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WHAT IS LEGAL DUE DILIGENCE?<br />A Legal due diligence is scrutiny of all, or specific parts of the legal affairs of the target company depending on the purpose of legal due diligence which may be mergers, acquisition or any major investment decision with a view of uncovering any legal risks and provide the buyer with an extensive insight into the company’s legal matter.<br />Due Diligence is an art that requires expertise in asking, gathering and reporting of sensitive information.<br /> It is a precautionary operation through which one can know the strengths and weakness of the company through the maximum possible information available. This reduces future problems and ensures safety. <br />
OBJECTIVES OF LEGAL DUE DILIGENCE <br />The objectives may vary from case to case. However some of the common objectives in most of the cases would be as follows:-<br /> Gathering of information from the target company.<br />Uncovering the risks of target company through a SWOT analysis.<br />Improving the bargaining position.<br />Mapping of compliance requirement of the target company and the actual status. <br />
SCOPE OF LEGAL DUE DILIGENCE<br />REGULATORY COMPLIANCE<br />CONTRACTUAL COMPLIANCE<br />COMPLIANCE UNDER INTRA-CORPORATE ASPECTS.<br />FINANCIAL ASPECTS<br />NON FINANCIAL ASPECTS<br />
NEED OF LEGAL DUE DILIGENCE<br />Legal due diligence provides complete picture of a company through a methodological investigative process.<br />Due diligence investigations are good at finding liabilities in a company and to uncover the hidden risks. These investigations can help to negotiate a lower price in a business transaction negotiation.<br />It is an art of managing risk of undertaking a major business transactions. It involves maintaining a methodological system for organizing and analyzing the documents, data and information and then quantitatively assessing risks associated with any issues or problems discovered during the process.<br />
NEED OF LEGAL DUE DILIGENCE<br />It allows getting the current information that is needed to make good and financial decisions. <br />These investigations help to avoid costly mistakes and can also help to avoid lawsuits caused by a bad partnership.<br />
LEGAL DUE DILIGENCE PROCESS<br />There is no definitive process of a legal due diligence. The investigative aspects as well as legal due diligence process varies depending upon case to case. In general, the following process is involved in legal due diligence.<br /><ul><li>Entering of Memorandum of Understanding between the transacting parties along with confidentiality agreement.
Determination of scope of legal due diligence</li></li></ul><li>LEGAL DUE DILIGENCE PROCESS<br /><ul><li>Calculation of time frame.
Drafting of various questioners and checklist.
Obtaining of access to records and data room agreement
Interaction with management and key managerial persons with the questionnaires and checklists and for other material information.
Interaction with regulatory authorities for independent check.</li></li></ul><li>LEGAL DUE DILIGENCE PROCESS<br /><ul><li>Checking of regulatory and contractual compliance.
Analysis of financial and non financial information.
