With the sudden outbreak of COVID-19, the entire economy has been forced to come to a halt and unanticipated future lies ahead for Companies with the financial year-end round the corner. Several questions are arising in the minds of business traders, suppliers of essential goods, etc. because of the unprecedented situation. MSMEs and big companies are facing disruption in the cycle which is leading to an economic slowdown. The economy is being pushed back to the baseline, growth-wise. With next to no outputs and low-profit margins, the situation is turning out to be a catastrophe for the company’s existence. Therefore, this article focusses on the apposite changes and amendments brought by the government in corporate laws to help companies and businesses to tide over the crisis.

INTRODUCTION

COVID-19 has brought the world to a standstill, pushing governments around the world to take strict measures on war footing to prevent the spread of this pandemic. India has also put all its machinery and material into motion to curb the disease. Countries around the world are facing difficulties, not only medically but also economically. India is no exception. India is bound to be affected not only because of domestic slowdown but also of the global recession. Almost every activity, barring the essential supplies came to a complete grinding halt. The Union

Government on 1^st of February, 2020 had estimated India’s nominal GDP growth rate at 10%, however, the same now seems wide off the mark and far from certain to achieve. 

India having announced the fourth phase of lockdown, it is believed that the country’s growth rate will go down to 1.6% from 4.5% it had earlier estimated. One of those entities that will be affected majorly are companies. According to a survey by global advisory firm Willis Towers Watson, 57% of organisations in India are expected to have a moderate to a large negative impact on their businesses in the next six months while 46% expect the effects of the pandemic to last over 12 months. Being mindful of this situation, amendments/changes in the law governing company jurisprudence can have far-reaching consequences, beginning with helping these businesses sustain as well as for the economic development of companies. In the light of these unprecedented and uncertain events, the Government of India announced a slew of legislative measures and changes in corporate laws to help businesses to tide over the crisis.

Reforming Companies Act

Companies are usually fully loaded with the task of meeting all pending statutory compliances in the last month of the Financial Year. The most affected entities of the economy currently are the companies, with the financial year-end right around the corner. Non-compliance with these statutory obligations can lead to dire consequences and often penal liabilities for companies. Therefore, the government introduced an ordinance for decriminalising the Companies Act and move the majority of compoundable offences to an internal adjudication mechanism. The following Companies Act defaults will be decriminalised:

1. 7 compoundable offences dropped
2. 5 to be dealt with under an alternative framework
3. 58 sections to be dealt with under internal adjudication mechanism
4. 14,000 prosecutions withdrawn under Companies Act
5. Databank of independent directors launched 
6. Integrated web-based incorporation form launched  ^[1]

Procedural violations under the Companies Act, such as drawbacks in corporate social responsibility reporting, inadequacies in board reports, filing defaults and delay in holding annual general meetings will be decriminalised.

CSR Spending

The Ministry of Corporate Affairs vide its Circular on 23^rd of March, 2020 allowed companies to use their Corporate Social Responsibility measures to fight COVID-19². As per the Circular, given the worldwide pandemic and its spread in India, the Government of India notified it as a national disaster and hence it was clarified that the amount spent by companies on activities relating to COVID- 19 will be eligible for CSR activity.

It was further clarified that funds may be spent for various activities related to COVID-19 and that items classified as CSR activities in Schedule VII of the Companies Act, 2013 are wide-ranging and may be interpreted liberally for this purpose. By way of this notification, the Government provided a major relief to the Companies by providing them with a lenient pathway of giving something back to society. Additionally, the Government was able to channel all these funds to a cause where such funding is much necessary.

Major relief for MSME sector

The economic relief package titled Atmanirbhar Bharat Abhiyan announced by Honourable Prime Minister Narendra Modi, in its first allocation aimed at micro, small and medium enterprises MSMEs and non-banking financial companies NBFCs. Here are the proposals aimed at offering relief to MSMEs:

1. Collateral-free loans to MSMEs which will be fully guaranteed by the centre.
2. 12 months will be the principal repayment moratorium period and interest rate will be capped.  
3. Borrowing rate up to 20% of their total outstanding credit as on February 29 2020, for MSMEs with a turnover of up to Rs.100 crore and with outstanding credit of up to Rs. 25 crores. Loans given under this economic relief package will have a four-year tenure and the scheme will be accessible until October 31. ³

This loan amount will help small enterprises buy raw materials, pay initial bills and daily wages to employees. In short, this relief package will act as initial seed money for MSMEs hit by zero cash flow, for cranking up their businesses again. Banks are reluctant to lend loans to this category of borrowers as they fear that the money will not be repaid. To end this logjam, the government said that it will aid banks up to Rs.3 lakh crore and these loans do not need collaterals. 

