Due Diligence

Meaning :

In simple words we can describe the word Due Diligence as the art or a state of mind, which we employ, while engaging in some Investigations or associated engagements.

The term was first introduced in Securities Act 1933, passed by the United States.

Consider the situation for better understanding:

In case when a Company goes for Public issue, it is customary to employ Brokers for issue of capital. Suppose the Public has subscribed the shares from the brokers thinking that the disclosure made by the brokers are accurate, in respect of the company.

In case it was found to be otherwise, the public can make responsible the brokers for providing wrong disclosures regarding the company. This is what, usually happens.


But, the climax changes if the Brokers would have employed Due Diligence. Here the term gains significance. Now in such a case the brokers cannot be held liable for any wrong disclosures made by them, because they would have enquired about the company in the manner prescribed under Due Diligence.

Now it becomes easy to explain the term.

Considering the above example, Due Diligence can be defined as a course of action or sequential process which is to be employed by a person for studying the relevant areas and their implications before contracting with the entity or engaging in some activities.