Start-ups have become ubiquitous with several entrepreneurs taking the plunge in giving their ideas a shape and nurturing them. On the other hand, several investors comprising of friends and family, angels, seed funds, venture/PE funds have also opened their purse strings by investing in various ventures. However, investments in start-ups without a proper due diligence is a recipe for disaster. Most start-ups have product development and roll-out to customers top-most on their minds and compliance with the laws and regulations take a back-seat. During our due diligence process, we have found several instances of non-compliance which turned out to be fatal and if not detected and fixed on time, would have led to disastrous consequences down the line. Our Due diligence checks are structured to ensure that the company has ticked off all the required compliances and not zipped past them in their zeal to get their product to the market. To give a few instances of non-compliances which became a no-go for the investors’ legal team – Non-registration of rental lease agreements and stamp duty not paid, no share certificates issued after incorporation and/or no stamp duty paid or share certificates transferred in a haphazard manner with no records maintained; Share Capital in books different from what is reported with the Registrar of Companies; non-compliance with FEMA, GST during cross-border transactions; failing to take mandatory registrations and not filing periodic returns under various tax laws.
At SMJA, we have represented the investors’ and their legal teams to do the due diligence for their potential investee companies on one side, while on the other side, we have also represented the start-ups in a pre-due diligence clean up to ensure the compliances are upto date before the same is scrutinized by the legal team on the investor side.