COVID-19 And Its Impact On Businesses In India.

 

COVID-19, which originated in Wuhan and has been declared as a pandemic, has resulted in lockdowns and travel restrictions all over the world.

 

Worldwide lockdowns and the uncertainty as to how long the lockdowns will continue, has made markets jittery. Almost all the major stock markets have seen significant falls and the bloodbath is expected to continue.

 

The outbreak is not just a human tragedy, but is having a severe global economic impact. The lockdowns around the world have impacted global supply chains, disrupted financial markets and have impacted almost every business. Unless an early solution is found to combat the virus, the impact on the global economy would be more severe than the 2008-09 financial crisis. 

 

India, like most countries, has not been immune to COVID-19 or the economic fallout resulting from it. As per news reports, over 50 % of Indian companies will have seen an impact on their operations and nearly 80% have already witnessed decline in cash flows. The growth rate which is already witnessing a decline is expected to slow down further due to COVID-19. In fact, S&P Global Ratings has lowered India’s 2020 growth forecast to 5.2%, from the earlier estimated growth rate of 5.7%, citing a global recession resulting

from the impact of the Covid-19 pandemic. S&P isn’t the only rating agency to have lowered India’s growth forecast, Moody’s has lowered India’s growth forecast to 5.3% and the Organisation for Economic Co-operation and Development (OECD) downgraded India’s growth to 5.1%. While these may be higher than the anticipated growth rates for major economies, the figures are lower than the 6-6.5% growth rate projected by the Economic Survey 2020.

 

While almost all businesses and sectors have taken a beating in light of the outbreak, tourism, hospitality, aviation, retail and manufacturing have been the hardest hit sectors. As per a survey carried out by The Economic Times (a leading financial newspaper), the tourism industry is expecting direct job losses of 1.2 million while the hospitality industry is expecting revenue losses of around USD 1.3-1.5 billion. The restaurant industry is expected to see 15-20% job losses. Aviation experts are predicting over INR 40 billion in losses to private carriers and the retail business is expecting about 11 million job losses if the current crisis continues for a few months.

 

However, reduction in revenue / cash flow due to business disruption is not the only challenge which businesses need to be prepared for. The outbreak, and the consequent virtual global lockdown, has brought forth a number of legal issues which businesses may end up facing in the near future.

 

While various measures have been taken by the regulators to address corporate governance and compliance issues*, there are a host of other legal issues, as set out below, which businesses should consider.

 

Contract performance

 

The lockdowns and travel restrictions have impacted the ability of companies to operate business as usual. This would consequently result in a situation where companies, especially those in the services as well as projects and infrastructure sector, may not be able to perform their contractual obligations in a time bound manner.

 

In view of the above, companies would need to promptly assess their legal rights and obligations in relation to contracts, the performance of which may be disrupted. This assessment should involve making a determination of the provisions that have been impacted, whether COVID-19 has made the performance of the obligation impossible or merely more burdensome and identifying the risks and consequences of the default.

 

For companies which may potentially end up in default, they need to consider whether COVID-19 outbreak can be claimed as a force majeure event and/or a ground for frustration thereby excusing the affected party from its default/non-performance*. However, prior to claiming frustration or a force majeure event it is imperative that companies consult their legal advisors. 

 

Companies which are negotiating contracts should ensure that the contracts take into account the disruptions caused due to COVID-19 outbreak so as so to appropriately allocate the potential risk. 

 

Impact on M&A transactions

 

The impact of COVID-19 and the resultant lockdowns as well as business disruptions will be felt on ongoing as well as future transactions. Travel restrictions and lockdown of businesses could impact timecritical deals.

 

Transactions which have been signed but not completed / closed could face the risk of the investor / buyer trying to invoke the material adverse effect (MAE) / material adverse change (MAC) clause. 

