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Securities market code to include SEBI Act – Government securities act and depositories act, Budget 2021

The consolidation of securities laws, existing decriminalisation of offences under the Companies Act and the proposed decriminalisation under the LLP Act marks an important move towards making Indian corporate legal framework, simpler, business friendly and ultimately (hopefully) reducing compliance costs.  The securities market code is in line with previous discussions on the NFRA. It marks a step towards streamlining the multiple laws, ordinances, guidelines and regulations. If drafted and executed in a proper manner, it will be helpful to market participants and remove any possible conflicts in the regulatory framework and will provide clarity in policy making to investors and stakeholders.

Quote by Arka Mookerjee, published in CNBC, Moneycontrol, Indian Express, Fortune India, IIFL Group, Yahoo.com, Firstpost.

Relaxation to Minimum Public Shareholding Requirements


The Securities and Exchange Board of India (“SEBI”) has, after taking into consideration requests received from listed entities and industry bodies as well as considering the prevailing business and market conditions, decided to grant relaxation from the applicability of the circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115) on the actions to be taken in case of non-compliance of the minimum public shareholding (“MPS”) requirements.

What is minimum public shareholding?

In terms of the Securities Contracts (Regulation) Rules, 1957, as amended (“SCRR”) read with Regulation 28 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“Listing Regulations”), listed companies are required to maintain public shareholding of at least 25%. The obligation to reach and maintain this MPS threshold of 25% is attracted in three separate instances:

(a) Initial listing – In terms of Rule 19(2)(b) of the SCRR, the minimum offer and allotment to public in terms of an offer document by a company seeking listing, has to be within the range of at least 10% to at least 25%, subject to the post-issue market capitalisation of the listed company. If the post-issue market capitalisation of the listed company is more than Rs. 1,600 crores, the listed entity has the option, but not obligation, to offer and allot less than 25% of its capital to the public. The relaxation of issuing less than 25% of its capital to the public is available subject to the listed entity meeting the MPS threshold of 25% within a period of three years from the date of listing of its securities;

(b) Continuous listing – In terms of Rule 19A of the SCRR, every listed company, other than a public sector company, is required to maintain the MPS threshold of at least 25%. In case of a public sector company which has public shareholding below 25% on the commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018, a period of two years has been provided from the date of such commencement to restore the MPS to 25%. For companies covered under (a) above, the obligation to maintain MPS initiates from the date upon which the threshold of 25% MPS is first achieved.

(c) Violation of continuous listing – In the event that a listed entity, other than a public sector company, breaches the MPS threshold of 25%, it is required to bring back MPS threshold to 25% within a period of 12 months from the date of the breach of the threshold. For public sector companies, a two-year window is provided to restore the MPS threshold to 25%. Further, a three-year time period is provided to listed companies for restitution of the MPS threshold for breaches caused by issue of depository receipts or implementation of a resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016.

Non-compliance of the MPS requirements

In terms of Regulation 97 of the Listing Regulations, a recognized stock exchange is charged with the duty to monitor compliance with the provisions of the Listing Regulations. Further, Regulation 98 of the Listing Regulations provides for penal actions that may be undertaken by stock exchanges in case of failure to comply with the provisions of the Listing Regulations, including the requirement to maintain MPS threshold. Towards this end, SEBI issued a circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115), directing stock exchanges to review compliance with MPS requirements based on shareholding pattern/ other filings made with them by the listed entities from time to time and within fifteen days from date of observation of non-compliance, to issue notices to such entities intimating all actions taken/ being taken as per this circular and advise the entities to ensure compliance. On observing non-compliance, the recognised stock exchanges may take actions such as (i) levying of a fine against the listed entities for each day of non-compliance; (ii) freezing the entire shareholding of the promoters and promoter group in conjunction with depositories; (iii) freezing of all securities held in the dematerialized beneficial ownership accounts of the promoters and promoter group; and (iv) banning the promoters, promoter group and directors from taking up any new position as director of a listed entity. The recognised stock exchange may also consider compulsory delisting of the non-compliant listed entity.

