Due Diligence: A Legal perspective

The conceptualisation of Due Diligence can be traced back to the year of 1930s; however, the practice goes beyond that. The first time the term “Due Diligence” was ever used officially was in the United States of America in the United States Securities Act of 1933. The United States Securities Act of 1933 deals with the protection of investors in the purchase of securities or property. However, the term used was “reasonable investigation”, but the concept remained pretty much the same. 

Due Diligence as a concept can be seen everywhere - not just investments, but in all our daily life activities. Whenever we are to make a decision, it is a normal human tendency to analyse the pros and cons of the decision that is to be made. For instance, when we plan a trip, we look at the entire process, from the travel arrangements to the accommodation. The budget is also an important decisive factor. Thus, Due Diligence can be zeroed down to any prudence practice. Any person researching something to avoid taking any wrong turns is essentially practising Due Diligence. 

In India, we have hints of the practice of Due Diligence in several of the Acts. For instance, in the Transfer of Property Act of 1882, Section 3 states that 

“a person is said to have notice” of a fact when he actually knows that fact, or when, but for wilful abstention from an enquiry or search which he ought to have made, or gross negligence, he would have known it.

Now the general presumption is that the person has a duty to investigate the fact presented to him. In any case, it will be presumed that the person had done his job of investigating the property and that any such ignorance is not a very viable excuse. 

Similarly, in the several acts dealing with the companies, the term Due Diligence has been used. Securities Exchange Board of India (SEBI) in its SEBI Act of 1992, states that in Section 27 of the SEBI Act which deals with the offences committed by the company, has a provision which states that, 

Provided that nothing contained in this subsection shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due Diligence to prevent the commission of such offence.

Since a company deals with the public, either directly or indirectly, at a large scale, the Legislative Body of India has taken note of the same and has incorporated the same in its Acts. 

Several versions of the provision can be found in various different acts of the Securities Contract Regulation Act of 1956, Monopolies Restrictive Trade Practices Act of 1969, Information Technology Act of 1961.