Month: March 2020

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Suspension of Limitation Period

Taking suo moto cognisance of difficulties faced by litigants in view of the COVID-19 pandemic, and to avoid overcrowding at filing counters in courts, the Supreme Court has passed an order dated 23 March 2020 with respect to the period of limitation for filing requirements.

A 3 judge bench of the Supreme Court headed by the Chief Justice of India, exercising its powers under Article 142 read with Article 141 of the Constitution of India, directed that the period of limitation in all proceedings before any Court/Tribunal, irrespective of the limitation prescribed under the general law or special law, whether condonable or not, would stand extended with effect from 15 March 2020 till any further orders passed by the Supreme Court in this regard.

In effect, if the limitation period for filing of any proceeding, be it a petition, application, suit, appeal or any other proceeding, expired on or after 15 March 2020, the same stands extended. The date till which limitation would stand extended will be notified by the Supreme Court in its subsequent orders.

The order, having been passed under Articles 141 and 142 of the Constitution of India, has the effect of law and is binding on all courts, tribunals and authorities.

Notification issued by the MoHFW in order to regulate the doorstep delivery of drugs to consumers

Pharmacy in a supermarket during coronavirus pandemic. BRISTOL, UK, March 30, 2020

The Ministry of Health and Family Welfare, on 26th March 2020 notified that retail sale of drugs to the doorstep of consumers is essential to meet the requirements of emergency arising due to pandemic COVID-19. Therefore, in order to regulate the sale and distribution of drugs for their delivery to customers, the following directions have been issued:

In case any person holding a license in Form-20 or Form-21 under the Drugs and Cosmetics Rules, 1945 intends to sell, stock or exhibit or offer for sale, or distribute drugs by retail, intends to sell any drug including the drugs specified in Schedule H except narcotics, psychotropics and controlled substances as defined in the Narcotic Drugs and Psychotropic Substances Act, 1985 and the drugs as specified in Schedule H1 & Schedule X to the said rules, by retail with doorstep delivery of the drug, the licensee can sell such drugs subject to the condition that:

Any such sale of a drug specified in Schedule H shall be based on receipt of prescription physically or through e-mail; The licensee shall submit an e-mail ID for registration with the licensing authority if prescriptions are to be received through email; The drugs shall be supplied at the doorstep of the patients located within the same revenue district where the licensee is located; In case of chronic diseases, the prescription shall be dispensed only if it is presented to the licensee within 30 days of its issue and in acute cases, the prescription shall be dispensed only if it is presented to licensee within 7 days of its issue; and The bill or cash memo shall be sent by the return email and records of all such transactions shall be maintained by the licensee.

SEBI takes steps to make short selling harder – Press Release 20 March 2020

On 20 March 2020, SEBI issued a press release taking note of the continued volatility in Indian and global stock markets and observed that significant market movements had not yet disrupted settlement cycles in India. SEBI announced a slew of measures which came into effect at the start of trading on 23 March 2020 for a period of 1 month (subject to review at the end of this period).

These changes include revision of market wide position limits for stocks in the futures and options segment, increase in margin for stocks in the futures and options segment, increase in cash market margins for stocks which are not futures/options, revised position limits for equity index derivatives, and flexing of dynamic price bands for futures and options stocks.

  1. Revision of Market Wide Position Limit (MWPL)[1]:

For futures and options stocks (“F&O Stocks”) whose:

(a) average Daily Price High Low variation percentage[2] (during last 5 trading days) was more than or equal to 15%; or,

(b) whose average MWPL utilization percentage (during last 5 trading days) was more than or equal to 40%,

MWPL may be revised to 50% of the existing levels. This re-calculated MWPL shall be used to impose ban periods on fresh positions and not to determined enhanced eligibility criteria for derivative stocks.

If MWPL utilization for any security crosses 95%, derivative contracts will enter a ban period and further trading will be allowed only to decrease positions through offsetting positions[3].

Stock exchanges and clearing corporations have been instructed to put monitoring mechanisms in place and to conduct checks on an intra-day basis. Violations will result in penalties that will range from an amount 10 times higher than the current minimum penalty up to an amount 5 times higher than the current maximum penalty.

  1. Increase in margin rate in Cash Market:

For the stocks mentioned in (1) above, the margin to be maintained in the Cash Market will be increased in a phased manner: 20% (as on 23.03.2020); 30% (from 26.03.2020); and 40% (from 30.03.2020). These will apply for 1 month.

