The outbreak of the pandemic of COVID-19 has radically altered the economic landscape and increased volatility in the global capital markets.
While it is an inescapable conclusion that the after-effects of such a pandemic will continue to show on the financial and capital markets for a substantial amount of time, the Government of India has announced various measures to deal with such unprecedented circumstances. The Central and State Governments of India have taken proactive measures by declaring a countrywide ‘lock down’, thereby imposing restrictions on all sectors of the economy and impacting smooth operations of businesses. To address such concerns, market regulators such as the Securities and Exchange Board of India (“SEBI”) have relaxed several compliances applicable to listed companies.
The Reserve Bank of India (“RBI”) permitted all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and non-banking financial companies (including housing finance companies and micro-finance institutions) to allow a moratorium inter alia on servicing of term loans (“Moratorium”) by its notification dated 27th March 2020. Pursuant to the Moratorium, SEBI has permitted credit rating agencies and valuation agencies (for mutual funds) to assess defaults in payment of principal/interest which is solely due to the COVID-19 lockdown or operational challenges created by the Moratorium on a case-to-case basis and allowed them to not declare defaults in such cases. SEBI has allowed the relaxation to continue till the Moratorium imposed by RBI is lifted. While it is true that if this relaxation had not been given by SEBI, it is likely that a large number of companies would have defaulted on payment of principal/interest due to the financial impact of COVID-19, and there would have been downgrade of a lot of entities. However, considering SEBI has left it to the discretion of credit rating and valuation agencies to assess and determine whether or not to declare default, it is possible that companies who would have anyway defaulted (even in a non-COVID-19 era) may seek benefit from such relaxation.
Apart from relaxations granted for determination of default in servicing of debt, various relaxations have been provided to listed companies for raising of capital. It is likely that due to the lack of investor appetite and stringent regulatory requirements, listed companies would struggle with raising capital in the current market. Therefore, SEBI made it easier for companies to undertake a fast track rights issue. Under regular circumstances, only a company who has been listed and in compliance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) for 3 years is permitted to undertake a fast track rights issue. SEBI has now reduced this period to 18 months, allowing younger listed companies to seek capital infusion. Further, the minimum subscription requirement for a successful rights issue has also been reduced from 90% to 75% of the issue size. Listed companies have also been allowed by SEBI to raise further capital (until 31st December 2020), upon completion of only 6 (six) months from the date of the preceding buy-back, as against the minimum period of 1 (one) year which is stipulated under the SEBI (Buy-back of Securities) Regulations, 2018.
For day-to-day operations, listed companies have been given several relaxations from compliance with the LODR Regulations. SEBI has granted listed companies a relaxation in filing of their quarterly and annual financial results till 31st July 2020. Apart from the above, SEBI has granted various other relaxations with respect to submitting the corporate governance report, shareholding pattern and compliance certificate.
In order to ensure transparency and investor protection, SEBI has directed all listed companies to disclose the impact of COVID-19 on their business operations, financials, and performance, both qualitative and quantitative on an ongoing basis. From a review of the disclosures uploaded, it appears that companies are reluctant to disclose the full extent of the financial impact and losses that have been incurred in view of COVID-19. Only time can tell whether this is due to the apprehension of crash of share price in an already bearish market or genuine inability to quantify the actual losses that have been caused on account of the shutdown of plants and operations due to the pandemic.
SEBI has not yet granted an equivalent suspension of payments on principal and interest in relation to listed debt securities (such as the Moratorium imposed by the RBI). This may be because a sizeable portion of investors in listed debentures are retail investors and mutual funds for whom non-payment will create financial hardships in an already strained situation. This created a peculiar problem for non-banking financial companies (“NBFCs”) who raise money by way of debentures. The cash in-flows of such NBFCs have been hampered by the Moratorium, but there has been no relaxation given in relation to the redemption of non-convertible debentures issued by them. This may trigger cross-default and cross-acceleration across multiple transactions, thereby leading to a domino effect.
SEBI has however been mindful of the fact that steps need to be taken in maintaining the strength of the market for defaulted debt securities in times where companies have been defaulting on their payments. There is a need for such market in the COVID times. In furtherance thereof, SEBI has introduced an operational framework for transactions in defaulted debt securities post their redemption date, under the provisions of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, which will be effective from 1st July 2020. Vide this framework, SEBI has permitted transactions to be conducted in ‘defaulted’ listed debt securities with certain conditionalities on the issuer, and the debenture trustee, depository, and the stock exchange.
In times where the economy is dealing with a global pandemic, the role of the capital market regulator, SEBI has become all the more significant. The relaxations provided to listed companies have been a welcome move, and in such unprecedented times are necessary to reduce the inordinate amount of logistical and practical burdens. The regulator has tried to tread the fine line between taking measures to enable companies to carry on their operations and, protecting the interests of investors. While companies may fear that projections of the impact of COVID-19 may subject them to scrutiny and criticism, investors are entitled to receive accurate disclosures of the impact of COVID-19.
One can only wait and watch to find out the long-term impact of this global pandemic and whether the measures introduced by SEBI to mitigate the same have been satisfactory to cushion the impact of COVID on the capital markets.