Investor's Compliance Checklist

Raising capital is a major function for any business and equity funding has gained tremendous popularity over the last decade owing to the success of ecommerce companies like Flipkart, Snapdeal, In-Mobi and more. The increased interest in startups has led to the development of a strong angel investor community, venture capital investors and private equity firms. All equity investors prior to making an investment conduct an investment due-diligence of the target company on a wide variety of areas. In this article, we look at an Investor's compliance checklist, designed to make sure the investee is compliant with relevant rules and regulations.

Business Entity

Equity investment requires issuance of shares of the company to the investor in return for equity / shares. Only private limited company or limited company is capable of supporting such a transaction. Hence, the first step in the fund raise process should be to incorporate a company, if not already done. During incorporation, it is important to ensure that the Memorandum of Association and Articles of Association of the Company are drafted to handle an equity investment without any amendments to the MOA or AOA.

ROC Compliance

The company must maintain a statutory register and should have complied with all the provisions of the Companies Act, 2013. Some of the main compliances post incorporation of a company are appointment of Auditor, conducting of board meetings, filing of statutory annual returns and maintenance of statutory register. During the investment due-diligence the above areas pertaining to ROC compliance will be verified.

Tax Compliance

Tax compliance for a business would vary depending on the nature of business and state of operation. Businesses involved in selling goods or products would have to comply with state VAT regulations, including VAT registration, VAT payments and filing of VAT returns. Businesses involved in providing services would have to obtain service tax registration, make service tax payments and file service tax returns.

In addition to service tax or VAT regulations, income tax compliance would also be checked. TDS payments and TDS return filing would be checked to ensure that the business complied with the relevant Income Tax rules and regulations.

Labour Law Compliance

If the investee company has an employee workforce of over 20, the business would have to comply with ESI and PF regulations. Hence, ESI registration documents, ESI return filing, PF return filing, ESI payments and PF payments would be checked. If the company is involved in the development of intellectual property, then due-diligence will also be performed to ensure that the business has the necessary employee non-disclosure agreements in place.

Intellectual Property

Intellectual property is one of the biggest asset of a technology based company. Hence, investors will ensure that relevant intellectual property of the company like trademark, copyright, patent and design are protected with a trademark registration or copyright registration or patent registration. Even if the registration certificate is not issued, investors will want to see proof for filing of application for trademark or copyright or patent.

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Frequently Asked Questions

Common questions about Investor's Compliance Checklist for Equity Funding.

The first step in the fund-raising process for a business is to incorporate a company, if it is not already incorporated. The company should be either a private limited company or a limited company to support equity investment and issuance of shares.

It is crucial to ensure that the Memorandum of Association and Articles of Association of the company are drafted correctly during incorporation to handle an equity investment without requiring any amendments to these documents later on. This ensures a smooth process for issuing shares to investors.

Some of the main compliances that a company needs to fulfill after incorporation are the appointment of an auditor, conducting board meetings, filing statutory annual returns, and maintaining statutory registers. These ROC (Registrar of Companies) compliances will be verified during the investment due diligence process.

Tax compliance for a business is evaluated based on the nature of the business and the state of operation. For businesses selling goods or products, VAT registration, VAT payments, and VAT return filing will be checked. For service providers, service tax registration, service tax payments, and service tax return filing will be verified. Additionally, income tax compliance, including TDS payments and TDS return filing, will also be assessed.

A business needs to comply with ESI (Employees' State Insurance) and PF (Provident Fund) regulations if it has an employee workforce of more than 20 people. In such cases, the due diligence process will check ESI registration documents, ESI return filing, PF return filing, ESI payments, and PF payments.

Intellectual property is considered one of the biggest assets of a technology-based company. Therefore, investors will ensure that the company's relevant intellectual property, such as trademarks, copyrights, patents, and designs, are protected through registration or proof of application filing.

During the due diligence process for intellectual property, investors will typically review documents such as trademark registration certificates, copyright registration certificates, patent registration certificates, or proof of filing applications for these registrations.

The due diligence process ensures compliance with labor laws by checking for ESI (Employees' State Insurance) registration documents, ESI return filing, PF (Provident Fund) return filing, ESI payments, and PF payments if the company has more than 20 employees. Additionally, if the company is involved in the development of intellectual property, the due diligence will also check for the existence of necessary employee non-disclosure agreements.

ROC compliance is significant during the investment due diligence process because it ensures that the company has maintained statutory registers and complied with all the provisions of the Companies Act, 2013. This includes the appointment of an auditor, conducting board meetings, filing statutory annual returns, and maintaining statutory registers.

It is essential for a company to have proper documentation and compliance in place before seeking equity investment because all equity investors conduct a thorough investment due diligence of the target company on a wide variety of areas, including business entity, ROC compliance, tax compliance, labor law compliance, and intellectual property. Having these aspects in order demonstrates the company's credibility and reduces potential risks for investors.