Introduction
COVID-19 is one of the worst crises faced by humankind, a glimpse of the devastating impact of COVID-19 pandemic on the economy was seen by the estimates released by the National Statistical Office. The nation’s GDP growth for the FY was 4.2%, which was the lowest in the last 11 years, while the fourth quarter of the FY witnessed it slump to 3.1%.[1] However, this only takes into account the first week of the lockdown, which started on March 25; thus, the situation is estimated to worsen.
On one hand, the pandemic has resulted in stark unemployment and bankruptcy for entities that cannot function during the lockdown, while on the other and it has forced businesses all over the world to re-evaluate their functioning mechanism to enable continuance of their operations in the present situation.
In the current times, there is a stark need for the development of new strategies to enable the recommencement of economic activities, and such development is only possible by combined efforts of the government and the private players.
During situations of crisis, the government and the regulators play a pivotal role in maintaining stability by issuing guidance for drafting new and relevant policies and relaxing the statutory mandates which were applicable earlier but due to the current scenario are rendered irrelevant.
Relaxations concerning Compliances by MCA and SEBI
Relaxations issued by MCA
Ministry of Corporate Affairs (“ MCA”) regulates the corporate affairs in India through a variety of legislations, thus protecting the interests of corporates, investors, and other stakeholders. The Securities Exchange Board of India (“SEBI”), the Indian regulator of securities and commodity market governs the conduct of the market entities.
In light of the COVID-19 pandemic, MCA has released several circulars to relax several compliances under the Companies Act and rules therein, like an extension of 9 months in conducting AGMs whose FY ends on December 31, 2019[2], and relaxing in conducting EGMs through video conferencing and doing away with the need of physical presence. For the meetings conducted they have mandated e-voting for all resolutions mandatorily requiring shareholders approval, the Board meetings are allowed to be held via video conferencing till June 30, 2020 [3].
MCA also clarified that any spent by corporates for COVID-19 would be eligible as activities under Corporate Social Responsibility [4]. The Ministry has also required measures to enable a continual of practicing social distancing like the development of a ‘work from home’ policy and for the succession of the management.
Additionally, MCA has taken several commendable steps to mitigate the losses incurred by the companies; the majority of them are aimed at MSMEs. The suspension of sections 7, 8, and 10 of Insolvency and Bankruptcy Code in itself has prevented a plethora of insolvency petitions that would have otherwise been filed, thus inevitably jeopardizing the MSME throughout the country.
Some other relief measures taken are waiver of additional fees for late filings during April 1 to September 30, 2020, waiver of the requirement of minimum residency period of at least 182 days by one director of every company, additional six months granted for newly incorporated companies to provide the certificate for commencement of business.[5]
Relaxations issued by SEBI
Similarly, SEBI has issued several relaxations related to compliances, disclosures, and new measures to regulate the market in the current situation.
On March 20 took regulatory measures to curb market volatility, the regulations included a revision of Market Wide Position Limit (MWPL) in the F&O segment to 50% of existing levels, an increase in margin for specific shares to a minimum of 40%. These margins were only applicable in Cash Market. There was also an increase in margin for Non- F&O Stocks in Cash Market for the specified stocks with a brand of 20% and an intraday price movement of more than 10%.
The Board on July 21, 2020, stated these measures shall remain in force till August 27, 2020.
There were relaxations given to listed companies with respect to compliances under SEBI (LODR) Regulations, 2015 vide several circulars, the notable ones are the following:
? extending the last date to conduct AGM and other meetings
? periodic fillings like compliance certificates, statement of investor complaints, corporate governance report, shareholding pattern, financial results.
? Disclosures (initial and annual alike), financial results.r.t NCDs, NCRPS, CPs.
The Board also allowed conducting AGMs of unit-holders of Infrastructure investment trusts (InvITs) and Real Estate Investment Trust (REITs) through video conferencing or other audio-visual means.
There have been several relaxations provided to listed entities under SEBI ICDR Regulations 2018, some of which are as follows:
? relaxation in cut off dates for the issuance of NCDS/ NCRPS/ CPs[6]
? relaxation in eligibility conditions related to Fast Track Rights Issue[7]
? relaxations in eligibility conditions related to Fast Track Further Public Offer[8]
And general relaxation in timelines for compliances with regulatory requirements by Stock Exchanges, Clearing Corporations, Trading Members Depository Participants, and KYC Agencies were also issued.[9]
Impact on Merger and Acquisition Deals
Merger and Acquisition (“M&A”) transactions are volatile transactions which have several determinants to it having a significant effect on determining the terms of the agreements and the position of the parties involved. Patently one such key determinant is the valuation of the target company ( including the financial position and net worth); in the COVID-19 crisis, several companies have incurred severe losses, thus affecting their previously presented financial position.