Manner of achieving MPS

SEBI has by way of a circular dated November 30, 2015 (Circular No. CIR/CFD/CMD/14/2015) provided the mechanisms through which a listed entity may achieve compliance with MPS threshold. The approved mechanisms include (a) issue of fresh shares to public through prospectus (further public offering); (b) offer for sale of shares by promoters to public through prospectus (further public offering); (c) sale of shares by promoters through the stock exchange offer-for-sale mechanism; (d) offer for sale of shares by promoters by way of a qualified institutions placement; (e) rights issues with the promoters and/or members of the promoter group forgoing their entitlement; and (f) bonus issues with the promoters and/or members of the promoter group forgoing their entitlement. Mechanisms not specifically set out in this circular or elsewhere under SEBI regulations, can also be utilised, subject to approval of SEBI.

Relaxation provided by SEBI

Given the current volatility in the markets, SEBI, in its recent circular dated May 14, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/81) (the “Circular”) has provided a temporary relaxation to listed entities for whom the due date for complying with the minimum public shareholding fell within the time period of March 1, 2020 to August 31, 2020. SEBI has also advised recognized stock exchanges not to take any penal action as envisaged in the SEBI circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115) against such entities in case of non-compliance during the said period. Penal actions, if any, initiated by stock exchanges from March 1, 2020 till May 14, 2020 for non-compliance of the MPS requirements by such listed entities may be withdrawn.

The Circular shall come into force immediately.

Please refer to the SEBI circular dated May 14, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/81) for more details.

Key aspects of SEBI’s circular re relaxations relating to procedural matters in issues and listings


In light of the recent developments relating to the COVID-19 pandemic (and its ongoing consequent impact on the Indian and global economy), the Securities and Exchange Board of India (“SEBI”), had recently, vide its two circulars, each dated April 21, 2020 (“April Circulars”), granted (a) temporary relaxations from compliance with certain provisions of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“SEBI ICDR Regulations”), and (b) one-time relaxation with respect to validity of SEBI observations, in respect of rights issues, with an intent to improve fund raising access to listed corporate entities as well as revive investor confidence in the securities market. With the aforesaid intention in mind, SEBI has issued another circular dated May 6, 2020 (Circular No. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) (“Circular”), for granting relaxation relation to (a) certain procedural matters in relation to rights issues, and (b) authentication of offer documents and inspection of documents electronically for all capital markets issues.

The Circular shall be applicable for all rights issues (including fast track rights issues) opening before July 31, 2020, and for all offer documents filed until July 31, 2020.

Key aspects of the Circular

A. Relaxation in respect of rights issues

i. Availability of letter of offer and other issue materials

Regulation 77(2) of the SEBI ICDR Regulations prescribes that the abridged letter of offer (along with application form), can be despatched either through registered post, speed post, courier service or by electronic transmission to all existing shareholders of the issuer company, prior to the opening of the issue.

However, keeping in mind the various practical challenges that may arise in the COVID-19 era, particularly in relation to engaging courier or postal services, SEBI has now specifically clarified that failure to dispatch the aforesaid offering material through registered post or speed post or courier services, due to prevailing COVID-19 related conditions, will not be treated as non-compliance, for rights issues opening up to July 31, 2020. To supplement the aforesaid relaxation, the following additional steps are required to be undertaken:

  • issuers are required to publish the letter of offer, abridged letter of offer and application forms on its website as well as on the websites of the lead manager(s) to the issue, registrar to the issue and stock exchanges; and

  • issuers as well as the lead manager(s) to the issue are required to undertake adequate steps to reach out to the shareholders through other means, including through SMS, ordinary post, audio-visual advertisements on television, as well as digital advertisements.

These measures help issuers negate the difficulties they may face in respect of physical distribution of offering material. The availability of offering material on the internet would ensure that potential investors get access to the same through virtual means. Having said that, digital modes of communication may not be preferred by a select set of investors, who are either not accustomed to such platforms, or may face challenges in receiving uninterrupted internet network connectivity.

Thus, the aforesaid clarification showcases SEBI’s positive intent towards making the Indian capital markets regime a technologically driven and an environment friendly one, and we may hope for increased usage of electronic transmission systems for dispatch of the aforesaid offering materials, not only during the next couple of months, but also in the coming years in the post COVID-19 era.