  1. Revised position limits in equity index derivatives:

Mutual Funds, foreign portfolio investors, proprietary trading members and clients shall be subject to the following limits in equity index derivatives:

(a) Short position[4] shall not exceed the notional value of their holding of stocks; and

(b) Long position[5] shall not exceed their holding of treasure bills, cash, government securities and similar instruments.

Additionally, equity index futures contracts and equity index options contracts shall each be capped at INR 500 crores.

Breach of these conditions will require an additional deposit that is twice the margin amount (chargeable on the excess) and stock exchanges and clearing houses shall retain such deposits for 3 months. However, positions that existed prior to the circulars issued by stock exchanges and clearing houses were permitted to continue till their expiry.

This position applies to institutional and proprietary trading members for 1 month from 23 March 2020. For all others, it applies on and from 27 March 2020.

  1. Flexing of dynamic price bands for F&O stocks:

As on date of this press release, F&O stocks are subject to a dynamic price band which relaxes based on certain specified market movement in either direction. For instance, if at least 25 trades occurred involving no less than 5 unique client codes (UCC) on each side of the trade, where each trade is at or above 9.9% of the base price.

To prevent premature relaxation of price bands, SEBI has now imposed a 15-minute cooling off period. After the relevant F&O stock satisfies any requirement specified by a stock exchange to qualify for a relaxation of the price band, no relaxation can occur until the expiry of a mandatory 15-minute cooling-off period.

These measures were taken by SEBI to prevent market distortion. For instance, after the implementation of this press release, speculative short selling has become much harder, given that the changed margin requirements make it expensive, there is now a limit of number of shares that can be traded in the derivatives segment, and there is a sharp increase in penalty for violation of these revised norms.

SEBI’s timely actions, both in easing the compliance burden on listed entities and in acting swiftly to stem the tide of market volatility are laudable and, one expects, will improve our market resilience.

[1] A market-wide position limit is defined, with respect to a specific underlying stock, as the maximum number of open positions allowed across all futures and options contracts of that stock.
[2] This is the percentage of the difference between the highest and lowest trading values of a particular stock on any given trading day.
[3] i.e. the taking of an equivalent but opposite position to reduce the net position to zero.
[4] In layman terms, this is the sale of a stock the investor does not own in the belief that she will buy it in future – this is based on the assumption that the price of the stock is expected to fall in future, therefore they expect to make a profit by selling the stock at a higher price now and buying it a lower price later.
[5] In layman terms, this is the purchase of a security in the hope that it will increase in value.

Guidelines issued to the management of factories and establishments

In the backdrop of the catastrophic outbreak of COVID-19, the Ministry of Labour and Employment of India on 20 March 2020[1], has advised the Employers of Public/ Private Establishments to extend their coordination by not terminating their employees, particularly, casual or contractual workers from job or reduce their wages. If any worker takes leave, he should be deemed to be on duty without any consequential deduction in wages for this period. Further, if the place of employment is to be made non-operational due to COVID-19, the employees of such unit will be deemed to be on duty.

The Government of Karnataka, on 22 March 2020[2] ordered that all shops, commercial establishments, workshops, godowns dealing with non-essential services be closed. And all labour intensive industries must work at 50% of their strength on rotation basis. The Government has also advised that the employers do not remove any worker on this account and to sanction paid leave on these days to the remaining workers.

The Government of Telengana, vide a notification[3] has ordered for closure of all shops and establishments, except as notified, between the period from 22 March 2020 to 31 March 2020 and declared it as a paid holiday for all categories of employees.

The government of Tamil Nadu, Haryana and Odisha have issued certain guidelines to the management of factories /establishments in view of the prevailing COVID-19 outbreak. These guidelines have been issued on in order to ensure strict compliance with the measures that every factory/ an establishment should necessarily undertake and follow so that it results in containing the spread of COVID-19, as one of the major tools to prevent the spread of COVID-19 is by way of observing social distancing, Therefore, one should adopt highest level of hygiene and sanitation along with social distancing. The following guidelines have been formulated on these lines:

  • Promote frequent handwashing;
  • Workers should be encouraged to stay home if they are sick;
  • Never avail public transport facility to hospital, if suspected of possible exposure of COVID-19;
  • Encourage respiratory etiquettes;
  • Establish policies and practices which facilitate flexible worksite and work hours;
  • Discourage workers from using others’ phones, desks, tools or equipment’s to the extent possible.
  • Avoid grouping;
  • Prompt identification and isolation of infected individuals;
  • Educate the employees to self-monitor signs and symptoms of COVID-19;
  • The district administration should be informed of any employees who has returned from a foreign location or if someone from any foreign location has visited the premises of the factory/establishment;
  • Provide personal protective equipments like prescribed nose mask, face shield / goggles, gloves, apron etc.;
  • Provide facilities for safe disposal of the soiled nose mask, gloves, apron etc.
  • Provide facilities for drying clothing
  • Resist from insisting on the medical certificate of employees who are sick with acute respiratory illness;
  • Permit employee to stay at home to take care of a family member who has been sick;
  • Reduce the number of employees on site, allowing them to maintain distance from one another;
  • Maintain regular housekeeping practices including routine cleaning and disinfecting of surfaces, equipment’s and other elements in the factory/establishment;
  • Maintain the canteens and dining rooms in proper hygienic condition;
  • If possible, all workers or visitors, to be screened by infrared thermometer before entering the premises;
  • Avoid bio-metric attendance of the people;
  • To the extent possible, every establishment/factory should have an isolation room, or atleast an area designated with closable doors;
  • Creches shall be specifically monitored and disinfected thoroughly;
  • Health provisions prescribed in chapter III of the Factories Act, 1948 and Chapter VII of The Building and Other Construction Workers Act, 1996 and related provisions of the Tamil Nadu Factories Rules, 1950 and Tamil Nadu BOCW Rules, 2006 should be strictly complied with;
  • Factories having public address/virtual display system may utilize the same for educating workers on the measures for preventing possible exposure of COVID-19.

 

The most effective way of containing the spread of COVID-19 is by way of observing ‘social distancing’. Government establishments including Secretariat, Directorates, District Level Offices and Sub-district Level Offices as well as certain private establishments including shops, workshops and factories that remain operational during the said period will have to comply with the following guidelines, in order to break the chain of contact to prevent the further spread of the disease. In this regard, the government of Odisha has formulated the following guidelines:

[1] https://labour.gov.in/sites/default/files/file%201.pdf
[2] No. DD/SSU/COVID-19/17/19-20
[3] G.O. Rt No. 160 available at https://goir.telangana.gov.in/

Special measures notified and implemented by the Ministry of Corporate Affairs

Following are the special measures notified and implemented by the Ministry of Corporate Affairs (MCA) under Companies Act, 2013 and Limited Liability Partnerships Act, 2008 in view of COVID 19 outbreak.

Exemption on additional filing fees Any additional fees which is applicable for late filings to any Company or LLPs, will not be charged during a moratorium period from April 01, 2020 to September 30, 2020, in respect of any document, return, statement etc., required to be filed in the MCA registry, irrespective of its due date.
Holding Board meetings as per section 173 of the Companies Act, 2013 As a one-time relaxation the gap between two consecutive meetings of the Board has been extended to 180 days till September 30, 2020, instead of 120 days.
Applicability of The Companies (Auditor’s Report) Order, 2020 The Companies (Auditor’s Report) Order, 2020 will now be applicable from financial year 2020-21 instead of being applicable from 2019-20.
Para VII (1) of Schedule IV to Companies Act, 2013 For the financial year 2019-20 the Independent Directors are allowed to share their views via telephone or email or any other mode of communication (if they deem to be necessary). This is in lieu of their meeting which is required to be held during the financial year 2019-20.
Deposit repayment reserve- Section 73(2)(c) of Companies Act, 2013 Creation of deposit repayment reserve of 20% of deposits maturing during the financial year 2020-21 before April 30, 2020 will now be allowed to complied with till June 30, 2020.
Declaration for commencement of business- Section 10A of the Companies Act, 2013 An additional period of 180 days is allowed for filing this declaration.
Relaxation to Rule 18 of the Companies (Share Capital & Debentures) Rules, 2014 Time period for investing or depositing at least 15% of amount of debentures maturing in specified methods of investments or deposits before April 30, 2020 can now be complied with June 30, 2020.
Resident director compliance requirements-Section 149 of the Companies Act, 2013 For the financial year 2019-20 the requirement of meeting 182 days by a resident director has been relaxed.


This initiative of MCA is to support and enable Companies and LLPs in India to focus on taking necessary measures to address the COVID-19 threat, including the economic disruptions caused by it.

India under Lockdown – Center invokes Disaster Management Act to contain COVID-19. What happens to State orders?

The Indian Prime Minister, Mr. Narendra Modi, while addressing the nation on March 24, 2020, announced a nationwide lockdown for 21 days to contain the spread of COVID-19.