The issue can be broadly divided into two parts: first is the impact on the ongoing M&A deal transactions and the second the impact on the future M&A transactions. Both issues are analyzed in the following parts.
I. MAC Clauses
Material Adverse Change (“ MAC”) refers to any change in the position of the target company, which significantly varies its position from the one it had represented to the acquirer company while the M&A deal was in process. The clause enables the acquirer company to terminate the agreement or renegotiate the terms. MAC is usually defined in the restructuring agreement itself, thus has a subjective element to it. M&A agreements like all other agreements have their basis on “ad-idem” of parties[10], i.e., agreeing on the same thing in the same manner where in the process of the transaction the subject matter (in this case the target company’s valuation) changes the parties no longer have ad- idem and thus the contract must be voidable at the option of the buyer (in this case acquirer).
In addition to that SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, has a provision to enable withdrawal of an offer where the condition to make an open offer under the agreement is not met with due to reasons outside the control of the acquirer[11]
Thus, whether or not such M&A deals see the light of the day depends on whether the effect of the pandemic on the target company itself and whether or not it qualifies for MAC as drafted in the M&A agreement.
II. Force Majure Clauses
Similarly, the force-majure clauses in a contract remove the liability of parties involved for non-performance due to an act outside their reasonable control, an act of god, natural calamity, etc. The Indian courts have emphasized on the invocation of the clauses only in circumstances which are a direct result of the COVID-19, and the mitigating steps have been taken[12].
III. Future of M&A
Coming to the issue of the impact of the pandemic on prospective M&A deals, many experts have predicted a global recession as an impact of COVID-19. Currently, the provisions for fillings for bankruptcy have been suspended once they are revived several companies will be unable to meet the pending dues and inevitably fall in the cycle of defaults and bankruptcy petitions will be filed against them. For such companies, many more prominent players will emerge to invest in them either to increase their market share or diversify their operations. Even without the defaults, many several corporates in the same market are expected to opt for M&As to pool their resources in a mutually beneficial manner. The Governments are also expected to take measures to boost the economy and provide incentives for such M&A deals. Both situations increase the scope for M&A transactions after the pandemic.
SEBI’S Advisory on Disclosure of Impact of the Pandemic
The Government of India announced the national lockdown on March 25, 2020, and from that day, the businesses have come at a standstill due to which the economy has incurred unprecedented losses. In such difficult times, the role of government, as well as Sectoral regulators, is crucial in aiding the companies in surviving as well as recovering from its impact.
Worldwide statutory securities authorities are attempting to assess the impact of COVID-19 outbreak on the markets and thus, requiring disclosures from the market players. The U.S. Securities and Exchange Commission (“SEC”) on April 8, 2020, made a public announcement asking public companies to ‘provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning’.[13] Similarly, the European Securities and Market Authority (“ESMA”) issued a recommendation on March 11, 2020, requiring the issuers to disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects, financial situation or a qualitative and quantitative assessment of business activities under their transparency obligations under the Market Abuse Regulation[14].
SEBI has taken a lenient approach with regards to the compliances the listed companies have to adhere to during this period. During the lockdown period, SEBI has in total issued 73 circulars, on relaxations and extensions in timelines concerning compliances due to COVID 19 and interim regulatory standards to be maintained.
I. SEBI Advisory on Disclosures
The advisory issued by SEBI on May 20, 2020, urged the listed entities to publish material information on the impact the COVID-19 pandemic has had on their business, performance, and financials along with the measures taken to curb the same [15].
SEBI acknowledged that many companies had issued statements regarding the temporary closure of their operations; however, the financial disclosures have been less and prompted the companies to endeavour to make disclosures in a timely and adequate manner.