Suspension of IBC for Companies under stress due to COVID-19

The government has excluded all COVID-related debt from the definition of default under the insolvency and bankruptcy code (IBC) and suspended any fresh initiation of insolvency for up

Ministry of Finance and Corporate Affairs- First Tranche of Aatmanirbhar Bharat Abhiyaan

to a year. The quarterly newsletter issued by the Insolvency and Bankruptcy Board of India (IBBI) for October- December 2019, states that as on 31^st December 2019, there are approximately 1,961 entities which were undergoing a corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016. The lockdown has made it nearly impossible for all the stakeholders to effectively discharge their functions within the timeline as stipulated under the code. In light of these incidents, a series of policy changes were introduced and the quasi-judicial authorities have issued directions for undertaking different actions under the code which are as follows:

1. GOI issued a notification on 24 March 2020 under Section 4 of the Code, increasing the de-minimus amount for filing an application to initiate CIRP of a corporate debtor from INR 1 lakh to 1 Crore. The objective of this amendment is to curb the filing of CIRP applications against MSMEs.⁴

1. Regulation 40C has been added to Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons) Regulations, 2016 (CIRP Regulations) providing for the exclusion of the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak from the computation of timelines for completion of activities under a CIRP, notwithstanding the timelines prescribed in the CIRP Regulations, but subject to the provisions set out in the Code.

Suspension of IBC gave a new lease of life for companies. These steps are expected to assist the process of the recommencement of business operations and restore normalcy for overall business continuity.

Income Tax relief measures

Ministry of Finance announced a slew of direct tax measures as part of the COVID-19 relief package. The key measures announced by the Ministry of Finance are as follows:

TDS/TCS (Tax deducted at source/ Tax collected at source) Rate Reduction

i. The rate for tax deducted at source for specified non-salary payments which are made to residents and tax collected at source for specified receipts have been reduced by 25%.

F. No. 30/9/2020-Insolvency

ii. As per government estimates, reduction in TDS/TCS rates will result in the release of liquidity of Rs.50, 000 crores.

The due date for all income tax returns for FY2019-20 has been extended to Nov 30. Tax audit due date has been extended from Sept 30 to Oct 31. Under ‘Vivaad se Vishwas Scheme’- a tax dispute resolution mechanism – without any additional amount has been extended till December 31. 

Impact of COVID 19 on FDI regime

In the last few years, countries around the world have tweaked their Foreign Direct Investment transactions to address national security concerns. The COVID-19 pandemic has not only brought health care and infrastructure into focus from an FDI perspective but has also enfeebled companies in other sectors and made them soft targets for creditors and opportunistic buyers. In this regard, the Department for Promotion of Industry and Internal trade has imposed certain restrictions for receiving FDI from neighbouring countries. As per Press Note 3, any entity of a country which shares its land borders with India (i.e. China, Nepal, Bhutan, Bangladesh, Myanmar, Pakistan and Afghanistan) (“Specified Country“) or where the gainful owner of any investment in India is based in such country or is a citizen of such a country, will now require initial approval from the Government for its direct investment in India. ⁵

Furthermore, any transfer of ownership (whether existing or future) of an entity in India resulting in the beneficial ownership being situated in a Specified Country will also require initial Government approval. Changes suggested vide Press Note 3 will have a statutory effect upon amendment of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules“). Indian Government is keen to curb any opportunistic takeovers/acquisitions of Indian companies who may be suffering from poor valuation due to the current pandemic. News reports indicate that Indian pharma companies are trading at their lowest valuations in the past 8-10 years. Given the unprecedented situation and India’s heavy reliance on private healthcare, the government will need to review the permissibility of, and security concerns relating to, FDI in healthcare.  

DPIIT File No.: No. 5(5)/2020-FDI Policy

CONCLUSION

Given the current circumstances and uncertainties on the recovery for market conditions, these slew of measures will help companies survive the storm and manage their costs. COVID-19 will change the way the world works; just like the Great Depression, Spanish Flu, Great plague of London, the dot-com bubble, and the 2008 financial crash did in the past. The question on everyone’s mind is, ‘Will things go back to normal?’ Let’s be clear about it. Rudimentary changes will take place in how people, businesses, and economies function. With the help of these reforms, the level of GDP may stabilise, more so when India is immune to the global recession. Companies will be prevented from falling back to square one, growth-wise. The next 12 months will be crucial. Many businesses will struggle, but as with economic adversities of the past, new industries will emerge bringing with it renewed hope of recovery. Eventually, things will go back to normal. Just that we’ll have to change the definition of normal.

References:

1. Ministry of Finance and Corporate Affairs- 5^th Tranche of Aatmanirbhar Bharat Abhiyaan
2. Companies Act, 2013
3. Ministry of Finance and Corporate Affairs- First Tranche of Aatmanirbhar Bharat Abhiyaan
4. F.No. CSR-01/4/2020-CSR-MCA
5. Insolvency and Bankruptcy Code, 2016
6. F. No. 30/9/2020-Insolvency
7. Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules“)
8. Press Note 3; DPIIT File No.: No. 5(5)/2020-FDI Policy

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[1] Ministry of Finance and Corporate Affairs- 5^th Tranche of Aatmanirbhar Bharat Abhiyaan   F.No. CSR-01/4/2020-CSR-MCA

AUTHOR : MAHESHWAR PRASAD.

PG COLLEGE OF LAW, OSMANIA UNIVERSIRTY.