Shortly thereafter, the National Disaster Management Authority (“NDMA”) issued an order dated March 24, 2020 under the Disaster Management Act, 2005 (“DM Act”) noting that it was satisfied that the country is threatened by the spread of COVID-19, and that there is an urgent need to bring about consistency in the application and implementation of various measures across the country while ensuring maintenance of essential services and supplies (“NDMA Order”). To this end, the NDMA directed that necessary guidelines be issued immediately.

Pursuant to the NDMA Order, and in exercise of the powers conferred under Section 10(2)(l) of the DM Act, 2005, the Ministry of Home Affairs, through the National Executive Committee under the DM Act, issued an order dated March 24, 2020 (“Lockdown Order”) for the prevention and containment of COVID-19. The Lockdown Order will be operative for a period of 21 days, with effect from March 25, 2020.

Under the Lockdown Order, all States and Union Territories need to ensure strict implementation of the guidelines set out therein, which can be accessed here.

The Lockdown Order has effectively placed India under a nationwide lockdown for 21 days. In the days leading up to the Lockdown Order, several State Governments had issued orders notifying curfews and restrictions in their respective States for containment and prevention of COVID-19 (“State Orders”). At the time of writing, the State Orders have not yet been revoked by the respective States. However, under Section 72 of the DM Act, the provisions of the DM Act will have an overriding effect over any other law or instrument issued under any other law for the time being in force. Accordingly, the guidelines issued under the Lockdown Order will, to the extent of any conflict with the previous State Orders, have an overriding effect. Therefore, all State Governments would need to comply with the guidelines issued under the Lockdown Order.

That being said, State Governments are also empowered under Section 38 of the DM Act to undertake such further measures, over and above the guidelines issued by the NDMA, they may deem necessary or expedient. Therefore, there is no restriction on States to implement further or more stringent measure than those set out in the Lockdown Order, provided such measures are not in conflict the Lockdown Order. Accordingly, measures taken by State Governments under previous State Orders will continue to have force, to the extent that they are not in conflict with the Lockdown Order.

It remains to be seen whether any State Government will implement further or more stringent measures, given the variation in the impact of COVID-19 across States.

SEBI grants extension for filings related to listing of NCDs and more

In continuation of the circular of 19 March 2020, SEBI issued a circular on 23 March 2020 (SEBI/HO/DDHS/ON/P/2020/41) further relaxing certain timelines with respect to listed entities.

ParticularFrequencyDate of available Audited FinancialsOriginal Date of IssuanceRelaxation PeriodExtended Date of Issuance
Cut-off date for issuance of NCD/ NCRPS/ CPWithin 6 months of the date of the latest audited financials30 September 2019On or before 31 March 202060 daysOn or before 31 May 2020

2.    Extension of timeline for filings under SEBI (LODR) Regulation 2015

Regulation and FilingsFrequencyOriginal Due DateRelaxation PeriodExtended Date
Large Corporate-Initial Disclosure and Annual Disclosure (SEBI Circular HO/DDHS/CIR/P/2018/144 dated November 26, 2018)Yearly


Initial Disclosure – within 30 days from the beginning of Financial Year30 April 202060 days30 June 2020
Annual Disclosure – within 45 days from the end of Financial Year
15 May 202045 days30 June 2020
Non-Convertible Debentures (NCDs) / Non-Convertible Redeemable Preference Shares (NCRPS)
Regulation 52 (1) and (2) relating to Financial ResultsHalf Yearly/ Yearly


45 days from the end of the Half Year15 May 202045 days30 June 2020
60 days from the end of Financial Year for Annual Financial Results30 May 202030 days30 June 2020
Common obligations prescribed under Chapter-III of SEBI (LODR) Regulations, 2015As prescribed in SEBI Circular SEBI/HO/CFD/CMD1/CIR/P/2020/38
Commercial Papers (CPs)
Financial ResultsHalf yearly/Yearly


45 days from the end of the Half Year15 May 202045 days30 June 2020
60 days from the end of Financial Year for Annual Financial Results30 May 202030 days30 June 2020

3.    Extension of timeline for filings prescribed for Issuers of Municipal Debt Securities

Regulation and FilingsFrequencyOriginal Due DateRelaxation PeriodExtended Date
Investor Grievance Report as per Municipal BondHalf YearlyWithin 30 working days from end of the Half Year45 days30 June 2020
Financial ResultsHalf Yearly
60 days from the end of Financial Year for Annual Financial Results		30 May 202030 days30 June 2020
Accounts maintained by Issuers under ILDM RegulationsQuarterly
45 days from end of quarter

SEBI relaxes compliance requirement pertaining to Mutual Funds, REITs and InvITs

SEBI, vide its circular dated 23 March 2020 (SEBI/HO/IMD/DF3/CIR/P/2020/47) has provided for the following relaxations in compliance requirement with respect to mutual funds.