Further, in light of the Circular and other representations received re provision of clarification on mode of issue of notice (referred to in Sections 62(1)(a)(i) of the Companies Act, 2013 (“Companies Act”) for rights issues by listed companies, in view of difficulties faced by such companies in sending notices through postal/courier services on account of the threat posed by the COVID-19 situation, the Ministry of Corporate Affairs, Government of India, issued a clarificatory circular dated May 11, 2020 (General Circular No. 21/2020) (the “MCA Circular”). The MCA Circular clarified that the inability to dispatch the notice (referred to hereinabove) by listed companies (which comply with the Circular) to their shareholders through registered post, speed post or courier would not be viewed as a violation of Section 62(2) of the Companies Act. The MCA Circular shall be applicable in case of rights issues opening up to July 31, 2020.

ii. Issue-related advertisements

Prior to the opening of the rights issue, the issuer is required to publish advertisement(s) in certain specific newspapers (“Statutory Newspapers”), containing the disclosures mandated under Regulation 84(1) of the SEBI ICDR Regulations (“Statutory Advertisement(s)”). However, given the difficulties in publishing physical advertisements (i.e. in newspapers, hoardings, banners, etc.) and the potential inefficacies with respect to their outreach in the COVID-19 era, SEBI has provided a few additional mechanisms for publication of Statutory Advertisements and other issue-related advertisements:

(a) issuers have the flexibility to publish the Statutory Advertisement confirming dispatch of abridged letter of offer and application form in newspapers other than the Statutory Newspapers;

(b) all such advertisements must also be made available on the websites of the issuer, lead manager(s) to the issue, registrar to the issue, and the stock exchanges; and

(c) issuers are also required to make use of advertisements through other electronic media such as television channels, radio and the internet for disseminating information relating to the application process. Further, for the first time, SEBI has permitted such advertisements to be made in the form of crawlers or tickers as well.

The Circular also requires issuers to disclose additional details in Statutory Advertisement(s), specifically in relation to the application process for shareholders who have not been served notice via electronic modes.

iii. Application by physical shareholders

In 2008, SEBI, while acknowledging the market practice of trading of rights entitlements in physical form, envisaged the establishment of a uniform and exchange driven mode of trading of rights entitlements, and released a paper for receiving public comments on the proposed electronic rights issue process and e-trading of rights entitlements. While the proposal for establishing an e-trading platform for rights entitlements did not see the light of the day, SEBI had issued a circular for streamlining certain aspects of the rights issue process on January 22, 2020 (“January Circular”), with the intention of, among other things, reducing issue timelines and permitting trading of rights entitlements in dematerialized form. Pursuant to the January Circular, rights entitlements would have to be mandatorily credited to the demat account of eligible shareholders in dematerialized form, and physical shareholders were required to provide their demat account details to issuer or the registrar to the issue for credit of rights entitlements (within a period of two working days prior to the issue closing date). However, given certain impossibilities during the COVID-19 era, investors (especially those holding securities in physical form) may face several hurdles while undertaking the process of opening a demat account or communicating their demat account details to the issuer or registrar, prior to the issue closing date. While the January Circular was introduced with an intention of establishing an efficient process of credit of rights entitlements to respective demat accounts (which in turn would facilitate the existence of a robust rights entitlements trading platform), the onset of the COVID-19 pandemic has forced SEBI to offer certain relaxations to shareholders.

Keeping in mind the aforesaid challenges, SEBI has, vide the Circular, allowed physical shareholders to submit their applications re the rights issue, irrespective of whether they are able to open demat accounts or communicate details of the demat accounts in accordance with the requirements prescribed in the January Circular. However, the submission of applications by such physical shareholders would be allowed, subject to (a) the institution of a mechanism by the issuer, lead manager(s) to the issue and other intermediaries for allowing such shareholders to apply in the rights issue, and (b) adequate steps being taken by the issuer and lead manager(s) to the issue for communicating the mechanism described in (a) hereinabove to the aforesaid shareholders prior to opening of the issue. Further, such physical shareholders availing of the aforesaid relaxation shall not be eligible to renounce their rights entitlements, and shall receive shares in dematerialized form only.

