COVID 19 Need To Restructure -Neeraj Sharma .

The spread of pandemic Covid-19 has left the entire World grappling with its negative impact on socio-economic front. With most of the countries steadily going into lockdown, the businesses across the globe have taken or started taking a hit. India hasn’t been an exception. 

The outbreak has far-reaching consequences on the businesses – disruption of supply chain management, piling up of inventory, a mounting number of accounts receivables and payables, cash management issues, defaults in honoring debt servicing obligations, just to name a few.  In these difficult times, the prime endeavor of the organizations would be to keep the business and the employees’ immune from the aftermath. However, with the resulting turbulence and uncertainty, organizations would be required to strategically align themselves with the need of the hour and take conscious decisions or even reconsider the ones taken earlier.

Handling these challenging times may require the organizations to adopt proactive realignment / restructuring measures. In this article, we have attempted to cover certain critical issues that are anticipated in these regards and measures may be looked at.

Business Sustainability

  • For organizations operating on a small scale, to sustain in this phase is indeed a challenge. From a survival perspective, consolidation strategies may be looked at.

  • Merger, demerger, acquisition, takeover could be considered to achieve this objective after evaluating the below:

  • Income Tax, GST and stamp duty consideration

  • Impact of extant tax and regulatory incentives, benefits and relaxations

  • Impact on tax losses, GST credits

  • Impact on Cash flow

  • Ease in implementation – time and cost, process, integration level issues etc.

Liquidity Management

  • The present situation is expected to pose liquidity challenges resulting in the need for identifying alternate financing modes. Identification of the most suitable mode would require evaluation of the permissibility, limits under Company Law, Exchange Control Regulations, and tax considerations.

  • Even in an Intra-Group scenario, effective circulation/utilisation of funds within the Group would be an ideal solution where some entities are in a cash surplus situation while others are in need of it. 

  • Considering the overall objective, effective deployment and fund-raising strategies would be required to be devised taking into consideration the Company Law provisions, tax implications such as deemed dividend provisions, Transfer Pricing provisions etc. 

  • Even here, consolidation of such entities could be an option for contemplation.

Strategic Arrangements and Contractual Obligations

  • The pandemic is also expected to have a bearing on the continuity of the operations related contracts and compliance. There is a strong possibility of renegotiations on the clauses or terms for their relaxation or even discontinuance of agreement. This may also entail penal or default charges for breach of terms of contract, default in compliance.

  • Even the key strategic agreements – Shareholders’ and Share Subscription / Purchase Agreement, Joint Venture Agreement etc. may stand impacted.

  • Compliance with condition precedent, condition subsequent clause, honoring the consideration discharge schedule, potential invoking of material adverse effect/change clauses, force majeure clauses etc. are going to be the key aspects that must be handled prudently.

  • Effective management and delicate handling of the overall process would help in avoiding any impact being resulted on the control and management, governance issues, disagreements on key decisions and deadlocks especially is Joint Venture scenario.

  • While this would be on the operational and commercial front, there could be multitude of implications on the legal and tax side resulting from the above.

Operational Areas

  • With cash flow management going off track, lenders/creditors are going to face a tough time in the recoverability of the receivables. Chances are high that they may have to settle for a haircut as a voluntary act or under a debt restructuring exercise through IBC proceedings.

  • Write-backs as well as write-offs would require consideration of following aspects:

    • Tax implications both under normal and MAT provisions

    • If the loan is ECB, FEMA implications – permissibility, RBI approval process, compliances etc.

  • Considering the disruption of supply chain management, distribution channels, inventory pile-up is becoming a grave issue. This is expected to result in inventory obsolescence, impairment in valuation etc.

  • Tax and regulatory implications on account of entries for provisions / impairments / write offs based on Financial Reporting requirements would require a detailed evaluation.

Business Discontinuance

  • For some of the organizations, closing the operations, though not desirable, may be inevitable. Considering closure also has several regulatory ramifications and associated practical issues, it is quintessential that an effective closure strategy is adopted after a thorough evaluation of various aspects like the time involved, funds available for distribution, capital, reserves and surplus position, tax and implementation costs, cash flow considerations, ongoing litigations etc.

  • Management may also be looking at closing down of subsidiaries, branch offices, curtailing the operations at several locations. This may involve the repatriation of the closure proceeds. This calls for closer evaluation of tax implications – dividend tax, capital gains taxability etc. as also Exchange Control Regulations, if overseas jurisdiction is involved.

Utilization of lockdown:

A – to rectify long-standing mismatches with GSTR-2A 

  • There can be some items in the purchase register of a business that have not appeared in GSTR-2A for a considerable period of time.

  • The businesses may look to identify such items and coordinate with the vendors to understand the reason for a mismatch and further rectify it. This can be easily done in case of vendors that have implemented ‘Work from Home’ in their organization.

B – to explore settlement of tax disputes 

  • The government has extended the due date of Direct Tax – Vivad Se Viswaas Scheme to 30th June 20.  

  • The due date for payment under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 has also been extended to 30 June 20;

  • Management can closely evaluate the overall position and take conscious decisions 

  • Also, considering the depreciating Rupee against dollar, MNCs may considering weigh the tax liabilities of their Indian subsidiaries and consciously decide  

Concluding Remarks

Any challenging situation comes with set of opportunities. Organizations must adapt to the changing business environment and identify opportunities for growth. Businesses that wish to take advantage of these opportunities can consider restructuring through expansions, joint ventures, and divesting struggling and non-core assets.

With valuations being severely impacted, these times would also provide opportunities to acquire stressed but quality assets at very reasonable price. There are several advantages/benefits attached to restructuring such as achieving competitive advantages, synergies of operations, unlocking shareholder’s value, eliminating duplicate facilities/processes, diversification, sustainability in the long run. Companies must consider exploring the same.

Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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