyer_AngiraSinghviEvery private equity investor conducts due diligence on a target before the transaction is finalised and the documents are executed. Through this, a third party (and even the target entity itself) is able to know its actual position vis-a-vis the standards in various sectors.

With a legal due diligence, an investor wants to:

– ensure that the information provided by the target (and which forms basis for the investment) is accurate;

– find out any additional information the advisors should have been told, but were not;

– probe into the assumptions in the business plan and evaluate the possibility of achieving the targets set;

– identify the principal risks to the business and chalk out a mitigation plan; and

– conduct a more detailed analysis of the current state of the company.

There are several types of due-diligence, such as legal, financial, operational, and environmental. As lawyers advising on a private equity transaction, your focus area will be on the legal due diligence.

The term ‘legal due diligence review’ (“LDDR”) refers to the evaluation of whether the target entity has compied with various laws in letter and in spirit. This helps in identifying the major legal risks faced by the investor. Let us look at the steps involved in an effective LDDR.

Step 1: Prepare and circulate the LDDR checklist

An LDDR checklist will note all the possible documents needed from the target entity and to sub-divide them, they are typically grouped based on the areas of law.


Image above is from Oliver Tacke’s Flickr account and has been published under a CC BY 2.0 licence.

For example, you will need the incorporation documents of the target, the details of the shareholding and transfers made, the contracts that the company has entered into with third parties, environmental compliances, certificates of payments made under the Payment of Bonus Act and so on. You can accordingly sub-divide the LDDR checklist into main sections such as “General Corporate”, “Shareholding”, “Material Contracts”, “Finance”, “Employment”, and “IPR”. These sections can then be further sub-divided.

For instance, the general corporate information required from the target can include:

–  the company’s certificates of incorporation and commencement of business and the memorandum and articles of association, along with all amendments that have been made so far;

– the addresses of the registered office of the company, other office(s) of the company, and other locations from which the company operates;

– the legal structure of the group of which the company is a member, preferably in the form of an organisation chart, stating the names and addresses of all the companies in the group with the percentages of participating interest and describing the relationship between the company and other affiliated group companies, partnerships, and (un)incorporated business associations within the group;

– a summary of the history of the company;

– a brief description of the company business, for example, the business areas, the main products in each, and geographical presence;

– the details of any alliances entered into or to be entered into by the companies including copies of the agreements;

– the details of any branch, agency, place of business, or any permanent establishment of the company outside India including address, brief description of business carried on and numbers of personnel involved;

– the copies of all documents relating to any scheme, merger, amalgamation or restructuring, asset transfer, or acquisition involving the company or any of the group companies or subsidiaries.

The intention, as you can see, is to obtain as much information as possible.

Step 2: Know all the applicable laws

For an effective LDDR, the legal advisor should be aware of all the laws applicable to the target’s business. It is important to assess whether the target has complied with all thse laws and the consequences of any non-compliance. These consequences may pose risks for the target company and therefore, the investment as well.

For example, if the target is required to obtain a particular license prior to manufacturing a product and if it has not been obtained, there is a risk of having to cease the manufacturing activity. This may lead to immense losses to the target and therefore, the investor. Unless you know that this license was required, you will not be able to assess whether the company has complied with this legal obligation.

It is also important to understand the application of local laws. Land laws, for example, vary from state to state. Depending on the state in which activity is carried on, all applicable local laws should be identified.

Step 3: Review and comprehensively analyse documents

After circulating the LDDR checklist, a representative of the target entity, usually their lawyer or company secretary, will assess the applicability of each point. The relevant documents are then provided to the investor’s legal advisors.

documentsThese documents should be reviewed in detail by the lawyer and all possible outcomes should be analysed. For example, in case of an outstanding term loan shown in the books of the target, you should analyse all the restrictions in the term loan agreement such as whether any further funding (by the investor) is permitted, whether there are restrictions on the payment of dividend to the investor, and whether the charges are enforceable. If these activities require the prior permission of a lender, it may not be easy to recoup the investment. If an outstanding loan is shown in the balance sheet, for instance, all relevant documents should be obtained from the target in order to assess any restrictions on the investment, the enforceability of any charge, and the value of secured assets.

