Why Investors and Banks Check Compliance Before Approving Funds?

Last Updated on February 7, 2026

Before making any loans or investing in the business, banks or investors undertake an extensive compliance review to assess the reliability, legality, and financial stability of the company. It is an essential part of due diligence as it aims to limit risks and ensure that the funds are being directed in the right way.

Compliance verification can be defined as the checking of legal registrations, statutory filings, tax returns, audited financial statements, the promoter, and regulatory approvals. It helps the financial institutions to evaluate whether the business is being run in a transparent manner or not.

Through a detailed scrutiny of the prevailing history of compliance, lenders and investors stand a better chance of determining potential red flags such as underlying litigations, unpaid tax dues, confrontational regulatory penalties, and even pertinent governance issues. Essentially, a reliable review process works towards safeguarding capital in addition to promoting compliance and a strong foundation for partnering in finance.

How Compliance Checks Help Banks and Investors Reduce Financial Risk?

Compliant checks are vital elements of the risk management process. They safeguard financial institutions, encourage prudent lending and investing, and ensure transparency and responsibility within every corporate entity.

1. Evaluating Legal Legitimacy of the Business

Also, financial institutions and investors ensure that the organisation is registered and runs a legitimate business as required by the law. Legal risks are involved in financing an organisation which is not registered and does not run a legitimate business.

2. Mitigating Financial Risk

Compliance documents show that the company is financially prudent. When a company presents compliance documents, it is evident that the company has been making timely tax submissions, has audited financial statements, and has been compliant in all areas, which serves to reduce

3. Evaluating credibility and transparency

The timely filing of GST returns, income tax returns, ROC returns, and other necessary documents is a reflection of transparency. In case of non-compliance, red flags are raised about the organization’s governance and integrity.

4. Ensuring appropriate allocation of funds

Investors seek assurance that funds will be utilised for legitimate business purposes. A history of compliance indicates whether management adheres to established protocols.

5. Preventing regulatory penalties

If a company has unresolved penalties, legal disputes, or tax obligations, its ability to repay may be compromised. Financial institutions tend to avoid engaging with companies that have significant regulatory burdens.

6. Verify the Background and Governance of Promoters

The assessments assist in identifying any history of fraud, insolvency, or defaults of the promoters. Effective corporate governance increases investors’ faith.

7. Fulfil Internal and Regulatory Obligations

Financial institutions need to adhere to guidelines framed by RBI, SEBI, and anti-money laundering regulations. Verification of such compliance is necessary while disbursing funds.

8. Assess Repayment Capacity

Well-maintained records of finances, tax returns, and audited financial statements all play a vital role in showing the cash flow position and repayment potential.

9. To Safeguard Reputation

In addition, providing funds to non-compliant businesses is likely to negatively impact the reputations of banks and investors. Carrying out due diligence is critical in ensuring that the reputation of institutions is maintained.

10. To Minimise Future Disputes

A clear paper trail and compliance minimises the likelihood of legal issues, misrepresentation, and contractual problems.

Basic Compliance Checklist for Banks and Investors Before Approving Funds

Between banks and other investors, negotiations and compliance actions take place before formal approval of funds. Opportunities for obtaining financial aid for a company that is well-prepared, compliant, and transparent in its financial data, reports, and procedures increase significantly. So, financial aid acquisition and trust development depend on adequate documentation and adherence.

1. Legal and Registration Compliance

• Certificate of Incorporation, Memorandum and Articles of Association (MOA & AOA), Partnership Deed, and LLP Agreement. If relevant, registration for PAN, TAN, and GST.
• Updated director and promoter KYC. Verification on the MCA Portal of CIN, DIN, and Firm Status.
• Verification of unfulfilled ROC filings and non-compliance issues.

2. Verification of Financial Records

• Financial records of the company for the previous two to three years checked by an auditor.
• Production of profit and loss statements, balance sheets, and cash flow statements. Notes for financial accounts, auditor’s report. – Analysis of revenue trends, margins, and profit margins.
• Validation of contingent debts and related parties’ deals.
• Pertaining to the auditor’s qualifications and their reports.

3. Compliance with Taxation and Statutory Regulations

• Filing of income tax returns for the prior two to three years. GST returns include GSTR1, GSTR3B, and GSTR9.
• Verified 26AS data for correctness and completed TDS Compliance.
• Confirmed that all professional tax, ESIC, and EPF compliances were current.
• Verified that all tax demands and litigation were little and handled.