 

However, there is no certainty whether the investor / buyer will be able to successfully invoke the MAE / MAC clause as such clauses usually have carve-outs for changes on account of general economic conditions. Further, sellers would need to consider if any disclosures need to be made against any business related warranties on account of COVID-19. The disruptions caused by the outbreak would also delay closing of transactions.

 

On the other hand, transactions which have not been signed may either be pushed or called off. Where parties decide to continue, buyers may need to revisit the valuations to take into account the impact on cash flows and business continuity risks. Further, the contracts would need to be renegotiated to address risk-allocation on account of COVID-19.

 

Additionally, sellers ought to consider providing to the buyer, as part of the due diligence process, information regarding the impact of COVID-19 on the business.

 

Employment issues

 

The pandemic has disrupted businesses in many ways, including affecting the workplace leading to labour and employment issues. Employers are under a legal obligation to provide a safe and healthy workplace and to protect the health and safety of their employees. Employers must take all possible steps to manage the risk, and stay abreast with the notifications/advisories/circulars being issued by various authorities. Employers are required to strike a fine balance between protecting the health and safety of their employees and continuity of business. 

 

The forced lockdowns will also have an impact on the leaves. Indian law grants employees statutory leaves and sick / casual leaves (in addition to other event based leaves like maternity). Employers are grappling with the issue of whether an affected employee’s period of absence from work (on account of COVID-19) can be adjusted against such employee’s leave entitlement.

 

A prolonged lockdown will have an impact on a company’s cash flows. Smaller businesses may be faced with the issue of workforce sustainability. The economic slowdown may prompt businesses to consider different strategies for reductions of employee costs, including lay-offs and/or pay cuts. Employee related matters, particularly aspects such as lay-offs and terminations are highly sensitive in nature and it is essential that employers implement any of the abovementioned employee cost reduction strategies with due care and caution. This would necessitate a thorough understanding of the labour and employment laws of India, the practical perspective and a review of the employment contracts and

company policies. The scope and applicability of the labour laws to be adhered to depends upon a variety of factors including, but not limited to, the category of employees being affected, the strategy proposed to be adopted, the total employee strength of the organization, the business activities of the organization etc. Further, from an employer’s perspective, it is also important to have appropriate documentation in place while implementing any employee cost reduction strategy.

 

Another aspect to be considered is data privacy of employees, as health related data is considered personal sensitive information. Companies need to ensure that any data collected regarding the health of its employees is handled and dealt with in accordance with the data protection law.

 

Borrowings

 

Companies need to carefully monitor the financial covenants under their respective loan agreements.

 

The outbreak is expected to result in financial hardship and cash flow issues. It is imperative for companies to keep an eye on their financial covenants as breach of the covenants will allow the lender to declare a default. Invocation of a default under a loan agreement could result in other lenders invoking the cross default clause.

 

Insolvency

 

With cash flows being constrained, companies may find it difficult to service their existing debt as well as meet their other financial obligations. Given the financial stress, it may not take long before businesses incur payment defaults, and thereby putting themselves at the risk of being subject to insolvency proceedings. It must be noted that an insolvency proceeding in India can be initiated in case the dues exceed INR 100,000, which is not a very high threshold.

 

Shareholder and regulatory disclosures

 

In light of their fiduciary duties, it is imperative for the board to communicate to the shareholders the risks being faced by the company and the contingency plans in place or proposed to be implemented. 

 

Similarly listed companies need to ensure that if there has been a material effect on their business, operations and/or finances then the adequate and timely disclosures are made to the relevant stock exchanges.

 

Insurance cover

 

Businesses are scrambling to check if their insurance policies cover them against business disruptions on account of COVID-19. However, standard business interruption policies in India are triggered only where there is a physical loss the insured. The extent of cover, if any is available, will depend on the wording of the policy. 

 

Given the uncertainty as to how long this crisis will continue, it is imperative for businesses to prep themselves not just for the financial impact but also on any legal and regulatory issues which may arise.

 

Every company may face not just the above issues but many more.