Due diligence

INDEX Section I: Concept 1.1. 1.2. 1.3. 1.4. Meaning of due diligence Difference from other assurance services Need for due diligence Review of Information

Section II: Transactions requiring Due Diligence 2.1 2.2 2.3 Mergers and acquisitions Partnershi !oint ventures " colla#orations Section III: Things to keep in mind when conducting due diligence. $ection I%& $te s in due diligence $ection %& 'ow to $elect a Due Diligence (onsultant $ection %I& (onclusion Anne ures )nne*ure 1& (hec+list of Documents to #e o#tained from ,arget (om an)nne*ure 2& $am le engagement letter )nne*ure 3& $am le due diligence re ort 1

Section I: Concept Meaning of Due Diligence In la- terms. Due diligence is the effort made #- an ordinaril- rudent or reasona#le artto avoid harm to another art- or himself. ,he term /Due diligence0 is used for a num#er of conce ts involving either the erformance of an investigation of a #usiness or erson. or the erformance of an act with a certain standard of care. In finance. due diligence is the rocess of research and anal-sis that ta+es lace in advance of an acquisition. investment. #usiness artnershi or #an+ loan in order to determine the value of the su#1ect of the due diligence or whether there are an/s+eletons in the closet0. In the #an+ing industr- it refers to the res onsi#ilit- of #an+ directors and officers to act in a rudent manner in evaluating credit a lications. In the securities mar+et. it refers to the res onsi#ilit- of underwriters to e* lain the details of new securities to interested urchasers. In criminal law. due diligence is the onl- availa#le defense to a crime that is one of strict lia#ilit2i.e. a erson is res onsi#le for the damage and loss caused #- their acts and omissions regardless of cul a#ilit- or fault3. It is not enough to rove that the defendant did not commit the crime intentionall- or +nowingl-. it must #e roven that the- did ever-thing ossi#le to revent the act from ha ening. It is not enough that the- too+ the normal standard of care in their industr- 4 the- must show that the- too+ ever- reasona#le recaution. Due diligence can also refer to the ongoing activities of ension or investment fund managers who +ee trac+ of the o erations and financial health of the cor orations theinvest in and the trustworthiness and a#ilit- of their managers . or those of the managers of an acquiring cor oration toward a target cor oration. ,hus. Due diligence involves investigation and evaluation of a management team5s characteristics. investment hiloso h-. and terms and conditions rior to committing

ca ital. Due diligence is underta+en in order to determine the value of the su#1ect of the due diligence and unearth an- issues or otential issues. It is e* ected to rovide a realistic icture of how the #usiness is erforming now. and how it is li+el- to erform in the future. ,he otential investor generall- uses in4house resources or out sources the 1o# to

consultants who s eciali6e in due diligence and cor orate investigations to investigate the #ac+ground and rinci als of the target com an-. ,he otential investor ma- also see+ legal counsel and rofessional accountants to get e* ert advice in all areas. In addition to identif-ing ris+s and im lications of an investment. due diligence mainclude data on a com an-5s solvenc- and assets 7n com letion of the e*ercise . one should +now e*actl- what he is getting into. what needs to #e fi*ed. what it will cost to fi* them. and if he is the right erson to ta+e on the #usiness. 8hile Due diligence is the res onsi#ilit- one has to investigate and identif- issues. due care is doing something a#out the findings from due diligence. Difference from other assurance services

In audit. the (hartered )ccountant5s o#1ective is to rovide a high 2#ut not a#solute3 level of assurance on the relia#ilit- of financial statements. ,he auditor rovides a ositive o inion which essentiall- states that #ased on the wor+ rocedures to o#tain the evidence necessar- to su erformed9 the financial statements com l- with relevant accounting standards and rinci les. ,he level of testing ort such an o inion is high.

In contrast. a review rovides a negative assurance re ort giving onl- a moderate level of assurance on the relia#ilit- of the financial information. ,he re ort essentiall- states that nothing has come to the reviewer5s attention to indicate that the financial information is not resented fairl- in accordance relevant accounting standards and rinci les. Review

engagements are designed as a limited review of financial statements9 therefore the ris+ of mista+es. omissions or incorrect disclosures is considera#l- greater than with an audit. )n audit engagement involves a stud- and evaluation of internal accounting controls. detailed tests of accounting records. or corro#orative evidence through ins ection. o#servation and confirmation which is not usuall- required in a review engagement. Due diligence goes far #e-ond the financial anal-sis. It differs from an audit in that the latter is concerned with the truth and fairness of historical financial statements onl-. ,he sco e of a due diligence review is generall- wider : it includes a review of historical figures as one of its elements and also involves anal-sing the sustaina#ilit- of #usiness. com etition. #usiness lan. future ros ects. cor orate " management structure. technolog-. s-nerg- of target #usiness to com an-5s #usiness a art from researching regulator- com liances . legal issues and other financial data. Need for due diligence

Due diligence is necessar- to limit reliance laced on vendor5s warranties : it is #etter to discover a /s+eleton in the closet0 #efore the #usiness is #ought than afterwards. ,he costs of #u-ing a #usiness with une* ected difficulties can #e disastrous. Due diligence is necessar- to allow the investigating art- to find out ever-thing that he needs to +now a#out the su#1ect of the due diligence. ,he o#1ective is to allow the investigator to consider his o tions in light of the facts. ,he investigator would then have the following o tions o en& i. ,o withdraw from the deal 4 if the due diligence unearths information that ma+es the investment. loan or artici ation ris+- or undesira#le and which cannot #e adequatel- resolved then ii. ,o ad1ust the valuation of the investment 4 the investigator ma- revise his valuation of the com an- or reassess the rice at which it will rovide services. More often. the information will #e adverse and therefore the

valuation will go down or the rice will go u . as ositive information will have #een made more u#licl- availa#le #- the target from the start. iii. ,o have the ro#lem remedied 4 it ma- #e ossi#le for a ro#lem uncovered #- the due diligence to #e remedied #efore the deal goes ahead. ;or e*am le. un aid stam dut- could #e aid. com an- filings could #e ut in order or. if negative information is uncovered on a rinci al of the target com an-. the investor ma- ut ressure on the target firm to re lace that individual. ,his will mean that the target is ut into a state that the investigator is ha ier with #efore it deals with it. Review of Information

,he information reviewed will include& a3 'istorical ;inancial Data #3 (urrent ;inancial Data c3 ;orecasted ;inancial Information d3 <usiness Plans e3 Minutes of Directors5 Meetings and Management Meetings f3 )udit wor+ a er files 2if availa#le3 g3 (ontracts with su liers. customers and staff h3 (onfirmations=re resentations from financiers. de#tors etc 'owever. due diligence review should not #e limited to reviewing documentation. Much can #e learnt a#out the target from discussion with the staff 2formal and informal tal+s3. and generall- attending at the target5s high4level e* erienced staff. remises and o#serving the ongoing dailactivities. It is for this ver- reason that it is recommended the review #e conducted #-

