India: Legal and financial plans beyond COVID-19

 

COVID-19 has presented challenges that nobody could have envisaged three months ago. Each day existing as well as future challenges become larger. We need to fight the current difficulties and keep ourselves safe from danger. At the same time we need to assess how we will recover from this threat from nature. Assuming that the COVID-19 pandemic lasts for the next three to six months, we should plan accordingly.

Legal challenges

The most difficult problems that businesses need to consider are their legal liabilities and obligations. Broadly, the areas that will be affected are contractual obligations, employee-employer relations and tax and compliance obligations.

For contractual obligations, there are two aspects to address. Firstly, how clearly have force majeure clauses been drafted in each agreement, and secondly, to scrutinize any new acts or laws that the government may introduce to define what would be a breach. We can expect substantial leniency and therefore contractual breaches should not bring too much stress, while economies are in lockdown or limited mobility phases.

With regards to employer-employee challenges, this could be the most critical challenge of all, given the inability of small businesses and low wage earners to survive for an extended period. The COVID-19 crisis comes on the back of an unprecedented slowdown in India and a world economy that was already slowing down. There will be no quick solution. There will have to be a combination of compassion and practical decisions. Substantial government support is not expected given the other challenges to the economy and the current deficit. The short-term crisis should be met by businesses absorbing the losses and requiring employees to take leave already accrued. If the crisis threatens to become larger, businesses would need to reduce non-core activities and make teams leaner. A much longer crisis might see the need to renegotiate employment contracts and to cut wages.

There should be little to worry about in the area of tax and compliance. The government can grant exemptions for the inability to file taxes and to fulfill compliance requirements. The government should grant extensions of time in cases where there would otherwise be lockouts or periods of restriction.

Fundraising during this period

Fundraising is likely to be hit during the period when the crisis exerts an influence unless it is for a purpose, industry or segment that alleviates pandemic-related problems. Domestic fundraising will be on hold, but should recover fairly quickly once the crisis ends with the government giving support and the Reserve Bank of India issuing policy guidance. M&A related capital raising will become extremely slow unless transactions represent bargains and are available at very attractive prices. Historically, when profit projections go south, valuations of businesses also go downwards. With this in mind, businesses should raise capital through debt funding rather than equity fundraising until valuations are restored.

Domestic and international expansion

Each crisis is an opportunity. This statement need not be interpreted as opportunistic. Instead it is a call to entrepreneurs to evaluate which way the economy is moving and to adapt their businesses. There will be a dip in traditional consumption, but a large expansion of industries in the data analytics, healthcare, food value chain and telecommunications sectors. Good entrepreneurs will seize the opportunities as soon as markets open up.

Cross-border opportunities will depend on how soon India is able to come out of the crisis, and how long other countries take to do the same. The shorter the period of crisis in India, the greater its investment appeal will be. Should the crisis deepen in India, however, the country could see itself sidelined for a very long time. If the country can bounce back right away, much outsourcing work will return very quickly. Businesses need to understand that foreign companies and financing sources will consider their own markets first. If their local markets provide attractive opportunities and India does not, FDI will be lost for some time. However, if the Indian market provides attractive business opportunities and the local markets in developed countries have not yet recovered there could be valuable FDI potential to be exploited. Indian businesses have to discover those areas that are attractive to the international investor community and be ready to exploit them at the earliest opportunity.

A lot will depend on the length of time the COVID-19 challenge continues in India. If the pandemic can be quickly brought under control, it can help India to achieve international leadership.

For further information, please contact:

Gautam Khurana, Managing Partner

India Law Offices, New Delhi

e: g.khurana@indialawoffices.com  

t: +91 (11) 24622218

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