On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic with an observation that governments, industries and individuals should continue to implement comprehensive strategies and measures to prevent infections, save lives and minimize impact. The crippling effects of COVID-19 are causing massive business interruptions across the globe/industries.
Currently, Ministry of Home Affairs vide its order dated March 24, 2020 directed a complete nationwide lockdown (with exceptions on essential services) for a period of 21 days, with effect from March 25, 2020 to prevent the spread of COVID-19 in the country.
Various regulatory authorities (including SEBI, Income Tax, RBI) actively liberalized deadlines for various compliances and requirements. The Ministry of Corporate Affairs dispensed with the need to conduct physical board meetings in relation to (amongst others) approval of financial results, board reports and corporate restructuring until June 30, 2020.
While COVID-19 has spooked global markets and escalated the world towards recession, it’s overarching impact on the Indian share market has been in sync with the descent in other global indices.
Here are a few considerations to be borne in mind by listed entities in India to ensure business continuity:
A. Corporate governance
With this unprecedented public health crisis, it is important that board of directors discharge their duties in the best interest of companies. Board of directors need to monitor management’s efforts to identify significant risks to business operations. Risk management committee need to analyze relevant contingencies impacting business continuity of companies.
Some of the key issues to consider are as follows:
- Supply chain disruption. Companies need to assess risks involved in performance of its obligations under commercial contracts entered into by companies and risks of supply disruption from counterparts
- Employee disruption. As employees continue to work remotely, initiatives to continue business operations by instilling confidence in employees should be kept in mind
- Crisis management. A robust crisis management policy should be implemented detailing out initiatives taken by companies (including initiatives taken by companies towards corporate social responsibility) for the coming days/month(s) of social distancing
- Governance continuity. Companies should ensure that a complete, transparent picture is being portrayed and is being disclosed to stock exchanges, from time to time. Any material adverse effect on operations of companies due to COVID-19 outbreak (including suspension of operations of factories and units, termination/frustration of key business contracts, breach of covenants under financing documents) should be disclosed pursuant to Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”).
In light of the contagion, on March 19, 2020, SEBI also decided to grant temporary relaxations from certain compliance stipulations under LODR, to listed companies with respect to the quarter/financial year ending March 31, 2020. In addition to the relaxations being given for filing of corporate governance report and other compliances, requirement to file quarterly and annual financial statements of companies with stock exchanges has been relaxed by 45 days/1 month.
B. Asset impairment
Erosion of value of listed companies due to COVID-19 is leading to the issue of assets impairment, where such listed companies are subsidiaries of big entities. Uncertainty in continuity of cash flows may trigger assets impairment, i.e. a scenario where the market value of assets are lower than the companies’ balance sheets. When assets are deemed to be impaired, it needs to be written down on companies’ balance sheet to its current market value. Such impacts need to be discussed and resolved with the statutory auditors and should be analyzed with immediate priority.
C. Continuity in material commercial contracts
Companies need to review relevant provisions of customer/vendor/third party contracts to determine available recourse. Following clauses are significant to decide whether a contract stands terminated/cancelled/frustrated:
- Force Majeure. A force majeure clause is generally a boilerplate clause in various contracts (primarily long term supply/distribution contracts)intending to ringfence a party/parties of liabilities which may arise when parties are unable to perform their contractual obligations due to change in circumstances or events beyond parties’ control. Such events may include natural calamities such as floods, storms, fires or governmental actions, change in law, riots, strikes, epidemics, etc. depending upon the nature of the contract and understanding between parties. One needs to interpret whether the terms of the contract imply occurrence of COVID-19 (being a pandemic) to mean a force majeure event or not. The ‘Office Memorandum’ dated February 19, 2020, issued by the Government of India inter alia clarified as follows:
“A doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered in the Force Majeure Clause (FMC). In this regard it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure as above.”
The memorandum holds persuasive value and is not binding on parties and will depend on how force majeure provisions are written in each contract and if such provisions provide protection to parties. Therefore, the force majeure clauses of contract need to be reviewed and analyzed properly on a case-to-case basis.
- Notice pursuant to force majeure. Many contracts provide for a notice to be given by non-performing parties on the occurrence of force majeure events. One needs to bear this requirement in mind, depending on the terms of the contract.