Section II: Transactions requiring Due Diligence

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2 ! Mergers and "cquisitions ,he term /due diligence0 is s-non-mous with /#ac+ground chec+0 and refers to the eriod during which #u-ers ma+e sure the- have all the information the- need to roceed with the transaction. ,he +e- o#1ective of the urchaser or acquirer from the transaction is to get something #etter than whatever it is that the- are resentl- doing. ,he ros ective urchaser tries to minimi6e or unveil an- ost settlement /sur rises0 and reduce uncertainties. ,he cost of the re aration of a qualit- due diligence e*ercise fades into insignificance when com ared to the cost of a #ad acquisition $o. the ros ective urchaser conducts e*tensive due diligence .'e sends a questionnaire

to the target com an-. requesting full details of the #usiness5s financials. atents and atent a lications. licenses and colla#oration agreements. ma1or s-stems. confidentialitagreements. em lo-ment contracts and a whole host of other information. ,he team doing the due diligence then reviews regulator- and ress filings. media re orts. etc. to find out whether there are an- legal and regulator- issues. e*isting and ending lawsuits and other litigation involving the entit-. ,he team ma- also loo+ for conflicts of interest. insider trading and other ro#lems. Due diligence is !oth "or the #u$er and the Seller. 'owever. it is not onl- the #u-er who will carr- out due diligence. ,he sale of a #usiness will invaria#l- include warranties given #- the seller in relation to certain as ects of the #usiness. ;or e*am le. the seller will usuall- #e as+ed to warrant that so far as it is aware. the activities of the #usiness do not infringe an- third4 art- intellectual rights. and that no third arties are infringing an- of the com an-5s rights. ,here will also t- icall- #e warranties relating to the com an-5s licenses. I, s-stems and so on. ,hus it is refera#le that the seller must carr- out a due diligence e*ercise of his own. $imilarl-. #usiness $ellers might conduct their own due diligence to #e assured of the a#ilit- of the #u-er to com lete the sale. the trac+ record of +ee ing com l-ing with agreements etc. $ ecificall-. the- ma- loo+ into&

8hether the #u-er has the resources to com lete the sale 8hether there is a ast record of revious acquisitions 8hether commitments made have #een com lied with in the ast 8hether (onfidential and Non4Disclosure )greements have #een com lied with

2 2 #artnership <efore entering into artnershi . the concerned arties conduct negotiations and

investigation into affairs of the entities. $ome of the different t- es of artnershi s where due diligence investigations are a ro riate include& $trategic )lliances. $trategic Partnershi s <usiness Partners and )lliances. Partnering )greements. <usiness (oalitions !ust In ,ime $u liers and Relationshi s. $ole $u liers. 7utsourcing )rrangements. and (ustomers ,echnolog- and Product @icensing. !oint Develo ment )greements. ,echnolog$haring and (ross @icensing )greements <usiness Partners. )ffiliates. ;ranchisees and ;ranchisers %alue )dded Resellers. %alue )dded Dealers. Distri#ution Relationshi s

2 $ %oint venture and colla&orations <efore entering into a ma1or commercial agreement li+e a 1oint venture or other

colla#oration with a com an-. a colla#oration artner will want to carr- out a certain amount of due diligence. ,his is articularl- li+el- to #e the case where a large com anis forming a relationshi for the first time with a relativel- small start4u com an-. ,he due diligence ma- not to #e as e*tensive as on an acquisition. #ut the larger com an- will #e see+ing comfort that its investment will #e secure and the small com an- has the s-stems. ersonnel. e* ertise and resources to erform its o#ligations.

Section III: Things to 'eep in mind when conducting due diligence %. &!'ecti(es and "ocus E pectations& <e clear a#out -our e* ectations in terms of revenues and rofits and whether the ro#a#ilit- of the target com an- to rovide -ou the same. Commitment& (onsider whether -ou have resources to ma+e the #usiness succeed and whether -ou are willing to ut in all the hard wor+ which is required for an- new venture Strengths: (onsider whether the #usiness gives -ou the o and e* erience to good use #usiness sector& @earn as much as -ou can a#out the #usiness sector -ou are interested in form media re orts. 1ournals and eo le in the industr-. ). *reparation Is The +e$, ,o ensure thorough and detailed investigation -our re aration should #egin in advance of the due diligence rocess #egins. 7nce -ou have decided that -ou are interested in articular #usiness re are $te s to #e followed in due diligence rocess )reas to #e chec+ed ,hings to chec+ in each area Information and other material to #e requested from the seller ortunit- to ut -our s+ills

-. Negotiate adequate time Most sellers want the rocess to get over as soon as ossi#le and tr- to hurr- the roceedings. Do not succum# to the ressure as -ou are tr-ing to understand and learn a#out a #usiness4its ast wor+ing and its future ros ects. which will ta+e time. )lso. when the seller gives a short financial review eriod9 consider it as red flag which could mean that the- have something to hide or some matter which the- don5t want -ou to

discover. It is in the #est interest of the seller to give -ou adequate time so that -ou are certain to #u-. Cou cannot move ahead with a deal sim l- #ecause -ou ran out of time for due diligence. .. /inimise $our risk: Dou#le4chec+ all information financials. ta* returns. atents. co -rights and customer #ase. and ma+e sure the com an- does not face a lawsuit or criminal investigation. ,he financials are also ver- im ortant and one needs to #e certain that the target com an- did not engage in creative accounting. ,he asset osition and rofita#ilit- of the com an- are vital. 'owever do not loo+ solel- at num#ers. $ince. Due diligence e*ercise deals with the overall #usiness. it is im ortant to consider& the management team5s ast erformance. roles and talent organi6ational strateg- . #usiness lans ris+ management structure technological su erioritadequac- of infrastructure

0. Seek in"ormation "rom e ternal sources: ,he com an-5s customers and vendors can #e quite informative. ;ind out from the vendors whether the target com an- falls in their most favored clients list. $ee+ out customers who were not considered #- the com an- for doing #usiness. 1. 2ind the !est help mone$ can !u$& It is alwa-s #etter to hire the #est consultants that -our #udget will allow than to ma+e a #ad decision. A. *repare to haggle. Cou can and should use an- flaws that the audit uncovers to negotiate down the sale rice. Due diligence is /a chance to get a #etter deal.0 <ut don5t go over#oard. Remem#er that the whole oint of #u-ing a com an- is to add eo le to -our own organi6ation. Dven if the seller and staff do not sta- on after the deal. the- marove useful as advisers in the future.

Section I(: Steps in due diligence ,he due diligence e*ercise should reduce uncertainties. confirm assum tions and define sco e and rioriti6e issues. ,he e*ercise should com#ine an understanding of organi6ation. its o erations. technologies. logistics. cor orate strateg- and finance and then summari6e com le* issues into concise. easil- understanda#le terms. The process would generall$ comprise o" %. *lanning phase ). Data Collection *hase -. Data Anal$sis phase .. 3eport 2inali4ation *hase

%. *lanning phase& ,his stage includes the following rocesses& a3 Defining the sco e #3 Deciding the focus areas c3 ;inali6ing the team structure d3 (lear definition of res onsi#ilities e3 Defining time schedules f3 ,imel- communication of information requirements a3 De"ining the scope Prior to conducting an engagement. the due diligence team needs to learn a#out the s ecifics of the ro1ect. ,he due diligence team or the consultants should discuss the ro osed transaction and the due diligence needs. )fter esta#lishing and rioriti6ing clear o#1ectives. the availa#ilit- of resources should #e studied and the areas on which the team has to focus on should #e defined.

