Is Covid-19 Pandemic Crisis Forcing Us To Think Differently?

The year 2020 has come bearing severe setbacks for the Indian economy. Amidst the already existing tell-tale signs of recession from the beginning of the year, the crisis now has reached a worse state, with the pandemic of the Covid-19 forcing majority of the workforce into a country-wide lockdown.

With inter-state and international borders being completely sealed off along with global travel restrictions, both domestic and international trade is facing a massive slowdown, while industrial production and manufacturing of all non-essential goods are at a halt.

Prima facie, sports and entertainment, travel and tourism, retail, hospitality sectors are the worst hit, with consumer focus shifting to emergency goods and essential services. The financial services sector, which was already grappling with the after-effects of defaults, is also struggling, especially from collections and NPA management perspective.

However, modern market economics is a complex mishmash of cyclical interdependencies, the ripple effect of the pandemic across all sectors is going to be tremendous. While consumer-based industries would increasingly serve as the ‘first-rush’ in this battle against Covid-19, the domino effect on B2B segments cannot be ignored.

Simplistically put, lack of demand for goods and services at the consumer level and the consequent cash crunch thereby will hit the supply chain management. Already coupled with its partial paralysis due to the difficulty of cross-border movement of goods and services and procurement, the supply chain disruption will, in turn, lead to a shortage of resources and raw materials that may eventually hit the B2B industries as well.

Similarly, with a decline in consumers’ disposable income, borrowings across MSME, retail may slowly decline, thereby reducing the asset base and quality for lenders, especially NBFCs. On the other hand, volatility in global markets and reduction in risk appetite may also hamper the credit line and increasing levels of defaults and non-performing assets may lead to increased liquidity pressure in the market.

Many early-stage companies may also become martyrs in this battle, given the already reduced and stalled PE/VC investments in the last few weeks. Investors would need to strike a delicate balance between ensuring viability in existing portfolios/asset class through follow-ons, as against expending resources on new investments. However, on the flip side, valuations may go through a free-fall, thereby increasing affordability.

Given the splurge of queries on deferring performance obligations under business agreements, such as rental agreements for office/co-working spaces, service and procurements agreements, debt agreements, certain clarifications/announcements by the government pertaining to force majeure clause covering the pandemic in central government procurement contracts for external trading perspectives and granting of 3 months moratorium on payment of instalments, thereby reducing the burden of debt, have been refreshing.

Many public and private sector banks such as SBI, Canara Bank, HDFC, ICICI, Axis Bank have started implementing this for customers.

Force majeure clauses have become rather significant. First, one needs to identify whether as per the terms of a contract, this would be a force majeure event (FME). In the absence of specific reference to epidemics, reliance has to be placed on provisions such as ‘any events beyond the reasonable control of the parties”. Secondly, consequences upon the occurrence of FME have to be looked into. Some contracts may provide for due notification and deferment of performance obligations.

The continued occurrence of FME could also be a reason for termination. One can also resort to the common law doctrine of frustration of contract. This doctrine, however, does not allow deferment of performance.

To ensure business continuity, a practical approach would be to initiate dialogue and enter into a well-mediated understanding in relation to terms of deferment, time-period for such deferment, ability to extend the term, if required.

Work from home has become the new normal, enabling continuity of service. However, the lack of any labour jurisprudence in India on the same has led to some ambiguities.

Most of these could be addressed through a 2-pronged approach of:

(a) policymaking including provisions on

• categories of covered employees (for instance, it may not be practically feasible to avail WFH, such as contractual workers);
• the process to be followed and compliance with other company policies during this period;
• guidelines for usage of company assets and consequences in the event of damage; and

(b) use of technology such as VPN, secured protocols for internal data sharing, using productivity mapping tools, ensuring that computer resources have security software uploaded and constantly upgraded and conducting frequent cyber-security checks.

This construct, however, becomes redundant in the context of retail, aviation, hospitality industries. Although the government has notified certain worker protection measures in this regard, the effect of these on start-ups and MSMEs needs immediate attention. The start-up ecosystem supports a significant percentage of our workforce and crippling this will have a much longer-term impact on the economy.

Strength planning, strategy adoption for better resource management, folding in non-essential or marketing projects, projects not yielding immediate returns, etc. are some of the elements that start-ups especially need to focus on.

If not anything else, these are times that remind us of the importance of bad-weather planning. Regular communication with the team, contractual partners and other stakeholders, and adopting austerity measures could be key elements to soften the blow. Only times will tell how newer challenges unfold around us and push us to think differently and be innovative.

[The article is co-authored by Archana Khosla Burman, founder partner, and Sohini Mandal, associate partner at Vertices Partners.]

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