To battle the ongoing COVID-19 pandemic, the central government and the various state governments imposed a nationwide lockdown in India. Additionally, to arrest the spread of the pandemic, government authorities and corporates are promoting “work from home”, and wherever necessary to work with minimum work force. Acknowledging the difficulties faced by corporates on account of the threat posed by COVID-19, requiring social distancing in day-to-day functioning, governmental authorities have granted various exemptions and reliefs by issuing circulars and amending rules to ease compliance requirements to be complied by companies.

This blog analyses the recent reliefs and relaxations announced by the Ministry of Corporate Affairs, Government of India (MCA), and the Securities and Exchange Board of India (SEBI), which may have an impact on financing transactions.

Dispensation of physical presence for board meeting: Section 173(2) of the Companies Act, 2013 (Act) provides for participation of directors in a meeting of the board by either in person or through video conferencing (VC) or other audio visual means (OAVM), except if the matters as specified in Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014, are being transacted in such a board meeting. Matters as specified in Rule 4, which cannot be dealt with in a meeting through VC or OAVM, relate to: (a) approval of the annual financial statements; (b) approval of the Board’s reports; (c) approval of the prospectus; and (d) audit committee meetings for consideration of financial statement (collectively Restricted Matters).

In view of COVID-19, MCA has relaxed the requirement for holding physical meetings in relation to Restricted Matters as well until June 30, 2020[1].

While the aforesaid relaxation is a welcome change, however, from a financing transaction perspective, it is noteworthy that the board resolutions that are generally required to be passed for borrowing monies, furnishing guarantee or providing security in respect of loans, and/or to issue securities under section 179 (3) of the Act, did not fall within the domain of Restricted Matters and participation in board meetings dealing with such matters was, in any case, permitted through VC or OAVM.

Passing of ordinary and special resolutions in a shareholders meeting: The general dispensation with respect to meetings to be conducted through VC or OAVM, as was available in respect of conducting board meetings, is not offered under the Act for conducting of the meetings of the shareholders. Section 108 of the Act and rules made thereunder provides for relevant companies like listed companies or having not less than one thousand members, to allow e-voting (including remote e-voting) in case of general meetings convened by them and to exercise the right of vote through e-voting and section 110 of the Act, on the other hand, allows the companies to pass resolutions (except items of ordinary business and items where any person has a right to be heard) through postal ballot (which includes electronic ballot and electronic voting under section 108 of the Act).

On account of the COVID-19 pandemic, MCA vide its circulars[2] has requested companies to take all decisions of urgent nature, which are unavoidable and require the approval of members, other than items of ordinary business[3] or business where any person has a right to be heard, through the mechanism of VC and OAVM in an extra ordinary general meetings (EGM) until June 30, 2020, in accordance with the provisions of the Act and rules made thereunder.

Considering the challenges of COVID-19, it is a much required initiative from the MCA to clear the air over the holding of the shareholders meetings in the present times.

While, the earlier mentioned circulars did not deal with the mechanism of holding annual general meetings (AGM), but in view of the continuing restrictions on the movement of persons, the MCA vide its circular[4] has now also allowed companies, except the companies whose financial year has ended on December 31, 2019[5], to conduct their AGM’s through VC or OAVM, during the calendar year 2020, subject to the fulfilment of certain requirements. Further, in such meetings, other than ordinary business, only those items of special business, which are considered unavoidable by the board, can be transacted.

Since, the shareholder resolutions that are typically required to be passed by a company in relation to a financing transaction (for example, shareholders resolution under: (a) section 180(1)(a) of the Act for the creation of charge over undertaking; (b) section 180(1)(c) of the Act for borrowing limits; (c) section 62(3) of the Act for conversion of debt to equity; (d) section 42 of the Act for offer or invitation for subscription of securities on private placement; (e) section 185 of the Act for loan to directors, and (f) section 186 of the Act for loan and investment by company) are not items of ordinary business in terms of Section 102 of the Act, until June 30, 2020 these matters can be transacted by holding a meeting through VC or OAVM where votes can be cast through the mechanism of postal ballot/e-voting in accordance with the provisions of the Act and rules made thereunder.

In relation to the circulars issued by the MCA granting relaxations for holding board meeting and shareholder meeting which have been discussed above an interesting aspect which needs to be considered is regarding the  enforceability of the circulars issued by MCA and how far companies may rely on them. This aspect has been discussed in detail in our blog “Ministry of Corporate Affairs Circulars – Are They Legally Enforceable?”

