Definition of Due Diligence
In business, a lot of terms are used which people know only by name, and are not really aware of in actual sense. Due diligence services in India is one of them. Let us take a look at what it actually is;
Due diligence in plain and simple English is the care and precautions that a person of sound mind takes to avoid any harm to others or their property. In business it is the process of the investigation taking place of a company to be sold. It was introduced in legislation by the USA in 1933, when securities dealers as well as brokers were responsible for full disclosure of material information in relation to the instruments they sold. Failure to comply would result in criminal prosecution.
The Downside and Solution
But the creators of the Act were aware that full disclosure could also lead to unfair prosecution in some cases, where the brokers or dealers could not have material facts required at the time of sale. Therefore a legal defense was also introduced that says that as long as due diligence is exercised while the brokers investigated companies, and also fully disclosed these results to the prospective investors; they would not be liable for any information which was not discovered during investigating. This applies to due diligence services in India as well.
The Process of Sue Diligence
There are some well-defined steps that due diligence services in India follow quite stringently;
Capitalization of the Company with Analysis
Firstly, it needs to be estimated how big the company is. The data of the market capitalization can speak volumes about the volatility of its stock, the reach of ownership, and the size of the company’s market. A due diligence company in India also checks on which stock exchange the shares are traded on.
Revenue and Profit Trends, Including Margin
A due diligence company in India will take a close look at the revenue as well as the net income trends for at least the past three years. Even price to sales ratio and price to earnings ratio are compared to see if there is stability. Margins are examined for rises and falls.
The Competition and Industry
It’s vital to get an understanding of what industries and competition the company is into, as this is of much importance to investors. Due diligence services in India can also help the investors in deciding the business model.
The Management and the Share Ownership
It has to be seen if the company is being run by its founders or has previously been sold, the management has to be covered, and their experience taken into consideration. The float and the institutional ownership percentage will give an indication of the coverage given by the analyst.
Expectations and long to short term Risks
Risks are there whenever investment comes into question. There has to be a clear understanding of industry and company specific risks. If the project is Eco-friendly, there will be acceptance with ease, and a spotless reputation in regulatory and legal matters help a lot in the due diligence process.