In light of the aforesaid, we believe that issuers and intermediaries may need to consider utilizing the issuer’s suspense accounts (including the one opened in accordance with Regulation 39 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“SEBI Listing Regulations”)) where such rights entitlements and shares (to be credited to the physical shareholders who have applied for allotment of equity shares), will be kept in abeyance in electronic mode by issuers, until the aforesaid shareholders provide details of their demat account particulars to the issuer or registrar, in accordance with the procedure as prescribed under Regulation 39 of the SEBI Listing Regulations.

iv. Non-cash based application process

Pursuant to the January Circular, all eligible shareholders are mandatorily required to use the application supported by blocked amount (“ASBA”) mechanism while applying for shares in a rights issue. However, the onset of the COVID-19 pandemic may have created certain practical roadblocks with respect to the transition to an ASBA only mechanism.

Shareholders who have not transitioned to using an ASBA account may face hurdles while trying to do so in the COVID-19 era, especially in light of the existence of a nation-wide lockdown. Further, an SCSB, a critical intermediary at the forefront of the ASBA process, may find it difficult to function optimally with reduced staff strength, given the remote working landscape that is now prevalent across industries.

In light of the practical difficulties and systemic challenges faced by both investors as well as intermediaries, SEBI has permitted issuers (along with the lead manager(s), the registrar, and other intermediaries) to institute optional mechanisms (non-cash mode only) to accept the application money from the shareholders. In view of the aforesaid, issuers and other intermediaries may look to establish mechanisms whereby application monies can be paid by way of online transfers into designated accounts. However, the Circular clarifies that no third party payments shall be allowed in respect of any application.

In order to ensure that relaxations provided hereinabove are utilised by the issuer and intermediaries towards achieving investor protection, SEBI has, vide the Circular, imposed a duty on the issuer and the lead manager(s) to the issue to ensure, in respect of the mechanisms referred in points (iii) and (iv) above, that:

(a) the mechanisms shall serve as an additional option, and would not be a replacement of the existing process, and efforts are made to adhere to the existing prescribed framework;

(b) the mechanisms function in a transparent and robust manner (with adequate checks and balances), and the transparency, fairness and integrity of such mechanisms are to the satisfaction of the lead managers and registrar to the issue, without imposing additional costs on investors;

(c) FAQs, a dedicated online investor helpdesk and helpline are created to guide investors through the application process, and to resolve difficulties faced on a priority basis; and

(d) the issuer, lead manager(s), registrar and other intermediaries are responsible for all investor complaints.

B. Relaxations in respect of all offer documents

i. Relaxations in relation to digital signatures and electronic inspection of material documents

In respect of all offer documents filed until July 31, 2020, SEBI has now permitted:

(a) usage of digital signature certifications for authenticating and certifying offer documents; and

(b) the issuer and lead manager(s) to establish a procedure for electronic inspection of material documents.

While the former is an option that may be used by the issuer, the latter appears to be a mandatory requirement. In light of the aforesaid, issuers may now be required to look for cost-effective ways of providing access to these documents, which may be through secured mechanisms, such as password-protected dedicated portal on the issuer’s website (wherein entry may be permitted via communications sent by way of SMS, emails, etc.).

Moreover, on a plain reading of the Circular, it appears that this part of the Circular shall be applicable for ‘all offer documents filed until July 31, 2020’ (and not just limited to rights issues alone), which may mean that inspection of material documents shall only be done electronically in case of all issues wherein the respective offer document (i.e. red herring prospectus, prospectus, shelf prospectus and letter of offer, as the case may be) is filed until July 31, 2020.


In these turbulent times of the COVID-19 pandemic, SEBI is trying to leave no stone unturned to revive Indian capital markets. With the issuance of the April Circulars and the Circular, it is quite evident that SEBI is looking to improve access to real-time fund raising options, with a specific focus on making the rights issue process technology friendly. While SEBI has tried to restore issuers’ and investors’ confidence in Indian capital markets with a slew of relaxations, it has kept in mind investor protection ideals and traditions while offering the same.