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!5 Deciding the "ocus areas ,he first thing would #e to decide on focus areas which normall- include& i. $ustaina#ilit- of the #usiness& ,he team can understand the sustaina#ilit- of the #usiness #- considering the target com an-5s #usiness strategic alliances. s-nergies. new ii. customers. order status and #ac+log. customer #ase ;inancials & ,he +e- financial data to #e reviewed are assets. lia#ilities. cash flow. Inventor- turnovers. accounts receiva#le.. accounts a-a#le. ownershi structure . revenues and accounting rocedures and olicies iii. iv. (om etition& It is essential to understand the mar+et environment. and the significant com etitors Management team and organi6ation culture& ,he revailing culture and the outloo+ and ca a#ilit- of the management team are of rime im ortance in ta+ing a decision a#out the target com an-. v. vi. 7rgani6ational Infrastructure& ,he organi6ation5s facilities. qualit- s-stems. ersonnel talent and olicies should also #e considered. Potential lia#ilities& It is im ortant to understand the otential ris+s and lia#ilities which an organi6ation would face. ,he issues to #e considered would include intellectual ro ert- rights. ending regulator- issues. liens. lawsuits etc. vii. viii. i*. ,echnolog-& It is essential to e* lore the technological advantage. if an-. which the target com an- has over its com etitors D*isting mar+et and otential. It is im ortant to gather Information a#out sales. distri#ution. mar+eting channels and romotional methods. <usiness to #usiness fit& If there is a good fit #etween the two #usinesses. it would create cor orate s-nerg-. ,he s-nerg- might arise due to com lementar- strateg-. ersonnel. financial situation etc. c5 2inali4ing the team structure lan. vision. roducts under develo ment. new

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Dnsure that the mem#ers who form the team are s ecificall- chosen #ased on their s+ills and #ac+ground so that the ro1ect is successful. ,he team mem#ers should +now the relevant #ac+ground information on the target com an-. the transaction. the industr-. and due diligence o#1ectives. ,he mem#ers should #e clear a#out what information should #e collected. what site visits should #e conducted. what anal-ses should #e erformed. and what end roducts should #e delivered at the end of the ro1ect.

d5 Clear de"inition o" responsi!ilities& ,he due diligence effort requires integration of efforts and communication with multi le arties .It is therefore im ortant that lanning is done in such a manner that res onsi#ilities and e* ected out uts are clearl- defined so that the team is wor+ing collectivel- towards a common goal. Define the e* ectations from all sources li+e target com an-. Internal searches. e5 De"ining time schedules <efore starting on the actual e*ecution. it is #est to define the sco e. e* ectations and timing from each ste . $cheduling the time of each +e- ste hel s achieving results in desired timeframe and hel s the arties focus on the common goal. "5 Timel$ communication o" in"ormation requirements : ,he success of due diligence rocess de ends u on com lete. accurate and timelinformation. ,his can #e made ossi#le if the information roviders are informed of the e* ectations from them and the timelines. Dach art- involved needs to rovide as earl- and s ecificall- as ossi#le. ;or e*am le. instead of ma+ing re eated information requests. if the target com an- is the communication timelines. g5 2inali4e the template and tools required rovided detailed information request list earl-. the- can effectivel- manage the rocess and meet arties. third art- sources. data#ase

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<ased on sco e. needs and o#1ectives. the due diligence team should decide on tools to #e used li+e internet data#ase search. regulator- data#ase search . questionnaires. wor+sheets and other communication methods li+e conducting interviews. emails etc. II. Data Collection *hase ,his stage involves collecting e*isting #usiness rocess data. +e- roducts. critical to qualit- services. ,he a roach used for data collection de ends on a num#er of factors including the desired recision and G ro1ecta#ilit-G of decision in uts. the nature of questions that need to #e answered. and availa#ilit- of time. mone- and access to information roviders. Information sources can #e& a3 #3 c3 d3 e3 f3 g3 Internet Regulator- organi6ations and data#ases (om etitors %endors (ustomers Industr- associations (ham#ers of commerce

,he research can #e qualitative research which is conducted via in4de th interviews with information roviders. ,he real answer to an- ro#lem is usuall- two or three questions dee and therefore requires a s+illed interviewer ade t at ro#ing. ,he quantitative research is conducted via surve-s 4 among a sam le of customers5 information roviders and the information from a sam le is e*tra olated to the entire o ulation.

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Initial /eeting (onduct a meeting with com an- management. In a merger. acquisition or investment scenario. consultants meet with the target com an- management in order to clarif- the due diligence rocess. the issues that should #e addressed. and the meetings and site visits that need to ta+e lace. ,he team ma+es the initial requests for information needed. such as #usiness and su lier contacts. lans. forecasts. financial statements. sales and rofit #rea+down. mar+et data. trans ortation records. customer lists. technolog- s ecifications.

/eetings6 Site 7isits6 Anal$sis and Communication )fter the meeting. the team conducts the rest of the rocess that has #een s ecificall- designed for this transaction or anal-sis. Interviews are conducted. ;or e*am le. su interviewed as to their liers and customers are discreetlroducts and services and its erce tions of the com an-Hs

osition alongside com etitors. (ollect and e*amine relevant information. ,he team wor+s through methodologies to identif- issues that ma- need to #e #rought to attention and that require further investigation. )do t a unique methodolog- for collecting critical to qualit- data #- re aring s ecific questionnaires and interviewing +e- customer Personnel.

Data Anal$sis phase: ,his stage involves anal-sis of the collected data and arriving at a conclusion #ased on critical factors li+e #usiness criticalit-. functional com le*it-. technical com le*it-. Infrastructure requirements etc. In life. there are no clear cut solutions. $imilarl- once the due diligence team has #een through the rocess of rigorousl- e*amining an organi6ation and its leadershi 9 it will reali6e that there are no consistent set of findings .In reviewing due diligence findings. the team ma- uncover some issues that lead to a favora#le im ression of the organi6ation and others that cause concern. ,here might #e few red flags too.

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During the course of due diligence. the team will understand the organi6ation5s financial health. its ca acit- to deliver in future. its re utation and its a roach to wor+ing. ,he team will get a ers ective on the leadershi of the organi6ation. ,he anal-sis of due diligence findings is generall- a weighing of a variet- of factors in order to determine whether team should give a ositive recommendation. )ll the factors need to #e considered and the organi6ation should #alance them to arrive at a decision. I7. 3eport 2inali4ation *hase

7nce all the interviews and site visits have #een com leted #- the due diligence team and all of the accom an-ing anal-ses resentation and final delivera#les. erformed. formali6e finding into final

,he due diligence team re ares due diligence re ort and resents its conclusion that #ecomes an integral com onent of the decision4ma+ing and negotiation rocesses. Section (: )ow to Select a Due Diligence Consultant

Due diligence ma- #e done #- -our house staff or can #e outsourced to a consultant having e* ertise in due diligence and cor orate investigations. 7ne gets the #enefit of e* erience. e* ertise and o#1ectivit- when wor+ is outsourced. ) good due diligence consultant can hel -ou ma+e #etter #usiness decisions. rotect -ou from lia#ilit-. and increase -our transaction success rate. <ut first -ou have to select a firm that understands -our requirements and can handle the 1o# right. &!'ecti(es ,he most im ortant thing is to ma+e sure that first the organi6ation defines its e* ectations from the rocess of due diligence. 7nce the o#1ectives are clear it will #e easier to communicate it to a ros ective consultant. Si4e o" the consulting "irm

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,he si6e of the consulting firm doesn5t matter. Cou should loo+ into e* erience. a#ilit-. +nowledge of s ecific industr- and technolog-. )nd then decide whether the firm5s staff is dedicated and assionate a#out -our o#1ective. ,he consultant who is on the same wavelength as -ou and does a good 1o# at a reasona#le rice is the one for -ou. /ulti82unctional E pertise ,r- to ic+ a firm which has e* ertise in multi le fields so that the- can give -ou the #ig icture and unearth inter functional issues. If -ou use one firm for technical due diligence. another for logistics due diligence. and -et another for financial due diligence. then the- will have a ver- narrow field of vision and greatl- limit their a#ilit- to identifthe most im ortant issues. Consider an End8to8End *ro(ider Post4transaction integration lanning starts along with due diligence e*ercise. Iiven the intimate +nowledge that the due diligence team gains from its wor+. itHs a no4#rainer to involve them in ost4transaction integration lanning. which is critical for success. )ccordingl-. ic+ a firm that not onl- does due diligence consulting #ut also can form. im lement and accelerate a com rehensive ost4transaction integration lan that will ensure -our #usiness goals are achieved. #e 9ar$ o" Con"licts o" Interest. (ertain firms ma- have a conflict of interest and -ou should #e war- of this. )n accounting firm that erforms due diligence consulting wor+. for e*am le. ma- want a transaction to roceed #ecause the- will get auditing wor+ if it does. Pic+ a firm that is com letel-. totall- and unequivocall- o#1ective. A(oid :Casual: Due Diligence Consultants $ome firms ma- rofess to do due diligence consulting #ut it isnHt something the-Hve dedicated their rofessional lives to mastering. ;or e*am le. a law firm ma- review contracts for -ou #ut ma- not have the s ecific industr- or #usiness +nowledge to 1?

