Due diligence requirements
What due diligence is necessary for buyers?
Pursuant to the principle of caveat emptor, Indian law necessitates reasonable diligence by the buyer before any proposed acquisition. Therefore, a buyer must at least undertake legal and financial due diligence on the target in order to make an informed assessment as to the viability of the proposed acquisition.
What information is available to buyers?
The following information is available to prospective buyers in the public domain with respect to private and public companies:
- corporate information relating to the corporate records of a company, including the filings made by companies with the Registrar of Companies, which is available on the Ministry of Corporate Affairs’ website (www.mca.gov.in/MCA21/);
- IP information, whether registered or pending registration, which can be obtained from the Department of Industrial Policy and Promotions’ website (http://ipindia.nic.in) in relation to trademarks, patents, designs and geographical indications of goods and the Ministry of Human Resource Development’s website (www.copyright.gov.in) in relation to copyright;
- information relating to the creation of encumbrances over the real property of the target, which can be determined by examining the encumbrance certificates issued by the office of the relevant sub-registrar of assurances and the register of charges maintained by the Registrar of Companies; and
- records with respect to any pending litigation, which can be examined by checking the online databases maintained by the relevant courts or by conducting a manual search of their records.
For listed companies, filings made with the relevant stock exchanges, available on the website of that stock exchange and on the Securities and Exchange Board of India’s website (www.sebi.gov.in/sebiweb/) are also available in the public domain.
What information can and cannot be disclosed when dealing with a public company?
Under the Companies Act 2013, a person – including a director or key managerial personnel – is prohibited from counselling about procurement or communicating directly or indirectly any non-public price sensitive information to any other person. In addition, directors and key managerial personnel cannot deal in the securities of another company while in possession of non-public price sensitive information.
With respect to a listed public company, due diligence is further limited by the restrictions set out in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 2015. Under these regulations, insiders are prohibited from communicating unpublished price sensitive information to any person, except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. In addition, no company or person can deal in the securities of another company while in possession of unpublished price sensitive information.
Unpublished price sensitive information may be communicated in connection with a transaction that:
- entails an obligation to make an open offer under the Takeover Code, where the board of directors of the company is of the informed opinion that the proposed transaction is in the company’s best interests; or
- does not attract the obligation to make an open offer under the Takeover Code, but where the board of directors of the company is of the informed opinion that the proposed transaction is in the company’s best interests and the information that constitutes unpublished price sensitive information is made generally available at least two trading days before the proposed transaction is effected in a form determined by the board of directors.
However, the board of directors should obtain confidentiality and non-disclosure agreements from the recipients of the unpublished price sensitive information.
‘Unpublished price sensitive information’ is defined as any information directly or indirectly relating to a company or its securities that is not generally available and which, on becoming generally available, is likely to have a material effect the price of the securities and includes information relating to:
- financial results;
- change in capital structure;
- mergers, demergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
- changes in key managerial personnel; and
- material events in accordance with the listing agreement prescribed by the relevant stock exchange.
Given the above, diligence is limited to information that is not price sensitive or publicly known.
How is stakebuilding regulated?
In India, stakebuilding for private and unlisted public companies is unregulated, except in cases where foreign investors are involved and the sectoral caps specified under the exchange control regulations must be met.
Stakebuilding for public listed companies is regulated by the Takeover Code and the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 2015 (PIT Regulations). Under the Takeover Code, a bidder, either individually or together with persons acting in concert, can acquire up to 24.99% of the shares or voting rights in the target without having to make an offer to the shareholders, provided that it does not otherwise acquire control over the target as set out in the Takeover Code.
If the bidder acquires more than 24.99% of the shares or voting rights in the target, it must make mandatory offers to the target’s shareholders in order to acquire at least 26% of the target’s voting rights, in accordance with the procedure set out in the Takeover Code. Mandatory offers must also be made when the acquirer already holds more than 25% of the shares or the voting rights of the target and intends to acquire, along with persons acting in concert, an additional 5% of the shares or voting rights of the target in any financial year, subject to a maximum of 75% (which is the maximum permissible non-public shareholding in a listed company).
Under the PIT Regulations, the promoters, directors and employees of a company must make disclosures to the company if the securities acquired or disposed by them, whether in one or multiple transactions, over any calendar quarter aggregates to a traded value in excess of Rs1 million.