However, it must be borne in mind that issuers, lead manager(s), registrars and other market intermediaries may face increased costs in the process of setting up the mechanisms discussed hereinabove. Moreover, it must not be forgotten that advertisements and other publicity materials issued pursuant to these relaxations would still have to pass the rigours of publicity restrictions prescribed under the SEBI ICDR Regulations. Regardless of the aforesaid, the efficacy of these relaxations can be completely examined only after the completion of few rights issues and interaction with market intermediaries.

Please refer to the SEBI circular dated May 6, 2020 (circular no. SEBI/HO/CFD/DIL2/CIR/P/2020/78) for more details.

SEBI’s measures to facilitate fund raising from capital markets in the current COVID-19 scenario

In view of the COVID-19 pandemic and nation-wide lockdown and with a view to improving access to funding to corporates through capital markets, the Securities and Exchange Board of India (SEBI), by way of press release dated April 21, 2020, bearing no. PR No.23/2020, has granted certain temporary relaxations from compliance with certain provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended, (SEBI ICDR Regulations) related to rights / public issuances by listed entities.

Pursuant to the press release, SEBI has notified two circulars dated April 21, 2020, each for (i) relaxations to issuers from certain provisions of the SEBI ICDR Regulations in respect of rights issue; and (ii) one-time relaxation to issuers with respect to validity of SEBI observations. The contents of the circulars are as follows:

(i) Relaxations to issuers from certain provisions of the SEBI ICDR Regulations in respect of rights issue

SEBI, vide its circular dated April 21, 2020, (circular no. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) has granted temporary relaxation to the (a) minimum subscription requirements for rights issues; (b) threshold for not filing the draft letter of offer; and (c) eligibility conditions related to fast track rights issues. These relaxations are applicable to right issues that open on or before March 31, 2021 and are not applicable for issuance of warrants.

(a) Eligibility conditions related to fast track rights issues

SEBI has granted the following temporary compliance relaxations with respect to the eligibility conditions related to fast track rights issues:

  • The eligibility requirement related to period of listing of equity shares of the issuer on any stock exchange and compliance with the equity listing agreement or the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as applicable, has been reduced from 3 years to 18 months;

  • The requirement of average market capitalisation of public shareholding of INR 250 crores has been reduced to INR 100 crores; The condition related to no audit qualifications on issuer’s audited accounts has been replaced with the requirement to disclose the impact of audit qualifications on issuer’s financials; The condition related to suspension from trading of equity shares of issuer as a disciplinary measure has been reduced from 3 years to 18 months; and Certain other eligibility conditions with respect to period of compliance with the provisions of the listing regulations, ongoing action initiated by SEBI against the issuer / promoters / directors and settlement of violation of securities laws have also been relaxed.

(b) Minimum subscription requirements for rights issues

The existing minimum subscription to be received in a rights issue shall be at least 90% of the offer through the letter of offer. However, in order to provide greater flexibility in fund raising, this threshold for minimum subscription requirements for a rights issue has been reduced from existing 90% to 75% of the offer size, subject to the condition that if the rights issue is subscribed between 75% to 90%, issue will be considered successful subject to the condition that out of the funds raised, at least 75% of the rights issue size shall be utilized for the objects of the issue other than general corporate purpose.

(c) Threshold for not filing the draft letter of offer with SEBI

An issuer in case of rights issue of size less than INR 10 crores shall prepare the letter of offer in accordance with SEBI ICDR Regulations. However, in order to reduce the time involved in fund raising and for easing the compliance requirements due to the COVID-19 pandemic, the threshold for not filing the draft letter of offer has been increased from INR 10 crores to INR 25 crores in a rights issue.

Please refer to the SEBI circular dated April 21, 2020, (circular no. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) for more details.

(ii) One-time relaxation to issuers with respect to validity of SEBI observations

In view of representations from various industry bodies, SEBI, vide its circular dated April 21, 2020, (circular no. SEBI/HO/CFD/DIL1/CIR/P/2020/66) has provided one-time relaxation with respect to validity of SEBI observations.