To take another example, agreements that reflect the business of the target need to be obtained and evaluated. Often, agreements have not been entered into and some times, such contracts have been entered into with related parties. This can be seen from the corporate details provided by the target. If there are any related party agreements, you should check whether all the required provisions have been complied with.

Since the LDDR is an investigative activity, it is important to keep your eyes and ears wide open. Often, attempts are made to hide information that may be detrimental to an investment. A glaring example is the Ranbaxy transaction. Important information was concealed during the due diligence and as a result, the joint venture party incurred losses. You may need to request the target for clarifications and seek further information backed by documents before you are satisfied on all the issues.

Step 4: Think about what can be done to mitigate risk

After the review of all the documents, you will often notice that further action is required to mitigate the investors’ risks. Usually, they belong to the following categories:

(i) obligations that have to be fulfilled as a condition precedent to closing the investment;

(ii) representations and warranties backed by indemnity;

(iii) creation of escrows; and

(iv) conditions subsequent.

For instance, after the review of loan documentation, you may conclude that prior permission is required before additional funding is brought in. It is your duty to make your client aware of this stipulation and then include it among the conditions precedent to closing the transaction.

Similarly, if the target is facing litigation with respect to an event prior to the investment, the investor should not be required to bear its costs. The amount of potential loss should either be set aside in an escrow or adequate representations and warranties backed by indemnity should be stipulated in the transaction documents.

Step 4: Draft and finalise the LDDR report

The outcomes of an LDDR exercise are usually set out in a report. Depending on your understanding with the client, it may either be a long form report or a report setting out only the main issues.

You should bear in mind that the report should be structured in a manner that all sections are classified and organised in the order of importance. Issues should be clearly identified and all risk mitigation solutions should be clearly set out.

In my next post, I will discuss the transaction documents in a typical private equity investment.

Angira Singhvi is a principal associate with Khaitan Sud and Partners and handles general corporate, joint ventures and private equity investments.


An introduction to strategies and risks in private equity for lawyers

PrivateEquityLawyer_AngiraSinghviCommon funding options available to companies include taking loans from banks, commercial borrowings, and issuing equity shares and convertible instruments. Even though the cost of borrowing is perceived to be lower than the cost of equity, companies often prefer not to take loans because among other reasons, loans require security, increase the repayment obligation on the company, and increase its debt-equity ratio.

Another option is to raise equity investment from a closed group of private persons directly. Well known examples of this category of investors, known as ‘private equity funds’ or ‘private equity firms’, include Blackstone, Goldman Sachs, Warburg Pincus, and Carlyle and their investments are called private equity (“PE”) investments. Their objective is to transfer back their shares in the company at a pre-determined rate at the end of a certain investment period and earn a return on these investments. In India, unless the gestation period of the target company’s business is long, this period ranges between three and five years.

In India, private equity investments are mostly made into private or public non-listed companies. While there is no bar, legally or conceptually, to making private equity investments in listed companies, the law governing the acquisition of shares in listed companies above a certain threshold makes them cumbersome.

Since it is aimed at maximising shareholder return in a fixed period, private equity helps in speeding up the process of achieving growth targets. Private equity can also help professionalise some mature companies that earn profits but do not have systems in place with respect to reporting, compliance, and accounting. It can also change the direction of a company and enable it to take calculated risks as opposed to the following the directions of one person. Remember also, that the private equity market is less transparent compared to the market for listed stocks and bonds, and so may offer more opportunities and higher returns.


Even though most PE funds are generalists and invest into all kinds of promising ventures in a variety of sectors, specialised PE funds focusing on particular sectors or a particular strategy of investment, have emerged. Private equity investments can be used for financing start-ups, injecting working capital into a growing company, or acquiring a mature company. It can also be used to strengthen a company’s balance sheet.