4. Banking and Credit Assessment

• Bank statements for the past 6-12 months.
• Proven ability to service existing loans.
• Credit score (CIBIL) of both promoters as well as the entity.
• Give information regarding collateral.

Evaluating the debt/equity ratio and leverage position:

• Adequate cash flows to support the proposed level of debt.

5. Business Model and Operational Review

• A thorough business strategy along with financial projections.
• Revenue model and scalability potential.
• Conduct a market analysis and evaluate the level of competition.
• Significant contracts with customers and suppliers.
• Dependency risks are linked to one client or one vendor.
• Obtain operating licenses and other required regulatory approvals.

6. Corporate Governance and Management Review

• Verification of promoters and key management personnel.
• Structure of the board and agreements between shareholders.
• A history of defaults, insolvency, or fraud accusations.
• Conduct litigation searches and resolve legal issues, etc.
• Adherence to the provisions of the Companies Act.

7. Regulation and Industry-Specific Compliance

• Industry-specific licenses such as RBI, SEBI, FSSAI, IRDAI, etc., as applicable.
• Obtain any necessary environmental permits.
• Verify compliance with data protection regulations and cybersecurity regulations.
• Registration of various intellectual properties such as trademarks, patents, and copyrights.

8. Risk and Due Diligence Checks

Conduct forensic due diligence for major funding:

• Perform AML checks.
• Ensure proper disclosure of ownership.
• Verify the pledged shares and encumbered shares.
• Evaluate the potential risks and legal liabilities.

9. Documentation and Agreements

• Prepare the loan/investment agreement.
• Review thoroughly the term sheet.
• Prepare documents needed for security creation and charge registration with ROC.
• Examine the patterns of shareholding both before and after sponsorship.
• Include exit clauses and repayment terms.

10. Projections and Fund Utilisation Plan

• Formulate an overall strategy for the utilisation of funds.
• Capital expenditures should be considered along with the need for working capital.
• Perform sensitivity analysis of the financial projections.
• To check repayment capacity, conduct a series of stress tests.

How Kanakkupillai Help For Compliance Checks?

KANAKKUPILLAI makes these compliance checks so easy, systematic, and stress-free for your organization. We perform a detailed review of your legal registrations, tax filings, financial statements, ROC compliances, and statutory records to ensure that they are correct and up-to-date. We identify gaps, rectify errors, and prepare your documents to instil confidence in the eyes of bankers and investors.

We will provide full support, from loan applications and investment to due diligence preparation, by covering everything from compliance assessment to documentation support. Our proactive approach mitigates risks, avoids last-minute surprises, and enhances your chances of securing funding.

KANAKKUPILLAI is your trusted compliance partner, offering expert advice, transparent processes, and reliable support. Reinforce your reputation, be prepared for an audit at all times, and confidently show the world your business with greater impact. Count on KANAKKUPILLAI for effective and efficient compliance checks.

Get Started Today!

Compliance problems, paperwork gaps, and regulatory misunderstandings should not hold your business back. Designed just for you, KANAKUPPILLAI provides useful, reliable solutions. We provide careful and thorough assistance on GST returns, business registration, compliance audits, and funding preparedness.

At every moment, our experienced team guarantees accuracy, quick completion, and total openness. We provide not only services but also full support and assistance that would enable your company to expand successfully.

Whether you are a newcomer company, a small business, or a well-known company, we want to give you an easyand trouble-free compliance experience. Handle your companies or corporations wisely by taking the sensible firstmeasure. Work with KANAKKUPILLAI for dependable expert support.

Let us start today; success starts with the ideal compliance partner.

Frequently Asked Questions (FAQ)

1. Why is compliance essential prior to funding?

It helps banks and investors verify that the company is registered and operates within legal frameworks.

2. How do tax filings affect funding decisions?

In fact, the timely filing of the GST and income tax returns is a measure of financial discipline and transparency.

3. Why are audited financial statements important?

They give an accurate and unbiased opinion about the financial position and repayment ability of the company.

4. Do Lenders Investigate the Background of the Promoters?

Yes, to check for credibility, defaults, legal issues, or potential fraud.

5. Is compliance connected to credit risk?

Of course. Non-compliance might imply poor financial position and the possibility of default.

6. Does compliance protect investors?

Yes, it mitigates legal risks, regulatory fines, and reputational damage while promoting good investments.

7. What is the aim of the compliance check?

Before providing finance to a company, it checks its legality, financial viability, transparency, and risk level.