- Dispute resolution. If parties fail to perform obligations under the force majeure period, or if parties fail to agree whether the outbreak constitutes force majeure under contracts or if contracts are silent on force majeure events, parties need to explore recourses available in such circumstances under the Indian Contract Act and in terms of litigation or arbitration of the dispute arising out of contracts.
Termination. One needs to look at the terms of contracts to understand under which circumstances would contracts stand suspended, the requirements to revoke suspensions, circumstances which lead to termination of contracts need to be thoroughly looked at to assess recourses and protections available to companies.
Once listed companies have identified the consequences of performance of material contracts, adequate disclosures to the stock exchanges should be made.
D. Impact on mergers and acquisitions
Schemes of arrangements at NCLT level will be delayed significantly. If proposed schemes of arrangements are at the stage of obtaining of no-objection clearance from stock exchanges/SEBI under Regulation 37 of LODR, the process will certainly take more time than usual. If proposed schemes of arrangements are at the stage of filing before NCLTs, the matter will be adjudicated as long as NCLTs are partially functioning. Such delays need to be accounted for, from the perspective of its financial implication on the balance sheets of the companies.
Further, in terms of contractual acquisitions, a clause which is similar to force majeure (which may be triggered on account of COVID-19) is the material adverse effect clause. The language of material adverse effect clause needs to be looked at, to determine the impact of the clause on the transaction, suitable recourse et al.
E. Tightened investor grievance redressal
Listed companies should initiate a more empathetic approach towards investors’ grievances and timely redressal mechanisms to ensure business continuity and to further the goodwill and confidence. Companies should continue to communicate through multiple channels, instill that shareholders’ interests are a priority.
F. Employment issues
While ‘work from home’ policies have been implemented across the nation, health and safety guidelines should be of prime importance and timely disseminated to employees. The Ministry of Labour and Employment issued an ‘advisory’ on March 20, 2020 for employers of public and private establishments to extend their coordination by not terminating or reducing wages of their employees, more particularly the casual or contractual workers. During the outbreak, if any worker takes a leave from work or is unable to work due to non-operation of workplace caused by COVID-19, such worker shall be “deemed to be on duty” without any consequential deduction in wages.
Further, the Department of Expenditure, Ministry of Finance vide its office memorandum number F.No.23(4)/E.Coord/2020/1 dated March 23, 2020 stated that wherever contractual, casual or outsourced workers of any government organization are required to stay at home in view of the lockdown order for COVID-19, such workers shall be treated as “on duty” during such period and salaries/wages shall be paid accordingly.
G. Delayed Litigations
With the courts hearing only urgent matters, material litigations filed by/against companies may take a deep hit and impact its potential financial effect. The Supreme Court of India gave respite to the litigants by extending the limitation period in all proceedings before all the courts/tribunals in India. The apex court vide its order dated March 23, 2020, held that the period of limitation in all proceedings, irrespective of the limitation prescribed under general law or special law, whether condonable or not, stands extended from March 15, 2020 till further orders to be passed by the Supreme Court of India in this regard.
Companies need to review their insurance policies to determine impact of the contagion on adverse financial consequences on companies and whether the effects of the contagion are covered under their insurance policies.
Further, the Insurance Regulatory and Development Authority of India vide its circular dated March 4, 2020 directed that where coverage is granted for treatment of hospitalization expenses, medical expenses for treatment of COVID-19 will also be covered. In light of the above, the companies need to ensure that the insurance policies provided by the companies to its employees cover treatment of COVID-19.
Such critical actions to mitigate the impact of COVID-19 in the listed space are to ensure maximum business continuity, dissemination of complete and transparent information, as well as initiatives by the companies to the public to maintain shareholders trust and retain market stability, to the maximum extent possible.
Disclaimer – The views and opinions expressed in this article are those of the authors and the article is meant for informational purpose only and does not purport to be an advice or opinion. The views and opinions expressed in this article are based on the information available as on March 27, 2020.
Aninda Pal is a Partner and Soumya Bhargava is an Associate with DSK Legal and are part of the Corporate / M & A team.