Due Diligence in Securities Issues, Mergers and Banking Transactions — Practice

Question 1

Name three areas covered by a legal due-diligence checklist.

Accepted Answer

Any three of: corporate structure/ownership, statutory/regulatory compliance history, material contracts, litigation/disputes, IP portfolio, employment/labour compliance, licences/permits, encumbrances on assets, related-party transactions, environmental compliance.

Question 2

What does 'quality of earnings' assess in a financial due-diligence review?

Accepted Answer

Whether reported profit reflects genuine, sustainable operating performance rather than one-off or aggressively recognised items.

Question 3

Which regulation set imposes a specific due-diligence obligation on merchant bankers in a public issue?

Accepted Answer

SEBI's ICDR Regulations.

Question 4

Distinguish legal due diligence from financial due diligence in one sentence each, and explain why a transaction typically needs both.

Accepted Answer

Legal due diligence tests the target's structural and compliance integrity and legal risk (contracts, litigation, licences, IP). Financial due diligence tests the target's economic and financial health and the reliability of its reported numbers (revenue trends, debt, quality of earnings). A transaction needs both because they are complementary, not substitutes — a target could be legally compliant while carrying serious undetected financial risk, or vice versa.

Question 5

Explain how a lender's credit due-diligence focus differs from an equity investor's due-diligence focus on the same target.

Accepted Answer

A lender's credit due diligence emphasises repayment capacity, the quality and enforceability of proposed security, and covenant compliance capacity — a downside-protection focus. An equity investor's due diligence instead places more emphasis on growth potential and upside, reflecting the investor's different risk-and-return position relative to a lender.

Question 6

Name four red flags common across securities-issue, M&A and banking due diligence.

Accepted Answer

Any four of: undisclosed or inadequately disclosed litigation, licensing/permit gaps, a declining revenue trend, unusually high leverage, a persistent working-capital gap, financial reporting irregularities, non-arm's-length related-party transactions.

Question 7

Explain, with an example, the two distinct ways an M&A due-diligence finding can affect the eventual transaction, beyond simply being documented in a report.

Accepted Answer

A finding can affect the deal price, through a valuation adjustment reflecting the identified risk or its cost — for example, a discovered environmental remediation liability could reduce the purchase price by the estimated remediation cost. It can also be addressed through the transaction documents themselves, via specific representations, warranties and indemnities that allocate the risk of the identified issue between buyer and seller — for example, the seller could indemnify the buyer specifically against losses arising from that same environmental liability, regardless of any price adjustment already made. Due diligence findings therefore feed directly into both valuation and drafting, rather than existing as a separate, disconnected report.

Question 8

A due-diligence team discovers that a target's material customer contract lacks a change-of-control clause (so an acquisition would not trigger termination rights), but separately finds the same customer relationship accounts for an unsustainably large share of revenue with a declining trend. Classify each finding by due-diligence category and explain why both matter to the same underlying commercial risk (customer concentration).

Accepted Answer

The absence of a change-of-control clause is a legal due-diligence finding (contract-term review), and it is actually a favourable/neutral finding here, since the acquisition would not disrupt the relationship contractually. The customer-concentration and declining-revenue-trend finding is a financial due-diligence finding (revenue-trend analysis). Both matter to the same underlying commercial risk because the legal finding addresses whether the relationship survives the transaction structurally, while the financial finding addresses whether the relationship itself is a sound, sustainable source of value even if it does survive — illustrating why the two workstreams, though addressing the same commercial concern, ask genuinely different questions that only their combination fully answers.

Practice — Due Diligence in Securities Issues, Mergers and Banking Transactions

Sign in to save attempts to your dashboard and track your accuracy over time

Find a verified tutor

Join a live course

Browse coaching centres

About

Categories

Support

Documentation

Get Study Tips & Updates

Download Our App

Download for iOS

Download for Android

Popular Cities