ro erl- identif- critical due diligence issues. ) s-stems integration firm or research organi6ation ma- o ortunisticall- announce the- have a due diligence ractice to create a new revenue stream without ever reall- understanding what it ta+es to do due diligence well. Pic+ a firm that is dedicated to achieve o erational e*cellence in the area of due diligence. Secure ;ong8Term 3elationships 9ith <our Consultant. ,he ultimate consulting relationshi is a highl- roductive one. in which there are no inefficient communications #etween -ou and -our consultant and there is an im licit understanding of and trust in each other. 'ence. when -ou do find a good consultant. nurture that relationshi for the long term so that the due diligence efforts are constantle*cellent. *repare "or the /eetings )rrange for meetings with the due diligence consulting firms. $hare -our o#1ectives with them #efore -ou meet with them. ,hen see how well the- tailor their resentation to -ou. ,he #est firms are alwa-s thin+ing a#out -ou. not a#out themselves. If the- come in and genericall- toot their horns a#out themselves #ut never give an- sign that the-Hve researched -our #usiness and -our transaction. with an e-e to meeting -our o#1ectives. thatHs a ver- #ad sign. If -ou are evaluating multi le consulting firms at the same time. inform them of their com etition. ,he- often will give -ou some insights on their com etition. ,a+e those insights with a grain of salt. and give high mar+s to those who ta+e the high road and donHt dis arage their com etition. ;inall-. some words of wisdom on soliciting firm resentations&

Provide the firms with relevant #ac+ground materials. If necessar-. have the firms sign a non4disclosure agreement.

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<e sure to schedule the resentations within as short a timeframe as ossi#le so -ou can com are and contrast them #etter. @et the firms +now who the decision4ma+ers are within -our organi6ation and #e sure the- attend all resentations.

=ow Can <ou Tell 9ho 9ill *er"orm 9ell 2or <ou> Ietting a sense for who will deliver the goods isnHt roc+et science. )fter -ouHve met with the consulting firm. -ou get a sense for their #readth of ractice areas. a#ilities. service levels. and rofessionalism. In general. -ou want smart eo le wor+ing for -ou. ,he good ones will raise issues or ideas that -ou havenHt even thought of -et. <e-ond that #asic intelligence criteria. loo+ for eo le with assion. who wor+ around the cloc+. and who can communicate well. =ow 2ormal Should the E(aluation #e> ,his is a matter of ersonal reference. Cou ma- want to formall- evaluate and score the consultants against a chec+list or. if time is of the essence 2which it usuall- is39 -ou mawant to go with -our gut after thin+ing through a few +e- questions. Do their eo le seem to #e of high qualit-J Is there a good cultural fit #etween the two organi6ationsJ Do the- im ress -ouJ 'ave the- done good wor+ for other clientsJ Do the- seem to have the right num#er of resources availa#le to service -ou wellJ /aking the Decision ,al+ it through and ma+e a decision. )void anal-sis aral-sis. ,he longer -ou donHt have a due diligence consulting firm u and running. the more -ou ris+ missing out on discovering im ortant information that could affect whether -ou ursue the transaction or influence negotiations. In a erfect

1B

world. when a new transaction materiali6es. -ou have the relationshi in lace alreadand start4u lead times are close to 6ero. Documentation Ietting the most out of -our due diligence consultant often hinges on the relationshi -ou formall- draft in the agreement. ItHs tem ting to do a one4off agreement. <ut the record indicates that -ouHll get #est results with a longer4term contract. ,hatHs #ecause the due diligence firm +nows -ouHll #e with them for a while and. fran+l-. that means a lot to them. ,he-Hll invest more resources and more effort if itHs a long4term marriage rather than a short4term #lind date. ,he-Hll assign their #est eo le to -our account on a dedicated #asis. 'ereHs what we recommend. (ommit to a certain num#er of consulting hours over the course of a -ear4long contract. Ma+e sure that -ou get a #etter rate for having committed to giving the com an- some guaranteed wor+. Section (I: Conclusion ,he conclusion of the financial due diligence review should rovide an overall evaluation of the via#ilit- of the target #usiness following the ro osed acquisition. ,he due diligence re orts will form a valua#le tool for the new owners of the #usiness in roviding an overview of the #usiness and identification of areas of wea+nesses and threats which will have to #e addressed. Dach due diligence review is unique #ut the overall aim is to rovide the investor with sufficient. relevant and timel- information in order to assist in the investment decision. ,he due diligence e*ercise is not sim l- a num#er crunching e*ercise #ut involves collation of strategic non financial information which is li+el- to #e crucial in the overall investment decision.

1E

,he successful

erformance of a due diligence investigation is de endent u on the

sco ing. co4ordination and lanning of the review and the use of a highl- s+illed team. ,he cost of the re aration of a qualit- due diligence e*ercise is insignificant when com ared to the cost of a #ad acquisition.

"nne*ures "nne*ure !+ Documents to &e o&tained from Target Compan,

I 1.1

Corporate 3ecords (ertificate of Incor oration. Memorandum " )rticles of )ssociation. including anamendments. <-e4@aws. artnershi

(hec+ed Reviewed ##-

7#servations

1.2

o erating deed.

agreements. anfor

including

1.3

amendments thereto Minute <oo+s. resolutions and an- committees of the a#ove $chedule of officers. directors committees of the <oard of Directors $toc+ <oo+ and $toc+ @edgers Shares and securities $hareholder agreements. ro*ies.

$hareholders. Mem#ers. <oard of Directors 1.4 1.> II 2.1 2.2 2.3 2.4 and

and

similar agreements )greements to urchase or re4 urchase anclass of securit)greements relating to reem tive rights

for an- class of securit)s of the most current date. the following

2F

information& 2a3 Num#er of. and record ownershi of. outstanding referred39 2#3 Num#er of shares held in treasur-9 2c3 7 tions. warrants and other rights outstanding. including detail of holders. e*ercises. une*ercised. vesting schedules. and 2d3 7wnershi #- officers. em lo-ees and 2.> directors. $toc+ o tion lans and stoc+ o tion. urchase shares 2common and

warrant and other similar stoc+ 2.? III 3.1

agreements )ll a lications for issuance=transfer of securities. ;ocation ?propert$ @ist of 1urisdictions 2domestic and foreign3 where the (om an- is 2or should #e qualified3 to do #usiness. $chedule of locations 2#- address. cit-. state and countr-3 at which the (om anhas offices. conducts #usiness or stores inventor- or equi ment. $chedule of leases and su#leases for ro ert- and facilities. including location. area. rent and lease term and renewal o tions. $chedule of material su

3.2

3.3

3.4 3.>

liers and other

third art- service roviders. $chedule of ro ert-. +e- man. lia#ilit-.

