As the Covid-19 pandemic spreads, countries have moved rapidly to manage its impact. On March 24, 2020, India announced a nation-wide, 21-day lockdown to deal with the crisis. The lockdown, which went into effect from 12:00 am on March 25, was authorized under India’s Disaster Management Act, 2005 (DMA). 1 The lockdown closed all private and public businesses and establishments, other than those providing specifically identified essential goods or services.2
To mitigate the impact of the lockdown on businesses and the economy, both national regulators and state governments in India have been announcing various measures. This note provides an overview of measures announced (to date), in four areas that are likely to be most relevant to businesses, i.e., (i) liquidity and credit, (ii) labour and employment, (iii) regulatory compliance, and (iv) disputes.
Liquidity and Credit
Massive stimulus for liquidity and credit: Perhaps the most significant and impactful of the various relief measures to date were the monetary policies announced by the country’s central bank, the Reserve Bank of India (RBI), on March 27, 2020. Three of the RBI’s measures warrant highlighting because of their sheer scale and potential wide-reaching economic impact going forward.
Easing monetary policy: First, the RBI drastically eased monetary policy by reducing its benchmark rate (the policy repo rate) by over 75 basis points to 4.4%. This rate reduction was coupled with a 100 basis point reduction in the cash reserve ratio required to be held by banks to further enhance distribution of liquidity into the financial system. 3 It is hoped that this extensive monetary easing will support demand and allow for credit growth.
Injecting liquidity into the financial system: Second, the RBI announced the auction of targeted term repos (of up to three-years tenure, and of appropriate sizes) aggregating up to Rs 1,000billion (approximately USD 13.2 billion), at a floating rate linked to the policy repo rate. The liquidity obtained by banks from these repo auctions must be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020. At least 50% of this corporate debt is required to be purchased from the primary market (while the balance can be acquired through secondary market purchases).
Giving borrowers a breather: Third, all banks, all-India financial institutions, and non-banking finance companies have been permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. The moratorium allows a deferment of interest on working capital facilities and has been extended by some banks to include a moratorium on repayment of credit card debt. While the moratorium is not a waiver, it will help businesses better manage cash flows. The RBI has mandated that the credit rating / history of borrowers availing the moratorium must also not be adversely affected. Banks and financial institutions have responded in various ways to this relaxation permitted by the RBI. While most government-owned banks have extended the moratorium to all customers, giving them the option to opt-out, most private-sector banks have extended the moratorium only to customers who elect to avail the moratorium. Some financial institutions are holding off on offering any moratorium at the time of this writing.
Labour and Employment
Protecting jobs and wages: In contrast to the RBI’s measures, the measures announced in relation to labour and employment do not appear to have any rationale aimed at sustainable economics. Rather they are focused on ensuring job and wage security. Prior to the lockdown being imposed, the central government issued advisories to employers’ of public and private establishments asking that they not terminate employees or reduce wages, and that they treat employees as reporting for duty if their units are rendered “non-operational” due to the Covid-19 pandemic. State governments have issued similar advisories. 4
No change (yet) to rules on retrenchment or layoffs: A number of employers (particularly small and medium businesses) have been concerned about their ability to make wage payments as their businesses are impacted—this is a genuine concern that requires the urgent attention of the government at both the centre and in the states. In our firm’s view, until any relaxation is allowed, and in light of the advisory, any lay-off or retrenchment of employees, or any reduction in their wages would be subject to the same rules and standards as applied prior to the pandemic (e.g., under the Industrial Disputes Act, 1947, the Contract Labour (Abolition and Regulation) Act, 1970, applicable sectoral laws, or the contract of employment, as may be applicable).
Filings deferred: Many regulators have announced measures to ease regulatory compliance obligations. For instances, the Ministry of Corporate Affairs (MCA), the Securities and Exchange Board of India (SEBI) and various state regulators have all relaxed or deferred filing requirements for businesses.5
Compliance requirements relaxed: In addition, the MCA has introduced relaxations to address the travel restrictions now in place, e.g., by dispensing with the requirement for at least one director of an Indian company to stay in India for at least 182 days in 2019-2020, by allowing longer periods between two board meetings, and by allowing board meetings of companies to be held by videoconference, even in cases where such meetings discuss matters that previously could only be dealt with at a physical meeting of the Board (such as for the approval of annual financial statements).
Protection for small businesses: In addition, in order to protect small businesses, the government has raised the debt default threshold required to initiate insolvency proceedings against a company or limited liability partnership. Previously, such insolvency proceedings could be initiated if a corporate debtor defaulted on an amount in excess of INR 100,000; now the default must exceed INR 10 million for such proceedings to be initiated.
Courts closed for all but urgent matters: Courts in India have limited their functioning to dealing with only the most urgent and pressing matters. The Supreme Court of India has required filings to be made electronically and is conducting hearings only on extremely urgent matters, by videoconference. High Courts in the states have adopted a similar approach. As a result, limitation periods for filing cases have also been correspondingly extended. Courts have also extended the duration of temporary injunctions previously granted.
Tribunals adopt a similar approach: Most tribunals have also stopped conducting hearings. The National Company Law Tribunal has suspended operations of all benches, except for unavoidable urgent matters, which are heard every Wednesday and Friday by the acting president of the Chennai bench. Other tribunals, such as the Income Tax Appellate Tribunal, the National Green Tribunal, the Customs Excise and Service Tax Appellate Tribunal, and the Securities Appellate Tribunal are not conducting hearings during the lockdown.
Conclusion and a Caveat
Check for updates and examine the small print: This note provides a flavour of some key regulatory measures that will impact Indian businesses as the Covid-19 pandemic spreads. As the situation is rapidly evolving, regulators have been frequently updating measures and issuing clarifications, often on a daily basis. It is therefore important to either check the latest notifications issued for these updates and clarifications, or seek legal advice before taking action in response to any measures announced.
1 The DMA gives the central government and agencies set up under the DMA wide powers to “take all such measures as it deems necessary or expedient for the purpose of disaster management.” See section 35(1) of the DMA. See also sections 6 and 10 of the DMA setting out the powers and functions of the National Disaster Management Authority and the National Executive, respectively.
2 Breach of the lockdown orders or non-compliance with the government’s directions attract monetary penalties and possible imprisonment (of up to 1 year) under the DMA and also expose violators to criminal prosecution under provisions of the Indian Penal Code, 1860.
3 The reduced cash reserve ratio (CRR) would now be just 3% of net demand and time based liabilities with effect from the reporting fortnight beginning March 28, 2020. The requirement of daily minimum CRR balance maintenance has also been reduced from 90% to 80%.
4 For government organizations, instructions were issued that up to April 30, 2020 contractual, casual and outsourced staff engaged by the Government of India and its ministries and organizations would be treated as being “on duty” even if they were required to stay home because of state imposed lock down orders, and entitled to receive pay and wages accordingly.
5 The MCA has also introduced a “Fresh Start Scheme” that provides companies and limited liability partnerships the opportunity to make good any filing related defaults, irrespective of duration of default, and make a fresh start as a fully compliant entity, without having to pay hefty penalties.