Collation with financial due diligence for confirmation of representations, warranties and liabilities
Determination of strategy.</li></li></ul><li>POSSIBLE HURDLES IN CARRYING OUT A LEGAL DUE DILIGENCE & REMEDIAL ACTIONS.<br />Non availability of information<br />Unwillingness of target company’s personnel in providing the complete information<br />Providing of incorrect information<br />Complex tax policies and hidden liabilities<br />Multiple Regulations and its applicability<br />Process in providing data<br />Absence of proper MIS<br />
ACTIONS TO BREAK HURDLES IN DUE DILIGENCE<br />Focus follow up questions<br />Ask several people the same questions and utilize appropriate professional skepticism.<br />Polite persistence may help to overcome this attitude<br />Independent check with regulatory authorities.<br />Considering this hurdles, it is advisable to insert the necessary disclaimer clauses in the due diligence report.<br />
ROLE OF COMPANY SECRETARIES IN LEGAL DUE DILIGENCE.<br />Company Secretary has vast theoretical knowledge base and practical experience and exposure in various laws and financial aspects. As a Compliance Management specialist, a company secretary is competent to discharge the Legal Due diligence process efficiently. <br />Company Secretary while carrying out due diligence has to maintain confidentially.<br />
ROLE OF COMPANY SECRETARIES IN LEGAL DUE DILIGENCE.<br />Certain activities conducted during due diligence may breach confidentiality that a transaction is being contemplated. Especially while interacting with external persons such as customers, suppliers, it is better to contact them under the disguise of being prospective supplier/customer, which will help in maintaining confidentially. <br />
INTRODUCTION TO PRIVATE EQUITY<br />Private Equity is broader term which refers to any type of equity investment in an assets in which the equity is not freely tradable on a public stock market. Private Equity refers to the manner in which the funds have been raised from private markets as opposed to the public markets. Private Equity firms were commonly understood to invest in assets which were not in public market.<br />
DEFINATION OF PRIVATE EQUITY<br />Private Equity Investing defined as “ investing in securities through a negotiated process”. The majority of private equity investments are in unquoted companies. Private Equity investments is typically a transformational, value added, active investment strategy. It calls for a specialized skill set which is considered and which is a key due diligence area for investors’ assessment of a manager. The process of buyout and venture investing call for different application of these skills as they focus on different stages of the life of the company.<br />
PRIVATE EQUITY INVESTOR<br />Finances rapidly growing companies in knowledge sector with sustainable, scalable business model.<br />Takes Equity / quasi-equity stakes.<br />Assists in collection of resources required to take the company to the next level.<br />Adds value to the company through active participation.<br />Takes higher risks in expectation of higher rewards<br />Have a 3-5 year investment horizon<br />
CATEGORIES OF PRIVATE EQUITY<br /><ul><li>LEVERAGED BUY OUT</li></ul> LBO or Buyout refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these transactions are typically mature and generate operating cash flows. <br />
CATEGORIES OF PRIVATE EQUITY<br /><ul><li>VENTURE CAPITAL</li></ul> Venture capitalis a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business. Venture investment is most often found in the application of new technology, new marketing concepts and new products that have yet to be proven.<br />
CATEGORIES OF PRIVATE EQUITY<br /><ul><li>GROWTH CAPITAL</li></ul> Growth capital refers to equity investments, most often minority investments, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business. <br />
CATEGORIES OF PRIVATE EQUITY<br /><ul><li>DISTRESSED AND SPECIAL SITUATIONS</li></ul>Distressed or Special Situations is a broad category referring to investments in equity or debt securities of financially stressed companies. The "distressed" category encompasses two broad sub-strategies including:<br />"Distressed-to-Control" or "Loan-to-Own" strategies where the investor acquires debt securities in the hopes of emerging from a corporate restructuring in control of the company's equity; <br />Special Situations" or "Turnaround" strategies where an investor will provide debt and equity investments, often "rescue financing" to companies undergoing operational or financial challenges. <br />
CATEGORIES OF PRIVATE EQUITY<br /><ul><li>MEZANINE CAPITAL</li></ul> Mezzanine capital refers to subordinated debt or preferred equity securities that often represent the most junior portion of a company's capital structure that is senior to the company's common equity. This form of financing is often used by private equity investors to reduce the amount of equity capital required to finance a leveraged buyout or major expansion.<br />
CATEGORIES OF PRIVATE EQUITY<br /><ul><li>SECONDARIES</li></ul> Secondary investments refer to investments made in existing private equity assets. These transactions can involve the sale of private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. <br />