21

and wor+erHs com 2including current and

insurance

olicies

ending insurance

carrier. olic- limits. deducti#les. and other s ecial arrangements3. and co ies of all 3.? I7 4.1 such insurance olicies and contracts. $chedule of owned ro ertIntellectual *ropert$ $chedule of owned or ro rietartechnolog- 2including software. data#ases 4.2 and s-stems3. $chedule and co ies 2if a lica#le3 of the following & a3 trade names. #rand names. trademar+s. logos and slogans9 2#3 atents. atent rights. innovations and designs9 2d3. co -rights9 2e3 trade secrets and other industrial ro ert- rights. including all +now4how. technical data9 and 2f3 Registrations. a lications. additions. and other filings related to the foregoing 4.3 items. $chedule of all material ongoing or lanned software. data#ases and=or networ+ 4.4 develo ment ro1ects. $chedule of third ro ert4.> sold. art- intellectual or otherwise rocesses.

licensed

distri#uted #- the (om an-. Product documentation and manuals for

22

the (om an-5s software. data#ases and 4.? networ+s. $chedule of software authors and other creators 4.A of the (om an-Hs software roducts and other intellectual ro ert-. ,he name2s3. address 2es3 and hone num#er2s3 of erson2s3 res onsi#le for atents and other a lication. maintenance and rotection of trademar+s. co -rights. 7 >.1 >.2 intellectual ro ert- rights. Contracts ? Agreements )greements with customers and clients warranties and guaranties (onsulting. develo ment and wor+4for4hire agreements with. or for and on #ehalf of. >.3 customers and clients Mar+eting agreements 44 distri#utorshi s. sales >.4 >.> >.? re resentatives. franchises and agreements. )greements with em lo-ees. inde endent contractors or other third arties @eases with res ect to tangi#le ro erties 2including equi ment3. Non4com etition. e*clusivitersonal and

non4solicitation agreements. in favor of the (om an- or #- which the (om an- is #ound. or #- which the (om an-5s +eem lo-ees or consultants ma- #e #ound to >.A third arties (onfidentialitand non4disclosure

agreements. in favor of the (om an- or #>.B which the (om an- is #ound. Dm lo-ment 2including incentive severance3 agreements. agencand and

23

>.E >.1F

inde endent contractor agreements. Indemnification agreements for the #enefit of officers. directors and em lo-ees. )greements or arrangements with

management. em lo-ees. shareholders and other affiliates 2including an- loans or management fee arrangements3. or with >.11 >.12 >.13 >.14 >.1> >.1? which an- of them have a relationshi 7utstanding agreements or commitments for ca ital e* enditures )greements with investment #an+ers.

#ro+ers and similar advisors. Inter com an- agreements @eases and su#leases (ontracts. or o tions to urchase. sell or lease real ro ert-. @oan agreements. lines of credit. other

de#t instruments. including notes a-a#le and guarantees 2#- or in favor of the (om an-3. and an- other agreements >.1A collaterali6ed or secured #- the assets )greements relating to ast. current or ro osed dis ositions. mergers. acquisitions or including transactions roduct

involving su#sidiaries. divisions. >.1B >.1E

lines and other su#stantial assets. Powers of )ttorne7ther material agreements to which the (om an- is #ound or which are necessarfor the conduct of the (om an-5s #usiness *ersonnel and Emplo$ee #ene"its $chedule of officers. directors. em lo-ees. inde endent contractors and consultants. and their res ective titles. length of service. current com ensation and #enefits. and

7I ?.1

24

?.2

contractual severance o#ligations. $chedule of em lo-ee #enefit including rofit4sharing. com ensation. e*ecutive management arachute Polic- and olicies and stoc+ o tion.

lans. deferred

ension. #onus. commission. incentive. fringe or retirement. #enefit. golden

medical. disa#ilit-. salar- continuation. #enefit. erquisites

?.3

ersonnel manuals. including rocedures with res ect to

vacation and sic+ time. harassment and ?.4 equal o ortunit-. Management erquisites or arrangements. contracts or loans #etween the (om anand an- shareholder. officer. director. em lo-ee or consultant or an- entities or ersons with which such @ A.1 relationshi 3egulator$ /atters ;ilings. registrations. ersons have a

re orts

and

corres ondence filed with local. state or central regulator- agencies and an- re orts A.2 issued #- such agencies Iovernmental licenses. ermits. a rovals and authori6ations necessar- to conduct A.3 A #usiness D* ert com liance rocedures or manuals ;itigation and &ther Disputes $chedule and details of ending or threatened litigation. claims and other dis utes. $chedule and details of government or regulatorroceedings. inquiries or

2>

B E.1

investigations !udgments. in1unctions or other orders $ettlements Ceneral 2inancial In"ormation Previous 2u to 3 -ears if availa#le3 annual audited = unaudited financial statements as well as interim eriod 2monthl- = quarterl-3 for current -ear .(urrent ros ective financial data 2i.e.. #udgets = forecasts3 with detail of assum tions. D*ternal and internal auditorsH re orts 2annual and quarterl-3. management last 3 -ears. (onsolidating letters ermanent files. and regulator-

E.2

E.3

e*amination re orts received = issued in the E.4 general ledger or trial

#alance for detailed accounts for the latest 2 fiscal -ears. current -ear quarters and E.> current eriod. $chedule of re aid e* enses and other assets

"nne*ure 2+ Sample -ngagement letter

($ R)7 " (7. (')R,DRDD )((7KN,)N,$

C&N2IDENTIA; Ma- 1>. 2LLL 2?

Mr. $. Mrishnan Navtri* (or oration President. (D7 and Director 11A. $% Road. Mum#ai. 4FFF2> Dear Mr. Mrishnan. ,his letter shall confirm the engagement of ($ Rao "(o. 2G)dvisorG3 as the e*clusive financial advisor to Navtri* (or oration 2G(om an-G3 to erform due diligence and ost acquisition=merger advisor- services as the (om an- and the )dvisor ma- agree u on in writing. ,he (om an-. as defined herein. shall include Navtri* (or oration. its su#sidiaries. affiliates and an- entities it ma- form. merge into. #e acquired #-. or investing. ,he term of this agreement 2G)greementG3 shall run from the date of recei t #- )dvisor of the (om an-Hs signed acce tance of this letter. until two months thereafter. and ma#e e*tended #- mutual written consent of the arties or cancelled ursuant to the terms hereof 2G,ermG3. ,his )greement ma- #e cancelled #- either art- as rovided in the aragra h entitled G,ermination of )greementG. T3ANSACTI&N: ,he due diligence services will #e erformed #- the )dvisor of the following t- es of ,ransactions with the target entit-. ,he term G,ransactionG shall include. #ut not #e limited to& a strategic alliance 2a G$trategic )llianceG3 that involves an agreement with the target com an- that ma-. either directl- or indirectl-. enter into an- t- e of sales. mar+eting and=or management agreement with the (om an-9

2A

the sale of the target com an- 2a G$aleG or GMergerG3. whether #merger. stoc+ sale or sale in one or more transactions. of all or su#stantiall- all of the assets of the target com an- to the (om an-9 a strategic acquisition 2an G)cquisitionG3 ursuant to which the (om anconsummates a merger. consolidation or other #usiness com#ination with the target com an-. where the (om an- is the surviving entit- 2or its shareholders own a ma1orit- of the equit- in the surviving entit-3 in such #usiness com#ination. or ,he (om an- acquires a ma1orit- of the total equitownershi of a (overed Part-. or all or su#stantiall- all of the assets of a (overed Part-.

DESC3I*TI&N &2 SE37ICES: ,he )dvisor will. to the e*tent requested #- the (om an-. assist the (om an- in anal-6ing otential ,ransactions according to the terms and conditions of this letter. In this regard. the )dvisor ma- underta+e certain activities on #ehalf of the (om an-. including the following& a3 Develo greater de th of understanding of a target com an- in terms

of current and e* ected #usiness. #3 7#tain requisite information from e*ternal and internal sources to

meet the o#1ectives of due diligence c3 Review the financial criteria 2e.g.. -ears to a-#ac+. return on invested

ca ital. the sales growth and internal rates of return3. d3 (om rehensive evaluation of otential ris+s 2e.g.. incom ati#le

technolog-. financial lia#ilities and flight of +e- rofessionals3.

