Due Diligence |
May 19Due 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.