A. Relaxations specified in SEBI (Mutual Funds) Regulations, 1996 and circulars issued thereunder:

  1. All schemes (NFO) which are yet to be launched but where observation letter was issued by SEBI shall remain valid for a period of 1 year from the date of such SEBI letter.
  2. All new schemes (NFO) where final observation letter is yet to be issued shall remain valid for a period of 1 year from the date of the SEBI letter.
  3. Timelines for disclosures have also been relaxed, as follows:

Particulars of disclosure/ Regulation/ CircularFrequencyOriginal Due DateExtended Date
Half yearly disclosures of unaudited financial results as required under Regulation 59 of SEBI (Mutual Funds) Regulations, 1996Half yearly
1 month from the close of the half year, i.e, 31 March 2020.		30 April 202031 May 2020
Disclosure of commission paid to distributors as required under Point 2(a) of SEBI circular No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated 18 March 2016Half yearly
Within 10 days from the half year end i.e. 31 March 2020		10 April 202010 May 2020
Yearly disclosure of investor complaints with respect to Mutual Funds as required under Point 4 (b) of SEBI circular No. Cir/IMD/DF/2/2010 dated 13 May 2010Yearly
Within 2 months of the close of the financial year i.e. 31 March 2020		31 May 202030 June 2020

B.     Extension in the date of implementation for certain policy initiatives:

CircularParticularsOriginal Due DateExtended Date
Risk management framework for liquid and overnight funds and norms governing investment in short term deposits dated 20 September 2019Liquid funds shall hold at least 20% of its net assets in liquid assets1 April 20201 May 2020
Review of investment norms for mutual funds for investment in Debt and Money Market Instruments dated 1 October 2019Existing open ended mutual fund schemes shall comply with the revised limits for sector exposure1 April 20201 May 2020
Review of investment norms for mutual funds for investment in Debt and Money Market Instruments dated 1 October 2019Maximum investment in unlisted NCDs as % of the debt portfolio of the scheme.15% – 31 March 202015% – 30 April 2020
Valuation of money market and debt securities dated 24 September 2019Amortization based valuation shall be dispensed with and irrespective of residual maturity, all money market and debt securities shall be valued in terms of paragraph 1.1.2.2 of the Circular.1 April 20201 May 2020

Further, SEBI issued a circular on 23 March 2020 (SEBI/HO/DDHS/CIR/P/2020/42), extending the due date for regulatory filings and compliances for REITs and InvITs for the period ending 31 March 2020 by 1 month, over and above the timelines prescribed under the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and SEBI (Real Estate Investment Trusts) Regulations, 2014 and related circulars.

21-day nationwide lock-down – Guidelines issued by the Ministry of Home Affairs

On 24 March 2020, the Ministry of Home Affairs vide its order no. 40-3/2020-DM-I(A) issued guidelines to be followed by ministries/departments of the Government of India, State/ Union Territory Governments and Authorities, containing measures to combat the spread of COVID-19.

These guidelines were issued by the National Executive Committee under the directions of the National Disaster Management Authority (order No. 1-29/2020-PP(Pt. II) dated 24 March 2020) and in exercise of its powers conferred under Section 10(2)(l) of the Disaster Management Act, 2005.

The Guidelines, inter alia, provide for the following containment measures which shall remain applicable for a period of 21 days with effect from 25 March 2020:

  1. All offices of the Government of India, its autonomous/subordinate offices and public corporations shall remain closed except for defence, central armed police forces, public utilities (including petroleum, LPG, CNG, PNG), disaster management, power generation and transmission units, post offices, National Informatics Centre, Early Warning Agencies etc. Certain offices, like that of the treasury, MCA-21 registry, GSTN, RBI etc., shall function with bare minimum staff.
  2. The offices of the State/Union Territory Governments, their autonomous bodies and corporations etc. shall remain closed except for police, home guard, civil defence, fire and emergency services, disaster management, prisons, district administration and treasury, electricity, water, sanitation and municipal bodies (relating to essential services like water supply and sanitation only), Mandis operated by the Agricultural Produce Market Committee or as notified by the state government, etc.
  3. All hospitals and related medical establishments including dispensaries, chemist, medical equipment shops, laboratories, clinics, nursing homes, ambulance, veterinary hospitals, pharmacies and pharmaceutical research labs etc. shall remain functional. Further, transportation of medical personnel, nurses, other hospital support services etc. shall be permitted.
  4. All commercial and private establishments to be closed other than shops dealing in food, groceries, fruits and vegetables, dairy, meat, fertilizers, seeds, pesticides etc.; bank, ATMs, insurance offices; print and electronic media; telecommunication, internet services, broadcasting and cable services; delivery of essential goods through e-commerce; petrol pumps, LPG, petroleum and gas retail and storage outlets; power generation and transmission units; private security services; farming operations by farmers and farm workers in the field, etc.
  5. All industrial establishments shall remain closed; other than those engaged in the manufacturing of essential goods, including drugs, pharmaceuticals, medical devices, their raw materials and intermediates; those production units which require continuous process and have obtained the approval from the state government; coal and mineral production, transportation, supply of explosives etc.; manufacturing units of packaging materials for food items, drugs, pharmaceuticals and medical devices and manufacturing and packaging units for fertilizers, pesticides and seeds.
  6. All transport services, other than for the transport of essential commodities or of fire or law and order or emergency services or for cargo movement, relief and evacuation and their related operational organisations, inter-state movement of goods/cargo for inland and exports, transit arrangements for foreign nationals in India according to the specified standard operating procedure, etc., shall remain suspended.
  7. All educational, training, research, coaching institutions etc. to remain closed.
  8. All places of worship shall remain closed.

(Please refer to the Guidelines, the first Addendum to the Guidelines (dated 25 March 2020), the second Addendum to the Guidelines (dated 27 March 2020), the third Addendum to the Guidelines (dated 02 April 2020), the fourth Addendum to the Guidelines (dated 03 April 2020) and the fifth Addendum to the Guidelines (dated 10 April 2020) for the complete list of containment measures and exceptions)

Wherever any exception has been provided to the containment measures, the organisation/ employer shall ensure necessary precautions, including social distancing measures, as advised by the Health Department.

Any violation of the containment measures specified in the Guidelines shall be liable to action under Sections 51 to 60 of the Disaster Management Act, 2005 and Section 188 of the Indian Penal Code, 1860.

COVID-19: Dos and don’ts for Borrowers and Lenders

It is an understatement that Covid-19 has wreaked a havoc in all major economies across the globe. While nations (including India) are grappling to keep their citizens safe, the impact this pandemic will have on the financial health of businesses is unimaginable at this stage. The stock markets are highly volatile, valuations are plummeting, businesses are suffering from the domestic and global lock-down and financial defaults are likely to rise. In these circumstances, if you are a borrower or a lender, it is imperative that you take immediate stock of the financial repercussions of this pandemic and what steps you can take to mitigate the impact. Below are some points to consider.