2B

e3

Determination of how the target com an-5s customers =vendors view

their e* erience with the target com an-. f3 Knderstanding how the customers and ros ects are li+el- to react to

the acquisition g3 h3 anal-6ing ,ransaction o tions availa#le to the (om an-9 Kncover anotential red flags with regard to internal control.

com liance with laws and regulations. resentation of financial statements and e* ectations that could influence negotiated terms in an acquisition i3 counseling the (om an- as to strateg- and tactics for effecting a otential ,ransaction9 13 (alculating the actual cost of acquisition.

EXC;DSI7IT<: ,he (om an- agrees that no other financial advisor is or will #e authori6ed #- it during the ,erm of this )greement to erform services on the (om an-Hs #ehalf of the t- e which )dvisor is authori6ed to erform hereunder. No fee a-a#le to an- other financial advisor either #- the (om an- or an- other entit- shall reduce or otherwise affect the fees a-a#le hereunder to )dvisor. e*ce t as otherwise agreed to in writing #)dvisor.

C&N2IDENTIA;IT<: ,he )dvisor agrees that. without rior written consent. it will not disclose. and will not include in an- u#lic announcement. the name or names of an- investor. #u-er. or strategic artner. unless and until such disclosure is required #- law or a lica#le 2E

regulation. and then onl- to the e*tent of such requirement. and that too after it has received a roval from the other art-. C;&SINC: ,he (losing of a ,ransaction shall occur on the earlier of e*ecution of all material legal documentation or the transfer 2if a lica#le3 of funds. ,he (om an- has no o#ligation to )dvisor to acce t or close an- ro osed ,ransaction. IN2&3/ATI&N 2D3NIS=ED #< T=E C&/*AN<: ,he (om an- will furnish )dvisor with all financial and other information and data as )dvisor #elieves a ro riate in connection with its activities on the (om an-Hs #ehalf. and shall rovide )dvisor full access to its officers. directors. em lo-ees and rofessional advisors. ,he (om an- agrees that it and its counsel will #e solel- res onsi#le for ensuring that the ,ransaction com lies in all res ects with a lica#le law. ,he (om an- re resents and warrants that an- material delivered to )dvisor at all times through (losing. will not contain an- untrue statement of material fact or omit to state an- material fact required to #e stated therein or necessarmisleading. ,he (om an- will rom tl- notif- )dvisor if it learns of an- material inaccurac- or misstatement in. or material omission from. an- information theretofore delivered to )dvisor. ,he (om an- recogni6es and confirms that )dvisor. in connection with erforming its services hereunder. will #e rel-ing without investigation u on all information that is availa#le from u#lic sources or su lied to it #- or on #ehalf of the (om an- or its advisors. ,he (om an- will also cause to #e furnished to )dvisor at the (losing co ies of such agreements. o inions. certificates and other documents delivered at the (losing as )dvisor ma- reasona#l- request. 9AI7E3 &2 C&N2;ICTS: to ma+e the statements contained therein. in light of the circumstances under which the- were made. not

3F

,he (om an- recogni6es that )dvisor is #eing engaged hereunder to rovide the services descri#ed a#ove onl- to the (om an- and to all other arties. if an-. who e*ecute this )greement in s ecified other ca acities and is not acting as an agent or a fiduciar- of. and shall have no duties or lia#ilit- to. the equit- holders of the (om anor an- third art- in connection with its engagement hereunder. all of which are here#e* ressl- waived. No one other than the (om an- 2and such other statements. advice. o inions or conduct #- )dvisor. 2EES AND EX*ENSES: 8ith res ect to the services rendered hereunder. the following descri#es the fees and e* ense reim#ursements that the (om an- agrees to a- the )dvisor& ) retainer fee of Rs.***** er month. with the first installment arties in such ca acities. if an-3 is authori6ed to rel- u on the engagement of )dvisor hereunder or an-

a)

a-a#le u on the e*ecution of this letter. ,he (om an- ma- credit the retainer amounts aid to the )dvisor against an- fees it #ecomes o#ligated to a- )dvisor under this )greement. ,his retainer ma- #e cancelled #- the (om an-. after giving the )dvisor 3F da-5s written notice. In the event that the (om an- roceeds with the transaction during the ,erm. the (om an- will a- the )dvisor. immediatelu on (losing of an- )cquisition. a ,ransaction fee according to $('DDK@D ) attached. #3 ,he (om an- agrees to immediatel- reim#urse an- out of oc+et e* enses incurred #- the )dvisor during the ,erm of the )greement. whether or not a ,ransaction is consummated. including. #ut not limited to legal. consulting. travel. lodging and due diligence e* enses. Individual )dvisor e* enses in e*cess of Rs. **** shall require the rior written a roval of the (om an-. 7n a month to month #asis. the (om an- will immediatel- reim#urse the )dvisor

31

for all e* enses related to arranging a ,ransaction. or other services rovided descri#ed.
c)

In the event that )dvisorHs fees. costs or other com ensation. are not aid on the due date. or the date of )dvisorHs invoice. if an-. there will #e an additional charge at a monthl- rate of * ercent or such lesser rate mandated #- law..

TE3/INATI&N &2 AC3EE/ENT& D*ce t as otherwise rovided for herein. this )greement ma- #e cancelled #either art- at an- time rior to the end of the ,erm. effective u on thirt- 23F3 da-s rior written notice to either art-. ED3ISDICTI&N& )ll lawsuits. hearings. ar#itration or other roceedings #e su#1ect to 1urisdiction in Mum#ai. ,he arties irrevoca#l- waive an- o#1ections the- ma- have #ased on im ro er venue or inconvenient forum in Mum#ai /ISCE;;ANE&DS: )ll a-ments and reim#ursements of e* enses a-a#le hereunder shall #e made in Indian Ru ees in immediatel- availa#le funds. ,his )greement contains all of the understandings #etween the arties hereto with reference to the su#1ect matter hereof. No other understanding not s ecificall- referred to herein. oral or otherwise. shall #e deemed to e*ist or #ind an- of the arties hereto and an- such understandings. oral or otherwise. not s ecificall- referred to herein shall #e merged into this )greement and su erseded #- the rovisions hereof. No officer or em lo-ee of an- art- has an- authorit- to ma+e an- re resentation or romise not contained herein. ,his )greement cannot #e modified or changed e*ce t #- a written instrument signed #- each art- hereto.

32

INDE/NI2ICATI&N: Recogni6ing that )dvisor. in roviding the services contem lated here#-. will #e acting as re resentative of and rel-ing on information rovided #- the (om an-. the (om an- agrees to the rovisions of )ttachment ) hereto. It is s ecificall- understood and agreed that the indemnification rovisions of )ttachment ) shall #e indemnified #inding on the successors and assigns of the arties hereto and of the arties. s ecificall- including the continuing cor oration after an-

,ransaction and an- successor thereto whether #- su#sequent merger. consolidation or transfer of all or su#stantial art of the assets or #usiness of the (om an- or such continuing cor oration. If this meets with -our a roval. lease indicate -our acce tance of the a#ove #signing where indicated #elow and returning this letter and the original #- mail to the undersigned. ,han+ -ou for the o $incerel-. =s= I. $. Rao Partner ($ Rao "(o ortunit- to #e of service.