The regulator has given the following examples as to what may form material information
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Impact of the CoVID-19 pandemic on the business;
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Ability to maintain operations including the factories/units/office spaces functioning and closed down;
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Schedule, if any, for restarting the operations;
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Steps were taken to ensure smooth functioning of operations;
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Estimation of the future impact of CoVID-19 on its operations;
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Details of the impact of CoVID-19 on listed entity’s-
(i) capital and financial resources
(ii) profitability
(iii) liquidity position;
(iv) ability to service debt and other financing arrangements
(v) assets;
(vi) internal financial reporting and control;
(vii) supply chain
(viii) demand for its products/services
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Existing contracts/agreements where non-fulfillment of the obligations by any party will have a significant impact on the listed entity’s business;
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Other relevant material updates about the listed entity’s business.
However, this list is subject to the application of criteria of materiality criteria develop by the BOD, and the information is to be provided as far as possible, thus vesting the final discretion to decide the extent of disclosure on the company’s management.
The circular does not provide a specific timeline for such disclosures, but reasonably it can be understood to be done under a Board of Directors (“BOD”) meeting and updating it as and when material developments occur.
II. Material Information
The circular provides discretion to the companies to determine what form ‘material’ information. Under SEBI Listing Obligations and Disclosure Regulations, 2015 (“LODR”), Regulation 4 the listed entities are to timely disclose all accurate information on material matters, including the financial situation, performance, ownership, and governance.
Regulation 30 of the LODR requires the entity to make such disclosures on material information in a periodical as well as event-based manner. The BOD of the listed entities is to develop a guideline for determining the materiality of an event or information on the basis that its omission is likely to result in its discontinuation or alteration of the event which is already publicly available, or where the late disclosure of such omission is likely to result into a significant market reaction and other criteria determined by the BOD[16].
The Schedule III, Part A of LODR, provides a list of events that are considered material and have to be mandatorily disclosed like any acquisition, a scheme of the arrangement, fraud defaults by KMPs, issuance/ forfeiture of securities, loan agreements taken not in the ordinary course of business, etc. Part B provides a list of events that shall be disclosed if such guidelines apply to them, one of such events is the disruption of operations of the listed entities. It is in pursuance of this provision that many companies issued statements about the closure of their business activities due to COVID 19 even before the SEBI advisory.
III. Disclosures regarding Future Actions
It is also pertinent to note that the advisory also provides for disclosures regarding future actions to be taken by the Companies, which are not covered in the LODR. Typically LODR requires disclosure limited to the facts; thus, the statements with regards to future obligations are not addressed under Indian Securities law. The SEC has also required companies to make forward-looking disclosures dealing with future operating conditions and strategies to be followed and directed companies to shift the focus on health and welfare strategy. Similarly, the ESMA has stated the forward-looking disclosures must be in adherence to the market regulations to prevent any form of market manipulation.
Such disclosures are quite relevant in making the investors aware and capable of assessing the entity’s current position and future approach. However, such information also has the potential to affect instruments’ market value, to create a false market, and to infringe other statutory provisions.
General and vague statements without any details will also not serve the purpose of transparency; thus, there is a need for a delicate balance to be maintained here. Companies should refrain from making general or selective statements; rather, disclosures should be made in letter and spirit to ensure minimum risk to the investors and greater market transparency, which in turn will aid in the revival of the investments in the market.
Conclusion
The various relaxations provided by the MCA have enabled companies to focus on restarting their business activities without worrying about the hefty penalties due to delay in compliances or disclosure, which are inevitable in such the current scenario.
Additionally, there are foreseeable opportunities for M&A deals post and during the pandemic as corporate restructuring is an accepted strategy for revivals the same trend was witnessed after the Global Financial Crisis[17].
In furtherance of the SEBI advisory, several companies have issued statements like Tata stated that the impact of the outbreak has been severe on its non-food industries; the production is gradually restarting with the approvals being granted steadily.[18] D-mart stated that it was able to continue its operations due to its classification as essential services, but its revenue reduced by 45% in April, whereas Leela Hotels estimated zero revenue in the June quarter.[19]
The intention behind it seems to be that of increasing transparency and making information available in the public domain not only for the benefit of the government but also for investors, individuals, and institutions alike. Such disclosures will be imperative in drawing an analysis of the pandemic as well as draft policies to form a way forward by the government and other statutory bodies.
These measures taken by the government and other statutory bodies have been preemptive and paved a way to make corporate compliances and market awareness possible in the current scenario. The Corporates should also endeavour in aiding the authorities by adhering to the applicable statutes and maintain transparency.