– Among all categories of PE investments, venture capital, which is provided to start-ups and early stage growth companies, has the highest risk and the highest potential for returns. The strategy here is to invest in companies that promise a bright future. Their business model typically involves high technology industries such as information technology, healthcare, and green or renewable energy. Companies, if successful, experience higher levels of growth.

– Growth capital is provided to mature companies that have already made it through the early stages and are able to generate constant revenues. Such financing is usually for a major expansion or diversification that the company cannot fund on its own. Recently, on 1 May 2015, Goldman Sachs and Rocket Internet invested USD 100 million into food delivery portal ‘Foodpanda’. The investment is aimed at further expanding Foodpanda’s own delivery activities and improving overall customer experience across global markets.

– The strategy behind buyouts is to acquire a stake in a mature, established company with a strong market position in order to exercise influence on it. Privatising a company allows the management to take decisions or adopt strategies that could otherwise be difficult or controversial in a publicly listed company. For example, disposing off an undertaking or a substantial asset of a listed company may be a cumbersome task since the same requires a special resolution to be passed under company law. It is much simpler to pass such resolution after acquiring a stake in a company through which the investor can influence the decisions of the company.


While a private equity investment may appear more appealing than a bank loan, there are risks involved in the transaction.

– The PE investor, even when holding a minority stake, exercises influence over the company and restricts the entrepreners discretion to a large extent.

– The costs of continuous and detailed reporting may be an added burden on the target company.

– There are likely to be restrictions on the transfer of shares of the current shareholders of the company for the benefit of the PE investor;

– The rights of the PE investor at the time of its exit from the company along with its return may often be unduly harsh on the promoters. For example, it may require the promoter to compulsorily sell his shares on terms and conditions agreed upon by the PE investor with a third party purchaser.

– Being pure investors, the interest of a PE investor in the company is limited to the recoupment of their investment.

These concerns, especially the risk of diluted control over the company, may often outweigh the benefits of PE investment.


To ensure a successful PE investment, lawyers advising the parties have to ensure that both investor and the target are well prepared.

– The target company should weigh the limitations that are likely to be placed on the discretionary powers of its current owners against the need for money from the investors. Clients that are not from a professional background must be clearly advised about these consequences.

The main concern of a PE investor is to ensure that it exits the company smoothly and with an acceptable return on its investment. An estimate of this return helps avoid disputes later. The target company should prepare this estimate professionally. This requires clarity on the current business situation as well as the forecast.

A PE investor, prior to investing in the company, always conducts a penetrating due diligence on the target company. The investor will examine every aspect of the company including its governance, compliance, and reporting structures. By ensuring that it is compliant, for example, that meetings are held in time, that books and registers are well maintained, that all filings are made, that proper contracts have been entered into for all activities, and that licenses and registrations have been duly obtained and maintained, the target company can remove uncertainty and delays in the conclusion of a transaction. In fact, the target company should even conduct an internal compliance due diligence on a regular basis.

– Disagreement during the finalisation of transaction documents can be largely reduced if, before entering into a transaction, the framework of the investment is set out in a term sheet. There should therefore be clarity on issues such as the nature and type of instrument (whether a convertible or plain vanilla equity), the structure through which equity will be infused, the exit rights of the investor, restrictions on the transfer of shares of the current shareholders, and the governance of the company. The agreement on these issues can be revised after the reviewing the results of the due diligence.

I will reflect about private equity transactions in greater detail in a few more posts here.

Angira Singhvi is a principal associate with Khaitan Sud and Partners and handles general corporate, joint ventures and private equity investments.


Learn to structure and communicate a good due diligence report

Drafting_for_Business_Deepa_Mookerjee.jpgIn my last post here, I listed out some points that are important for a due diligence exercise. Completing the investigation (or the due diligence) however is just half the job. The latter half – often more confusing – is to organise all the information you have collected in a structured manner and communicate it effectively to your client.

Before starting to draft, determine the type of due diligence report your client wants. Typically, though there is no formal classification, there are two types of due diligence reports.

A comprehensive due diligence report

You will come across this type more frequently. Many pages long, often going into hundreds of pages, it will contain all the information that you have found from your investigations about the company. It is usually divided into many chapters, each containing information about a specific part of the company.