CATEGORIES OF PRIVATE EQUITY<br /><ul><li>Other strategies</li></ul>Real Estate:<br /> In the context of private equity this will typically refer to the riskier end of the investment spectrum including "value added" and opportunity funds where the investments often more closely resemble leveraged buyouts than traditional real estate investments. Certain investors in private equity consider real estate to be a separate asset class. <br />
CATEGORIES OF PRIVATE EQUITY<br />Infrastructure:<br /> Investments in various public works (e.g., bridges, tunnels, toll roads, airports, public transportation and other public works) that are made typically as part of a privatization initiative on the part of a government entity.<br />Energy and Power: investments in a wide variety of companies (rather than assets) engaged in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution (Energy) or companies engaged in the production or transmission of electrical power (Power).<br />
CATEGORIES OF PRIVATE EQUITY<br />Merchant banking: negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies. <br />
INTRODUCTION<br />A designation of a securities issue given by the Securities and Exchange Board of India (SEBI) that allows an Indian-listed company to raise capital from its domestic markets without the need to submit any pre-issue filings to market regulators. The SEBI instituted the guidelines for this relatively new Indian financing avenue on May 8, 2006. <br />
QUALIFIED INSTITUTIONAL BUYER<br />a mutual fund, venture capital fund and foreign venture capital investor registered with SEBI;<br />a foreign institutional investor and sub-account (other than a sub-account which is a foreign corporate or foreign individual), registered with the SEBI;<br />a public financial institution as defined in section 4A of the Companies Act, 1956;<br />a scheduled commercial bank;<br />a multilateral and bilateral development financial institution;<br />a state industrial development corporation;<br />an insurance company registered with the Insurance Regulatory and Development<br />
----CONT.<br />Authority;<br />a provident fund with minimum corpus of Rs. 250 million;<br />a pension fund with minimum corpus of Rs. 250 million;<br />National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the Government of India published in the Gazette of India;<br />insurance funds set up and managed by army, navy or air force of the Union of India.<br />
RESTRICTIONS<br />The Preliminary Placement Document is being furnished solely for the purpose of providing information in connection with the proposed issue of securities described therein.<br />Nothing in the Preliminary Placement Document constitutes an offer or an invitation by or on behalf of the Company or the Managers to subscribe or purchase any of the securities described in the Preliminary Placement Document. If you have gained access to the Preliminary Placement Document contrary to the foregoing restrictions, you will be unable to purchase any of the securities described therein.<br />
Conditions for Qualified Institutional Placement <br />Definition<br /> Eligible Securities include equity shares, non convertible debt instruments along with the warrants and convertible securities other than warrants.<br /> Qualified Institutional Placement means allotment of eligible securities by a listed issuer to qualified institutional buyers on private placement basis in terms of these regulations.<br /> <br />
Conditions for Qualified Institutional Placement <br />A listed issuer may make Qualified Institutional Placement if it satisfies the following conditions<br />(A) A special Resolution approving the Qualified Institutional Placement has been passed by its share holders;<br />(B) The equity shares of the same class, which are proposed to be allotted through Qualified Institutional Placement or pursuant to conversion or exchange of eligible securities offered thought Qualified Institutional Placement, have been listed on a recognized stock exchange having nation wide trading terminal for a period of at least one year prior to the date of issuance of notices to its shares holders for convening the meeting to pass the special Resolution.<br />
Conditions for Qualified Institutional Placement <br /> Provided that where an issuer, being a transferee company in scheme of merger,demerger ,amalgamation or arrangement sanctioned by a High Courts under section 391 to 394 of the Companies Act 1956,make Qualified Institutional Placement,the period for which the equity shares of the same class of the transferor company were listed on the stock Exchange having nation wide trading terminals shall also be considered for the purpose of computation of the period of one year.<br />
Conditions for Qualified Institutional Placement <br />( C) It is in compliance with the requirement of minimum public shareholding specified in the listing Agreement with the stock exchange.<br />(D) in the special resolution, it shall be, among other relevant matters specified that the allotment is proposed to be made thought Qualified Institutional Placement and relevant date specified date referred to in sub clause (ii) of clause (c ) of regulation 81 shall also be specified.<br />