Companies Fresh Start Scheme (CFSS): In order to give an opportunity to the defaulting companies and to enable them to file the belated documents in the MCA-21 registry, MCA has vide a circular[6], introduced a scheme namely “Companies Fresh Start Scheme, 2020 (CFSS-2020)”, condoning the delay in filing of the annual return and financial statements and various other statements, documents, returns, etc., required to be filed on the MCA21 electronic registry within the prescribed time limits, insofar as it relates to charging of additional fees, and granting of immunity from launching of prosecution or proceedings for imposing penalty on account of delay associated with such filings[7]. However, no immunity is available from other consequential proceedings.

It is to be noted that in relation to the financial transaction, the CFSS scheme is not applicable, where any increase in authorised capital is involved (Form SH- 7) and also for the delay in filing of the charge related documents (CHG-1, CHG-4, CHG-8 and CHG-9). Further, as Section 42(4) of the Act provides for filing the return of allotment (PAS-3) before utilising the money received from private placement, immunity is available under the CFSS from penalties arising from delay of such filing of PAS-3, but not for breaching Section 42(4) of Act.

On account of the non-applicability of the scheme, with respect to delays in filing of charge related documents, the scheme may not really have any implications from the purview of financing transactions.

Public issue and private placement: SEBI vide its circular[8] has allowed companies, compliant with the SEBI (Listing Obligations and Disclosure Requirements) Regulations (LODR), to disclose unaudited financials, with limited review report along with the offer documents, instead of audited financials, for the issuance of non-convertible debentures/non-convertible redeemable preference shares/ commercial paper, proposed on or before May 31, 2020, by public issue or private placement of debt securities.

The requirement of providing audited financials along with the offer documents, especially considering that no relaxation has been granted by the MCA to transact the matters considering financial statements in a general meeting of the members through VC or OAVM, was a hurdle for companies that propose to issue and list debt securities by public issue or private placement and the relaxation granted by SEBI in this regard will provide the much required relief to the companies.

Credit Rating: In view of the Reserve Bank of India (RBI), on March 27, 2020, permitting lenders to grant a moratorium of 3 (three) months with respect to payments under the term loan and working capital/ overdraft facilities falling due between March 1, 2020 and May 31, 2020, SEBI has relaxed the requirements for recognition of default based on the guidelines issued vide its circulars^[9], until May 31, 2020. Accordingly, SEBI has advised the credit rating agencies (CRAs), that based on their assessment, if CRAs are of the view that the delay in payment of interest/principal on loan servicing, working capital facilities, etc., has arisen solely due to the lockdown conditions, creating temporary operational challenges in debt servicing, including due to procedural delays in approval of moratorium on loans by lending institutions, they may not consider the same as a default event and/or recognise the default.

Conclusion: MCA and SEBI have been proactive in understanding the impact of the COVID-19 pandemic and acknowledging the challenges faced by the stakeholders during these testing times and has till now granted reliefs and relaxations to companies to navigate through the challenging times. In connection to the financial transactions, the said relaxations and reliefs have addressed and resolved obstacles in relation to passing corporate authorisations for financial transactions, which may have been caused due to the COVID-19 pandemic.

[1] Notification dated March 19,2020

[2] General circular No. 14/2020 dated April 8, 2020 and General circular No. 17/2020 dated April 13, 2020

[3] Items of ordinary business as provided u/s 102 of the Act, i.e. (a) the consideration of financial statements and the reports of the Board of Directors and auditors; (b) the declaration of any dividend; (c) the appointment of directors in place of those retiring; and (d) the appointment of, and the fixing of the remuneration of, the auditors.

[4] General circular No. 20 /2020 dated May 05,2020.

[5] By virtue of the General Circular No. 18/2020, dated April 21, 2020, the companies whose financial year ended on December 31, 2019, have been allowed to hold their AGM by September 30,2020,

[6] General circular No. 12 /2020 dated March 30,2020

[7] Filing fees for filing such statements, documents, returns, etc is governed by section 403 of the Act read with Companies (Registration Offices and Fees) Rules 2014.

[8] SEBI/HO/DDHS/ON/P/2020/41 dated March 23, 2020

[9] CIR/MIRSD/CRA/6/2010: http://www.sebi.gov.in/legal/circulars/may-2010/guidelines-for-credit-rating-agencies_1467.html SEBI/HO/MIRSD/MIRSD4/CIR/P/2016/119: http://www.sebi.gov.in/sebi_data/attachdocs/1477999985100.pdf?QUERY