Points for borrowers and promoters

  1. Review existing debt obligations: Borrowers must carefully review the documents under which they have incurred any indebtedness. The review should be, at the bare minimum, to check (a) impending payment obligations, (b) any existing or potential covenant breaches, and (c) any existing or potential events of default. Lending documents may have various provisions including those on default interest, mandatory prepayment, material adverse effect, financial covenants, non-compliance with law, deterioration of the financial health, credit rating downgrade, termination of material contracts and delays in project implementation. They seldom contain provisions that will permit non-compliance due to force majeure situations. It is important for borrowers to acknowledge their obligations and the consequences of the breach of those obligations.
  2. Assess cashflows: Once borrowers have re-confirmed their obligations, they should also asses their cash flow position. In the Indian context, lenders usually do not press the trigger unless there are payment defaults (and that too, generally, after a considerable delay in payments). If the cash flow situation is robust or not worrisome, then even if there are existing or potential covenant breaches, lenders may be willing to grant waivers. If the cash flow situation is troublesome, then borrowers need to assess if this is a temporary situation or whether the effects will be long lasting. They should also evaluate ways in which the situation can be improved. For example, they may decide to cut back unnecessary expenses or halt expansion plans and save the resources they have for servicing debt and paying their employees. They may consider selling non-essential assets and use the sale consideration to deleverage. Each sector and each borrower will have its own peculiarities and it is important to assess this at the earliest. Under the Insolvency and Bankruptcy Code, 2016 (“IBC”), a payment default of Rs. 100,000 is sufficient for creditors to initiate the insolvency process. The IBC also currently has no carve-out for a payment default due to force majeure situations.
  3. Reach out to customers: Customers are the lifeline of any business. It is important to keep them assured. During this time, your customers may also be suffering and may need some leniency. If you are in the real estate construction business, you may need to provide your customers (who have lost a chunk of their financial wealth due to tumbling of the markets) some grace period or adjustments in their payment schedules. If you are in the retail business, you may be able to provide them home-deliveries of items (subject to relevant lock-down restrictions) and continue to the revenue flow. If you are in the services business, you may still be able to continue to provide services through electronic communication. If some customers can give you advances for goods to be sold or services to be rendered, those advances could alleviate some of your debt servicing burden.
  4. Re-assure your suppliers: For your business to continue functioning, your suppliers are a key stakeholder. Re-assure them of your business prospects, inform them of the steps you are taking to keep your business running or of the pitfalls due to which your business may be undergoing temporary stress. Try to negotiate longer payment periods with your suppliers. Re-look at any existing take or pay provisions in long term supply contracts and try to seek waivers or relaxations.
  5. Take care of your employees: The strains of the pandemic are likely to be felt to a much greater degree by employees than the promoters of businesses. This is a time when promoters and businesses need to provide their employees with job security. Ultimately, if these employees aren’t around, you will not be able to service your debts and your business may crumble.
  6. Re-assess business plans: This is the time to re-assess business plans for the foreseeable future. Annual or multi-year plans that were formulated a few months ago may not be relevant today. You may have to revisit any future fund-raising options given that investors may be cautious in the interim few months and lenders may be tight pursed given the global impact of this pandemic. However, if you are a cash rich entity, this period may also give rise to opportunities to acquire businesses at cheaper valuations in India and other geographies across the world.
  7. Impact on promoters: Promoters of borrowers must also evaluate their contractual and legal liabilities when companies under their management or control are facing potential defaults or insolvencies. They must consider if they have provided any guarantees, indemnities, sponsor support undertakings or comfort letters, or any quasi-security or security on their assets. They need to re-confirm their obligations and evaluate their ability and readiness to perform such obligations.
  8. Work together with creditors: Last but not the least, it is important that borrowers keep a constant dialogue with their creditors (through audio or web-based video apps, not in person please!) Borrowers who foresee that Covid-19 will have a minimal impact on their operations may want to provide the necessary comfort to their creditors. For those who are likely to be adversely impacted because of Covid-19, it is important to discuss the same with creditors and understand what can and can’t be done. Borrowers may also need to provide more information to creditors than they are used to doing to give the latter comfort about the operations and stability of the borrower. In case of pedigree borrowers or borrowers who had sound financial health pre-Covid-19, several lenders are likely to be supportive and understanding. Some of them may even be willing to grant temporary reliefs, waivers or moratoria. Some may also be willing to provide an additional credit line to ease out the temporary stress. For instance, State Bank of India has already introduced a scheme to provide additional working capital at attractive interest rates for existing customers impacted by Covid-19.

Points for lenders

  1. Review existing portfolios: Lenders need to take a hard look at their existing portfolios and determine which of their accounts are or may be adversely impacted. Besides meticulous monitoring the financial health of their borrowers and assessing their capability to service their debt obligations, lenders must immediately assess their remedies under their existing lending documents and under law. It would also be a good time for them to re-confirm whether their loan documents are validly executed, whether their existing security package is created and perfected and whether there are any bottlenecks that need to be ironed out (should they decide to take any action).
  2. Evaluate options: Lenders also need to evaluate their options. While accelerating the debt may seem to be the only way out, before pressing the trigger, the lenders should consider whether that is the best approach. Generally, lenders may have the following options available:

a) Reservation of rights: If the lenders believe that any event of default has occurred under the terms of their lending documents, they may consider issuing reservation of rights letters. This does not necessarily mean that the debt is being accelerated. However, it is a warning to the borrower that the lender is reserving its rights under the lending documents and under law and the non-exercise of any such rights immediately would not tantamount to a waiver of such rights.

b) Levy default interest: They can charge default interest (if the terms of their debt permit) without accelerating the debt. Borrowers may be willing to pay the default interest for a short duration rather than prematurely repaying the entire debt.

c) Grant waivers: They can provide a waiver of a default if there is a covenant default or relax the covenant to avoid any potential default. Payment of any waiver fees for lenders of external commercial borrowings (“ECBs”) will need to be examined from an exchange control perspective.