AC3EED AND ACCE*TED: ,he foregoing accuratel- sets forth our understanding and agreement with res ect to the matters set forth herein. Navtri* (or oration

33

<-& =s= $. Mrishnan ,itle& Date& (D7 >41>4LL

NNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNN $('DDK@D ) ,ransaction ;ees schedule NNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNN

INDE/NI2ICATI&N 8 ATTAC=/ENT A ,he (om an- shall indemnif- and hold harmless the )dvisor and its res ective directors. officers. agents. em lo-ees. affiliates and re resentatives 2collectivel- the GIndemnified PersonsG and individuall- an GIndemnified PersonG3. to the full e*tent lawful. from and against an- losses. lia#ilities. claims or damages. including reasona#le fees and e* enses of legal counsel. related to or arising out of the )dvisorHs engagement hereunder or the )dvisorHs role in the ,ransaction contem lated here#-. including an- losses. lia#ilities. claims or damages arising out of an- statements or omissions made in connection with the transaction contem lated here#-9 rovided. however. that such indemnit- shall not a l- to claims which are determined #- a final 1udgment of a court of com etent 1urisdiction to have resulted directl- from the fraud. gross negligence or willful misconduct of an Indemnified Person. No Indemnified Person shall have an- lia#ilit- to the (om an- for or in connection with this engagement. e*ce t for an- which are determined #- a final 1udgment of a court of com etent 1urisdiction to have resulted

34

directl- from the fraud. willful misconduct or gross negligence of the Indemnified Person. Notwithstanding an- other rovisions hereunder. in no event shall the Indemnified Persons #e lia#le to the (om an- for an amount greater. in the aggregate. than the cash fees actuall- received #- the )dvisor hereunder. If an- action is #rought against an- Indemnified Person in res ect to which indemnitma- #e sought against the (om an-. or if an- Indemnified Person receives notice from an- otential litigant of a claim which such erson reasona#l- #elieves will result in the commencement of an- action or roceeding. such Indemnified Person shall rom tlnotif- the (om an- in writing. ;ailure to notif- the (om an- of an- such action or roceeding shall not. however. relieve the (om an- from an- other o#ligation or lia#ilit-. e*ce t to the e*tent that the (om an- demonstrates that defense of such action is materiallre1udiced #- this failure. In case an- such action or roceeding shall #e #rought against an- Indemnified Person. the (om an- shall #e entitled 2at its own e* ense3 to artici ate in such action or roceeding with counsel of the (om an-Hs choice. or to com romise or settle the action or roceeding. at its e* ense Notwithstanding the (om an-Hs election to assume the defense of an- action or roceeding. the Indemnified Person shall have the right to em lo- se arate counsel and the (om an- shall #ear the reasona#le fees. costs and e* enses of this se arate counsel. Knder no circumstances. however. will the )dvisor #e o#liged to ma+e an- contri#ution to an- e* enses descri#ed in this aragra h which is greater than the amount of cash reviousl- received #- )dvisor for its services to the (om an-. ,hese indemnification rovisions shall 2i3 remain o erative and in full force and effect regardless of an- termination or com letion of the engagement of the )dvisor9 2ii3 inure to the #enefit of an- successors. assigns. heirs or Person ma- have at common law or otherwise. ersonal re resentative of anIndemnified Person9 and 2iii3 #e in addition to an- other rights that an- Indemnified

3>

AC3EED AND ACCE*TED: ,he foregoing accuratel- sets forth our understanding and agreement as ertains to the )greement dated Ma- 1>. 2LLL N)%,RIL (7RP7R),I7N <-& ,itle& Date& =s= $. Mrishnan (D7 >41>4LL

"nne*ure $: Sample due Diligence Report

A#C ;imited Due Diligence 3eport

3?

Contents @etter to the <oard of Director. C @imited $ignificant ;indings ). Review of Net @ia#ilities $tatements <. $hare (a ital ) ) ) endi* 1& Irou $tructure endi* 2& 7rgani6ation (hart endi* 3& Profit and @oss Pro1ection

3A

ST3ICT;< *3I7ATE AND C&N2IDENTIA; ,he <oard of Directors C @imited Mum#ai 1A Decem#er 2LLL A#C ;imited FGA#CH5 Due Diligence E ercise Dear $irs. In accordance with the engagement letter dated 2? 7cto#er 2LLL. -ou engaged us to erform due diligence on )<( and its su#sidiaries. ,he engagement is conducted in accordance with the terms mentioned in the engagement letter. 8e have erformed the necessar- wor+ and here#- re ort our findings to -ou as follows. Terms o" 3e"erence 7ur re ort has #een re ared solel- for the use of the directors of the LC @imited. It is the ro ert- of the author. ,he re ort should not #e otherwise referred to. in whole or in art. or quoted #- e* ertise or reference in an- manner. or distri#uted in whole or in art or u#lished or co ied to an- third art- without our rior written consent. ,he sco e of the wor+ has #een limited to the ur ose of our engagement detailed in the engagement letter dated 2? 7cto#er 2LLL . *laces 7isited and Sources o" In"ormation 8e have visited the Irou 5s offices at Knit ) " <. 41. $D; <ldg 4. $DDPO. )ndheri. Mum#ai and AF D. 'osur Road. <angalore. 8e have held discussions with. and o#tained information from Mr. M <ole. the (hief D*ecutive 7fficer of )<(. Mr. I. $ingh. the Director : ;inance and Relationshi Manager of $tate <an+ of India. their rinci al #an+er. In addition. we have chec+ed the regulator- filings with $D<I and R7(. 7eri"ication

3B

In com leting our wor+ we have relied on the integrit- of the information and data su lied to us. 8e have not inde endentl- verified the information or documentation rovided to us unless e* ressl- stated in the re ort. *ro'ections 8e have made the ro1ections #ased on underl-ing assum tions rovided #- the management .we cannot or do not e* lore the technical as ects of #usiness decisions and their calculations. ,he assum tions are the sole res onsi#ilit- of the directors of the Irou . 8e have reviewed some ma1or contracts #ut some deals are still under negotiation. and we acce t no res onsi#ilit- for an- of them. or the ultimate accurac- and reali6ation of the ro1ections. ;urthermore. there is a high ro#a#ilit- that there will #e differences #etween ro1ected and actual figures. due to changed circumstances. and those differences ma- #e material.

Disclaimer $ince it s a art of our 1o# to loo+ for ossi#le issues. we highlight the negative as ects. In s ite of detailed research and anal-sis ris+s cannot #e eliminated and all #usiness and investment decisions contain some amount of ris+. 8e do not claim that we can or have uncovered all ossi#le issues. ,his re ort is issued on the understanding -ou have drawn our attention to all matters of which -ou are aware concerning the com an-5s financial osition or the ro osed transaction which ma- have an im act on our re ort u to the date of signature of the finali6ed re ort. ,he fieldwor+ for this re ort was com leted on Novem#er *. 2LLL and we acce t no res onsi#ilit- for events and circumstances occurring after that date or of u dating the re ort. ;imited 3e(iew 3eport ,his is onl- a limited review re ort. the sco e of the wor+ #eing confined to the areas s ecified in the engagement letter. ;urther. the sco e of our wor+ has #een limited #- the time availa#le and -ou should not rel- on our wor+ as #eing com rehensive.

