News and developments
IMPLICATIONS OF COVID-19 ON LISTED COMPANIES IN INDIA
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”).
- 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. 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.
- 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.