Appointment of Merchant Banker <br />Qualified Institutional Placement shall be managed by merchant banker(s) registered with the Board who shall exercise due diligence.<br /> The merchant Banker shall, while seeking in –principle approval for listing of the eligible securities issued under Qualified Institutional Placement, furnish to each stock exchange on which the same of equity shares of the issuer are listed, a due diligence certificate stating that the eligible securities are being issued under Qualified Institutional Placement and that the issuer complies with requirement of the chapter.<br />
PRICING<br />The qualified institutions placement shall be made at a price not less than the average of the weekly high and low of the closing prices of the equity shares of the same class quoted on the stock exchange during the two weeks preceding the relevant date.<br />Where eligible securities are convertible into or exchange with equity shares of the issuer, the issuer shall determine the price of such equity shares allotted pursuant to such conversion or exchange taking the relevant date as decided and disclosed by it while passing the special resolution.<br />
PRICING<br />The Issuer shall not allot party paid up eligible securities :<br /> Provided that in case of allotment of non convertible debt instruments along with warrants, the allottees may pay the full consideration or part thereof payable with Respect to warrants, at the time of allotment of such warrants: Provided further that on allotment of equity shares on exercise of options attached to warrants, such equity shares shall be fully paid up.<br />
PRICING<br />The prices determined for qualified institutions placement shall be subject to Appropriate adjustments if the issuer. <br /> (a) makes an issue of equity shares by way of capitalization of profit or reserves.Other than by way of a dividend on shares<br />(b) makes a rights issue of equity shares;<br />(c) consolidates its outstanding equity shares into a smaller number of shares;<br />
PRICING<br />(d) divides its outstanding equity shares including by way of stock split;<br />(e) re-classifies any of its equity share into other securities of the issuer;<br />(f) is involved in such other similar events of circumstances,which in the opinion of the concerned stock exchange, requires adjustments.<br />
TENURE<br />The tenure of the convertible or exchangeable eligible securities issued through Qualified Institutional Placement shall not exceed six months from the date of allotment <br />
Documents to be submitted for granting approvals under Clause 24(a) of the Listing Agreement <br />STAGE I – Prior Approval under clause 24(a) <br /><ul><li>Certified true copy of the resolution passed by the Board of Directors of the Company approving the placement of securities with Qualified Institutional Buyers (QIBs) under Chapter VIII of SEBI (Issue of Capital & Disclosure Requirement) Regulations, 2009.</li></li></ul><li>Documents<br /><ul><li>Copy of the notice sent to the shareholders of the Company.
Certified true copy of the resolution passed by the shareholders of the Company in accordance with the requirements of Chapter VIII of SEBI (Issue of Capital & Disclosure Requirement) Regulations, 2009.
Draft placement document for issue of specified securities to QIBs.</li></ul> <br />
Documents<br /><ul><li>Latest shareholding pattern of the Company in the revised Clause 35 format.
Net worth Certificate by the Statutory Auditors of the Company based on the audited figures of the previous financial year.
Confirmation from the lead Merchant Banker that the issue is being made in compliance with Chapter VIII of SEBI (Issue of Capital & Disclosure Requirement) Regulations,2009.</li></li></ul><li>Documents<br /><ul><li>The Managing Director/ Company Secretary of the Company shall confirm that:</li></ul>The Company complies with the prescribed requirements of minimum public shareholding as required under Clause 40A and Clause 35 of the Listing Agreement <br />The aggregate funds that is being raised through QIPs in the relevant financial year has not exceeded five times of the net worth of the Company as at the end of its previous financial year.<br />
Documents<br />The placement of specified securities to the Qualified Institutional Buyers shall be made in accordance with Chapter VIII of SEBI (Issue of Capital & Disclosure Requirement) Regulations,2009.<br />The equity shares arising pursuant to the Qualified Institutions Placement, shall rank paripassu in all respects including dividend entitlement with the existing equity shares of the Company.<br /> <br />
Documents<br />STAGE II – Hosting of Preliminary Placement Document on the website of CSE<br />After the Company decides to launch the issue, it is required to submit the Preliminary Placement Document for being uploaded on the website of CSE before the same is circulated to the QIBs or displayed on the website of the Company.<br />Hard copy of the preliminary Placement document (not applicable if no changes have been made therein after submission of the same at Stage I above)<br />CD of the Preliminary Placement Document<br />Due Diligence Certificate of the lead Merchant Banker in the following format:<br />