As per SEBI ICDR Regulations, any public issue/rights issue may be opened within 12 months from the date of issuance of the observations by SEBI. However, due to the prevailing COVID-19 pandemic, for all public/rights issuers whose SEBI observations have expired or shall expire between March 1, 2020, and September 30, 2020, SEBI has extended the validity of those observations by 6 months from the date of its expiry, subject to an undertaking from the lead manager of the issue confirming compliance with the SEBI ICDR Regulations.

Further, an issuer, whose offer document is pending receipt of SEBI observations and whose estimated issue size is increasing or decreasing by more than 20% shall be required to file a fresh offer document. However, SEBI has relaxed this requirement and permitted to increase or decrease the fresh issue size by up to 50% of the estimated issue size (instead of the present limit of 20%) without requiring to file fresh draft offer document with SEBI. This relaxation shall be applicable for all issues (i.e. IPOs, rights issues and FPOs) opening before December 31, 2020, subject to the following conditions:

  • there has been no change in the objects of the issue;

  • the lead manager undertakes that the draft offer document is in compliance with provisions of the SEBI ICDR Regulations;

  • and the lead manager shall ensure that all appropriate changes are made to the relevant section of draft offer document and an addendum, in this regard, shall be made public.

Please refer to the dated April 21, 2020, SEBI circular (circular no. SEBI/HO/CFD/DIL1/CIR/P/2020/66) for more details.

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.

COVID-19 and Section 144

If you follow Indian news, your feed is sure to have been inundated with announcements that one state or another had imposed “Section 144” within its limits. This post seeks to demystify the meaning and import of this section, particularly in the context of its current use.

The COVID-19 pandemic poses a key public health challenge to countries – how does one prevent community transmission? In epidemiology, “community transmission” means that the source of infection can no longer be traced i.e., an infected person can no longer be shown to have a link to the carrier of the disease – the virus is everywhere. The World Health Organisation defines it by saying: “Community transmission is evidenced by the inability to relate confirmed cases through chains of transmission for a large number of cases, or by increasing positive tests through sentinel samples (routine systematic testing of respiratory samples from established laboratories).”[i]

One of the key strategies that has been used to combat the risk of community transmission is Social Distancing – a technique that the Indian governments (Central and State) have been encouraging vociferously. The persistent bugbear, however, has been the sheer reluctance of people to stay at home. In a populous country like India, with her overcrowded public transport, spotty sense of hygiene, penchant for large public gatherings, and a large and vulnerable at-risk population of older people, this is a recipe for disaster. To begin with various state governments announced shutdowns of public gathering places including malls, gyms, shopping centres (other than essential commodities), and wedding halls. However, as the incidence of new cases increases in geometric progression and as global infection rates and fatalities show no signs of abating, several state governments have started imposing Section 144 orders in their states.

Section 144 of India’s Criminal Procedure Code, 1973 is titled “Power to issue order in urgent cases of nuisance or apprehended danger”. It empowers a District Magistrate to pass an order, in writing, to order a person/persons or the public at large to do or refrain from doing anything that could be a “danger to human life, health or safely, or a disturbance of the public tranquility”. An order under this section can remain valid only for 2 months, although the relevant State Government has the power to extend it for a further 6 months. A contravention of this order is punishable under Section 188 of the Indian Penal Code, 1860 (Disobedience to order duly promulgated by public servant) with imprisonment for up to 6 months or a fine up to INR 1,000 or both.

To offer a mere taste of the scale of its use, as of 21 March 2020:

· The union territory of Puducherry has imposed Section 144 across all its districts (i.e. Puducherry, Mahe, Karaikal and Yanam) restricting public gatherings to no more than 4 people. This will not apply to essentials such as groceries and medicines, although vegetable markets will have more restricted hours. The government has appealed to its people to refrain from overcrowding.

· Section 144 has been imposed in South Goa[ii] and North Goa[iii] to restrict large public gatherings. Section 144 was imposed in a staggered manner, covering an increasing number of establishments.[iv] Inter-state supply of non-essentials has also been suspended.

· Noida, an early adopter of Section 144, has extended the order until April 5, banning public gatherings of more than 4 people.