d) Restructure the debt: In certain cases (primarily where the debt is in the form of bonds or debentures), creditors may be able to grant a moratorium on interest or principal payments or restructure the principal payment schedule. Creditors who are foreign portfolio investors or lenders of ECBs need to assess the viability of any restructuring given exchange control regulations. Indian banks and non-banking finance companies need to consider the impact of the circular dated June 7, 2019 of the Reserve Bank of India on the prudential framework for resolution of stressed assets before agreeing to any restructuring proposals.

e) Recovery proceedings: Where lenders are unable to find any other suitable options and debt recovery action seems to be the only plausible option, lenders should determine what steps they need to take for such action. Certain classes of lenders may be able to take action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, whereas some lenders may have to approach civil courts. However, before initiating any action, it is important to check with your legal advisors on whether the courts and tribunals are functioning and whether they are only taking on urgent applications or all applications.

f) Enforcement of security: Certain lenders may have security which can be enforced. Before enforcement of security, it is vital that lenders confirm that the security has been validly created and all steps required for perfection of security have been taken. Any imperfections may adversely impact the security enforcement process. Certain types of security can be enforced without recourse to courts, such as enforcement of pledge on securities. However, certain security enforcement actions will have to go through a court process, such as enforcement of an equitable mortgage. Lenders (especially those who hold a pledge of listed securities) may also find it beneficial to wait and watch before enforcing their pledges if the value of their security has fallen substantially (with the hope that stock markets will correct themselves in the coming months). Security enforcement may also need consents of, notifications to or filings with existing lenders, shareholders, governmental authorities or third parties. In the current scenario, if security enforcement needs reliance on any third parties, then the enforcement process may be delayed given the general lock-down and work from home policies. These aspects need to be carefully evaluated or else the enforcement process may become unproductive.

g) Insolvency proceedings: Given the general lock-down, admission of corporate insolvency resolution applications may be delayed. Preparation of the insolvency applications and filing these applications may also be delayed. Further, general considerations for initiating insolvency proceedings such as the level of financial and operational debt, the viability of the business and availability of suitors, constitution of the committee of creditors etc. will continue to apply.

Lenders should note that that the Supreme Court has in an order dated March 23, 2020 extended the limitation period for various proceedings before any courts and tribunals with effect from March 15, 2020 until further orders. This should provide a breather for lenders who are unable to proceed with enforcement proceedings.

  1. Cross defaults: Triggering an event of default by a lender under one facility may result in triggering cross defaults across other facilities to the same borrower group by that lender, or for that matter cross defaults across other facilities to the same borrower or borrower group by other lenders as well. Therefore, lenders must evaluate the possibility of such cross defaults and their ability to take any effective enforcement action against the borrower / borrower group.
  2. Refinancing and priority financing opportunities: While borrowers grapple with the turmoil, they may either need to refinance their existing debts, or may require priority financing or last mile financing to complete certain projects. This may provide an opportunity to distressed debt lenders and investors. They need to assess the viability of the borrower, the value of the security and their ranking when providing any new debt. Also, given the recent judgement of the Supreme Court in the case of Jaypee Infratech, incoming lenders must conduct their due diligence and evaluate the risks of any avoidance transactions under the IBC before providing such debt.
  3. Consent requirements: Certain borrowers may approach their existing lenders for consents, for instance, for incurring new debt (including any refinancing or priority financing mentioned above) or creation of new security. At the time when banks/financial institutions are under lock-down and operating with marginal staff, it may be difficult to obtain necessary internal approvals for banks/financial institutions in a timely manner. Internal committees may find it difficult to co-ordinate and meet and internal processes for sanctioning of approvals may get delayed. At times such as this, it may be prudent for borrowers to err on the side of caution. Incoming lenders from whom the borrower proposes to raise new debt or in whose favour the borrower proposes to create security must also be wary of lending and accepting security where the consents required from existing lenders are not obtained. Otherwise, this could lead to disputes in the future, especially if the borrower undergoes corporate insolvency resolution proceedings under the IBC.

The above are just some of the steps that borrowers and lenders can take to minimise the impact. While our Government is taking several measures to shield the virus explosion, one fact that Covid-19 has brought to the forefront is that we all need to (and must and can) work together to fight this pandemic. Borrowers and lenders also need to work together during this phase. Borrowers and their promoters will need to be co-operative, conservative and constructive in their approach, whereas lenders will need to be patient. Borrowers and lenders have always shared a symbiotic relationship – let’s hope that the virus does not kill it.

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