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)ccordingl-. we do not. and cannot re resent that the rocedures have #een sufficient for -our ur oses. /atters E cluded ,here are other areas. such as. 1 1. issues of law 2including without re1udice to the foregoing. validit- and ro ert-. effectiveness of contracts. licenses. title deeds including those for 2 3 4 > ? A Cou should consider whether to o#tain e* ert advice in relation to these areas. 2. valuation of fi*ed assets #oth tangi#le and intangi#le 3. valuation of wor+4in4 rogress9 4. regulator- issues9 and >. @egal and other s ecialist areas where R$ )ssociates do not have e* ertise which ma- #e relevant and which are outside the sco e of our review.

investments and stoc+. encum#rances. and all matter relation to roduct lia#ilit-39

Cours faithfull-. ;or and on #ehalf of R$ )ssociates Mr. R. @aha. () Signi"icant 2indings During our review of relevant documents and accounting records. we have noted the significant findings a#out the Irou as follows&

1. Ioing (oncern (onsideration )<( @imited is now incurring heav- losses. ,he com an- de ends on #orrowed funds to finance is funds. <an+ overdraft facilit- is used to the ma*imum limit. )ccording to the

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rofit and loss ro1ection re ared #- )<( the com an- is not e* ected to ma+e anrofits for the ne*t two -ears. ,herefore. the continuit- of the (om an- is heavil- de endent on the immediate in1ection of ca ital and the continuous su 2. Intangi#le )ssets ) ma1or ortion of the assets com rise of develo ment cost incurred on P roduct nameQ which has not -et #een released in the mar+et. ,he otential economic #enefit of the roduct is not +nown and we find the inclusion of such assets in the financial statements as questiona#le. ) su#stantial ortion of the develo ment costs was aid to R)PR5 com an- .'owever. no details have #een rovided on services rovided #- the com an-. ,he com an- is not a listed com an- and even after ma+ing some reliminar- inquiries we have #een una#le to find an- information on the com an-. 3. (om etitive advantage& ,he com an- stated that its +e- com etitive advantage is #eing /first to mar+et0. 'owever. this does no indicate a lasing com etitive advantage. @i+ewise. their statement that their Pt- e of serviceQ /cannot #e du licated0 doesn5t sound convincing .If there is a strong mar+et. roviders will emerge. 4. <an+ing ;acilities <an+ing facilities was granted #- <an+ of PnameQ. ,he #an+ has a floating charge on all accounts receiva#les. cash and #an+ de osits of the (om an-. ,he #an+ers have to #e rovided with the audited accounts of the (om an- within si* months after the end of each financial -ear. ort from the #an+ers of the (om an-.

>. ;ounders and officers In our limited review. we did not find an- issues in this area. 8e did not find anconclusive evidence that an- of the rinci al ersons have an- ro#lematic records. 8e have no done thorough #ac+ground chec+s .8e have however. devoted fair amount of

41

time loo+ing and have come u with nothing which gives a reasona#le degree of comfort. If desired. we can do a thorough #ac+ground chec+ . ?. @icense for the o eration of P roduct PR7Q )s re resented #- the management of the (om an-. the success of )<( de ends on its mar+et for its newl- launched roduct PR7. K to now. the (om an- has not registered an- atent or co -rights for PR7. )lso. the (om an- did not o#tain an- significant licenses or rights for the develo ment. )n- a#normal changes in the government olicon this area will li+el- ham er the #usiness develo ment of the (om an-.

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A#C ;I/ITED DDE DI;ICENCE 3E*&3T A. 3e(iew o" Net ;ia!ilities Statement 8e have reviewed the Net @ia#ilities statement of the Irou as at 3F $e tem#er 2LLL and 31 March 2LLL as follows&

3F $e t Rs.2RFFF3 ;i*ed )ssets Intangi#le )ssets Current Assets 8or+4in4 rogress ,rade and other receiva#les Current ;ia!ilities <an+ overdraft ,rade and other a-a#le Net Current ;ia!ilities ;ong Term ;ia!ilities $hareholders5 @oan Net ;ia!ilities 13.3E2.FF A.1A?.FF 1B.4F>.FF 1.?>B.FF 2F.F?3.FF 2.>2B.FF 1.?2>.FF 4.1>3.FF 1.?EF 2F.43?

31 March Rs.2RFFF3 2.24? 2F.43?

2.A3A.FF >21.FF 3.2>B.FF

1A.4A?.FF 2.?F2.FF 2F.FAB.FF

E.311.FF 3.44E.FF

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%. 2i ed Assets 3F $e t Rs.2RFFF3 @easehold assets Plant " machiner;urniture and fi*ture 7ffice equi ment Motor vehicle (om uter hardware " software 2?4 3FF 2F1 2AE 14E 4EA 1.?EF 31 March Rs.2RFFF3 341 3FB 22F 3>2 1A> B>F 2.24?

)s discussed with the directors. there were no material additions and dis osals during the si* month ended 3F $e t 2LLL. ,he onl- fluctuation in #oo+ value of the fi*ed assets re resented the de reciation charges for that eriod.

). Intangi!le Assets 3F $e t Rs.2RFFF3 7 ening #alance eriod (losing #alance 2F.43? 2F.43? 2F.43? )ddition during the -ear or 4 31 March Rs.2RFFF3 1A.23? 3.2FF

)s re resented #- the Management. the intangi#le assets is mainl- the ca itali6ation of the develo ment cost incurred on P roduct nameQ which has not -et #een released in the mar+et. )n intangi#le asset arising from develo ment should #e recogni6ed if and onl- if the com an- could demonstrate all of the following&

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1 2 3 4

1. ,he technical feasi#ilit- of com leting the intangi#le asset so that it will #e availa#le for use or sales9 2. Its intention to com lete the intangi#le asset and use or sell it9 3. Its a#ilit- to use or sell the intangi#le asset9 4. 'ow the intangi#le asset will generate ro#a#le future economic #enefits. )mong other things. the enter rise should demonstrate the e*istence of a mar+et for the out ut of the intangi#le assets or the intangi#le asset itself or. if it is to #e used internall-. the usefulness of the intangi#le asset9 and

>

>. Its a#ilit- to measure the e* enditure attri#uta#le to the intangi#le asset during its develo ment relia#l-.

<asing on the a#ove information. the recognition of the intangi#le assets will have the following otential ro#lems& 1 1. Recognition of an intangi#le asset is highl- de ends on the generation of ro#a#le future economic #enefits from this assets. )ccording to the latest rofit and loss ro1ections. the com an- will have difficulties in generating such amount of future economic #enefits in the foreseea#le future. )mount to #e ca itali6ed should #e limited to the #enefits that can generated in the ro1ections9 2 2. ,he intangi#le asset should not #e carried at an amount ermanentl-. ,he amount should #e amorti6ed to the rofit and loss account as a cost against the revenue generated from the asset. ,herefore. the com an- should amorti6e the cost of assets to the rofit and loss account for a reasona#le eriod9 3. During our visit to )<(. we found that a su#stantial ortion of the develo ment costs was aid to R)PR5 com an- .'owever. no details have #een rovided on services rovided #- the com an-. ,he com an- is not a listed com an- and even after ma+ing some reliminar- inquiries we have #een una#le to find an- information on the com an-. 8e have as+ed the directors Mr. PQ and Mr. PQ. <ut u to the date of this re ort. the- have not rovided the details of these a-ments.

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#. Share Capital Num!er o" ordinar$ shares o" 3e%.II 4.?EE.BFF.FFF each issued and "ull$ paid as at -I Sept )XXX Nominal (alue Share premium %. ;ist o" Shareholders )s at 3F $e t 2LLL. the shareholders of the com an- are as follows& Rs.4.?EE.BFF.FFF Rs.23.F>A.F4F.FFF

Num#er of $D ;R Mr. <ole R, M@ shares 1.>1B.A?B >2E.A?4 22>.2FF 1.A?F.32F ??>.A4B .61BB6AII ). *re8empti(e rights

S holdings 32.32S 11.2AS 4.AES 3A.4?S 14.1?S %II.IIJ

,here are no rovisions for re4em tive rights under the (om an-5s )rticles of )ssociation. which would o#lige the (om an- to offer new shares on a ro4rata #asis to e*isting shareholder2s3. -. Share option scheme )s at the date of this re ort. the (om an- did not enter into an- agreement for granting o tions to su#scri#e an- shares of the (om an-. .. Directors )s at the date of this re ort. the lists of Directors are as follows& Mr. PQ

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Ms. PQ Mr. PQ Mr. PQ Appendi %: Croup Structure Appendi ): &rganisation Chart

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