· Erstwhile Jammu and Kashmir (now union territories of Jammu & Kashmir, and Ladakh), no stranger to Section 144 orders, now faces this prohibition to promote public health, instead of as a means to address law and order challenges. Multiple districts in Jammu[v] have imposed restrictions. Anantnag prohibits gatherings of more than 5 people, as do the districts of Budgam, Shopian, Kishtwar and Ramban[vi].

· Section 144 has been imposed in Rajasthan to prevent a gathering of 4 or more people.

· In Mumbai, Section 144 has been against tour operators. Other Maharashtrian regions of Nashik and Nagpur have broader Section 144 orders. Nevertheless, extensive lock-downs have been ordered in Mumbai over the coming weeks.

· Four districts in Himachal Pradesh (Una, Chamba, Hamirpur and Solan) are under Section 144.

· The southern state of Kerala, and one of the epicenters of COVID-19 in India, has imposed stringent prohibitions against public gatherings under the Epidemic Disease Control Act, 1897 and has authorized district magistrates to issue Section 144.

· The Kodagu district of Karnataka also faces a Section 144 which shall remain in place till 31 March 2020.

UPDATE: On 22 March 2020, Section 144 was imposed in two more key locations:

· The National Capital Territory of Delhi – this will be in force till midnight on 31 March 2020. No public gathering of more than 5 people will be permitted. Only half of Delhi’s buses will run during this time. No one is allowed to leave their houses unless for a purpose related to essential services.

· All cities in Maharashtra – only 5% of government employees will come in to work. No public gathering of more than 5 people will be permitted. All forms of public transport will be unavailable. There will be no inter-state buses and international flights will not be permitted to land.

It is easy to see why Section 144 is such a powerful and desirable tool in the fight against SARS-CoV-2 (COVID-19) – State governments can, for their most affected districts, order a limitation of public gathering, delineate working hours for public transport and essential services and, act quickly to mitigate risks in high-risk districts. Above all, this kind of order has a crucial advantage over other lock-down orders (such as those passed under Epidemic Diseases Control Act, 1897), which is that governments can enforce Section 144 orders, through well-established modes of criminal prosecution, against those who disobey them. This can be a huge deterrent for those who would otherwise have been asymptomatic/mildly infected vectors of a deadly disease.

Caution must, however, be exercised to ensure minimal disruption of essentials (such as vegetables, groceries and pharmacies) to prevent panic buying and hoarding. Constant communication of reliable information from authentic government sources, regarding what is and is not prohibited, can serve the dual purpose of educating the public while also fighting the scourge of fake news that inundates social media.

In short, Section 144 orders are unambiguous communications by a state of the seriousness of the public health situation in a district. While these can, and do, pose large economic and social burdens on many, the public health benefits they can usher will outweigh their difficulties. Section 144, to be truly effective, must be coupled with intensive screening and testing, regular follow-up of suspicious cases, stringent enforcement of quarantine for those infected or suspected of infection, constant awareness of hygiene best practices, co-opting of India’s vast private sector healthcare infrastructure to ease the burden on state resources, travel restrictions and coordinated international efforts to find effective means of risk management (including vaccines). These must also be coupled with economic stimulus packages or social security payments to those whose livelihoods and employment will be derailed by such restrictions.

Section 144 is no magic wand, but as part of the arsenal in a holistic approach to fighting COVID-19, it is a robust weapon.

[i] Available at https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200320-sitrep-60-covid-19.pdf?sfvrsn=d2bb4f1f_2 As an example, if people infected in India have no history of international travel and no contact, direct or indirect, can be established between them and any person with such travel history/a confirmed patient, then the community transmission stage will have begun.

[ii] https://www.goa.gov.in/wp-content/uploads/2020/03/Order-Section-144-Collectorate-South.pdf

[iii] https://www.goa.gov.in/wp-content/uploads/2020/03/order-977-collectorate-north.pdf

[iv] https://www.goa.gov.in/covid-19/

[v] https://jk.gov.in/jammukashmir/sites/default/files/Order%20for%20Imposition%20of%20section%20144.pdf

[vi] https://jk.gov.in/jammukashmir/sites/default/files/Order%20for%20Imposition%20of%20section%20144.pdf