Generally the chapters include:

Corporate information: This chapter contains details about all corporate matters related to the target company, including its date of incorporation, number of directors, provisions in the articles of association, corporate compliances, and key decisions of the board and the shareholders.

– Litigation: This chapter lays out the details of all the litigation pending against, and filed by, the target company and their impact on the transaction, if such litigation is decided against the target company.

– Material agreements: Here, all the material agreements that a company has with its suppliers, consumers, and retailers, are reviewed to understand the important terms of such agreements, and determine whether there are any particular clauses that will hinder the transaction.

– Human resources: Here, a broad overview is provided of the employee structure, the key employees, their terms of employment, and conditions of their contracts.

– Financial information or indebtedness: In this chapter, all information about loans or financial indebtedness of the company is reviewed, and key issues such as requirement of consents from lenders, and restrictions on transfer of shares or assets, are highlighted.

– Compliances: In this chapter, there is a detailed investigation into the registration and licenses required under law to carry on the business of the company. Information regarding all statutory compliances is found in this chapter.

– Property: Information about all property (movable and immovable), whether owned or leased by the company, and their terms and conditions, is reviewed and outlined in this chapter.

– Intellectual property law issues: This is important if the target company has registered trademarks, copyrights, or patents. All documents in relation to their registration, ownership, or assignment are analysed, to examine any restrictions present on such intellectual property rights.

– Environmental law issues: If the target company is a manufacturing, construction, or engineering company, acquirers ensure that the company is in compliance with all environmental statutes in India and does not violate any pollution standards that have been prescribed.

– Insurance law issues: This chapter outlines the insurance policies taken by the target company, to provide the acquirer with a general idea of the protection available to the target company.

Since such a report runs into many pages, a client often asks for a separate document listing key issues to accompany this report. The list of key issues is a three-or-four-page document (maybe more depending on the transaction) which only lists out the problem areas of the company and provides concrete suggestions on how to solve these problems. Remember that the client will always want a solution to the problems. It is not enough to only identify the problems in the company. As a lawyer it is your duty to provide a solution. Therefore, while drafting, take some time out to think clearly about the manner in which a particular problem can be solved, and then specify that.

An “exceptions only” due diligence reportAPCCLP_CompanyLaw-Banner

Here, a lawyer is only supposed to list out the problem areas or issues with the company. The due diligence report will have language to the effect that “everything is in order with the company except the following…”. This is a report where the client assumes that all the items are in order except those listed in the report. The only problems with the company or its operations are those identified in the report. In other words, while drafting, you will only list out the problems with the company that you have investigated. You will not spend your time stating facts about the company that are in order.

In a comprehensive due diligence report, you will provide the client with all the facts (whether they are in order or not). You will obviously identify problem areas specifically but provide a complete picture as well. In an “exceptions only” report, the client will assume everything is in order except those issues that you have mentioned. Reports like this are becoming common and clients often ask for such reports as they are more concise and much easier to plough through.

Obviously the manner in which you will draft will depend upon the type of report that your client asking for. However, there are some basic drafting points to keep in mind for any report. See the image below.

DraftingaDueDiligenceReport_DosAndDon'tsKeep these points in mind while drafting your report. While some of these seem very simple and obvious, browsing through it before starting to draft will always help refresh your memory and hold you in good stead in your career as a commercial lawyer.

(Deepa Mookerjee is part of the faculty on


Six tips for an effective due diligence process

Drafting_for_Business_Deepa_Mookerjee.jpgEven though Ray Limited has agreed in principle to acquire 30% shares in Whirl Limited and has signed a memorandum of understanding to this effect; it does not have enough information about that company. For instance, it does not know whether and to extent the company is in debt, how its business is doing, and who its main customers are. Obviously, just as you will not buy a car or a home theatre without a thorough investigation of its benefits, Ray Limited will never purchase shares in Whirl Limited without having complete knowledge about that company. Ray Limited will only invest in Whirl Limited once it carries out a thorough investigation of Whirl Limited. Such an investigation, called a ‘due diligence’ process, helps an investor carry out a cost-benefit analysis of whether the investment is beneficial. During this process, an investor investigates the financial, commercial, and litigation-related details and contractual and other information about the target company.

Such investigations can be of different types. They include:

Commercial due diligence: This consists of a review of the industry, market, and business model of the target company;

– Reputational due diligence: This includes a review of the credit worthiness and reputation of the target company;

Financial due diligence: This includes a review of the tax, financial position, policies, and internal controls of a target company; and

Legal due diligence: This is usually very broad in nature, and consists of a review of all relevant documentation and material contracts. This due diligence process, which is the focus of this post, aims to understand the business and identify potential legal issues that can impede the transaction or affect the transaction value.

Requisition list

As a lawyer carrying out a legal due diligence, the first step is to send to the target company, a questionnaire or list of the documents you require. This list is typically called a requisition list or a due diligence checklist. It helps the other side of the transaction organise documents in the manner you want and ensure that all the documents you require are provided to you. In the absence of such a list, confusion is likely to arise about the nature of documentation required.

APCCLP_CompanyLaw-BannerThis information is provided by the target company in a data room, set up for the purpose of the diligence. Such a data room is either a physical data room or an online data room, which is becoming more prevalent these days. Depending upon the nature of the deal and the extent of confidentiality required for the documents, the target company can grant limited access to the advisors of the acquirers or permit them to examine the records, contracts, and information about the company in person (in a physical data room) or download or edit them (in an online data room).

You will always have to comply with the directions of the target company in relation to handling sensitive information. For instance, you may be asked to not make copies of any documents. You will have to strictly comply with that direction.

While carrying out this investigation, bear in the mind the following:

1. Remember, what you are doing can make or break a deal.

You are the one who has access to all the company’s records and therefore, you have a responsibility to provide a complete and true picture of the company you are investigating. Your client will depend on your report to make a final decision. Never cut corners while investigating. Ensure that all the information is made available to you. If you face a problem accessing any information about the target company (which you feel is vital), let your client know that your investigation will be incomplete unless the information is provided to you.

2. Never assume any fact.

Always ask for documents or written evidence to confirm any statement made by the company. For instance, if a company says it has paid off a loan of Rupees 10 crore in the last two months, ask for written evidence (such as a letter or undertaking from the bank) stating that the loan has in fact ben repaid. If you don’t get what you have asked for in the beginning – ask again.

3. Never forget the nature of the transaction.

The type of documents you will ask for depends on the type of transaction. For instance, if you are only going to buy a specific part of the business, ask only for the documents relevant to that part. If you are acquiring the whole company – you need documents pertaining to the whole company.

4. Always be polite and courteous to those who are providing you the documents.

A Business Men Climbing a Pile of Papers
It can often seem like this but make sure you retain your cool during a due diligence process.

Remember, the documents will often be provided to you by employees or company secretaries who have little or no background to the deal and may not know the reason why the document may be important to your investigation. Patience is key to a successful due diligence investigation.

5. Where you can, make copies of documents.

Always keep copies of all documents you have looked at (if you are permitted to photocopy documents). If not, make detailed notes of every document. This will be helpful while preparing the report as you can look at your notes to refresh your memory. Remember, once the target company has provided some information, it is unlikely to provide it again. So, your notes will form the basis of the report and your conclusions regarding the deal.

6. Be efficient.

Almost all due diligence investigations are carried out within a limited time period. Parties are eager to close the deal and there is immense pressure on lawyers to carry out a diligence efficiently and effectively. While actions such as sending a requisition list will help save time, never hurry up the investigation and ignore documents just to complete the process on time. If necessary, ask your client for more time after providing a detailed explanation about why you need more time.

After this process is complete, as a lawyer you will be asked to prepare a due diligence report setting out details about the investigation and your conclusion about the legal issues in the deal. I will discuss the important points to keep in mind while drafting the due diligence report in my next blog.

(Deepa Mookerjee is part of the faculty on