COVID-19: The Regulators’ Response- MCA, IBBI and SEBI Ease Out Norms

Abir Lal Dey, L&L Partners

Arshi Siddiqui, L&L Partners


India, like any other country in the world, is facing the most significant hardship due to the prevailing COVID-19 pandemic which had led to lockdowns and unexpected restrictions on the public as well as the corporate sector. Even though the restrictions have been relaxed to a certain extent, their limited presence and repercussions continue to place an enormous amount of distress on the Indian economy. The considerate impact of these restrictions on the economy is palpable as a result of which compliances have taken a backseat. The government aims to pave the way for a robust and more durable Indian economy which has been reflected through various relaxations and reliefs provided by several governmental agencies. This article aims to discuss the notable measures and reliefs introduced by different governmental ministries vis-a-vis Ministry of Corporate Affairs (MCA), Insolvency and Bankruptcy Board (IBBI) and Securities and Exchange Board of India (SEBI).

Measures introduced by ‘Ministry of Corporate Affairs’:

In order to help the Companies and Limited Liability Partnerships (LLPs) in India to revive themselves from economic disruptions caused by COVID-19, MCA has taken some measures by reducing certain compliances under Companies Act, 2013 (the “Act”), & other allied Acts and rules & regulations framed thereunder.

Corporate meetings while maintaining social-distancing:

MCA realised that the meetings which are a requirement under various provisions of the “Act” could not be organised due to the disruptions caused by the pandemic in the form of lockdowns and restrictions. Hence, it decided to reduce the burden on the corporate sector by introducing the following exemptions:

  • Board Meetings:

Before the pandemic, companies were allowed to hold board meetings via video and audio conferencing. However, meetings dealing with the approval of matters relating to mergers and restructuring, approval of financial statements as well as books of accounts and approval of the board’s report needed directors physically presence. Understanding the practical scenario and the fast-approaching of the end of the financial year, MCA vide notification dated June 23, 2020[1] has allowed having board meetings including all issues through Video Conferencing (VC) or Other Audio-Visual Means (OAVM) without physical presence till September 30, 2020, in accordance with rule 3 of Companies (Meetings of Board and its Powers) Amendment Rules, 2020. Initially, this relaxation was provided till June 30, 2020 vide notification dated March 19, 2020[2].

MCA, vide circular dated March 24, 2020[3], further relaxed the requirement of having not more than 120 days of gap between two consecutive board meetings, by a period of 60 days till next two quarters, i.e., till September 30, 2020. The maximum gap, therefore, between two consecutive board meetings shall not be more than 180 days, till September 30, 2020.

Consequently, these measures aim at reducing the requirement to hold board meetings during the COVID-19 pandemic in adherence to social distancing measures. The relaxations will help businesses remain compliant with rules on board meetings under the “Act” wherein foreign directors will not have to travel, and the quorum of board member required will be complete which would allow the boards of these companies to continue functioning.

  • Relaxation for meetings of Independent Directors:

As per the requirements of Schedule 4 of the “Act”, the Independent Directors (IDs) of a company is required to hold a Board meeting in the absence of non-independent directors. Failure to fulfil this requirement during this financial year would not be construed as a violation under the “Act”. However, MCA vide circular dated March 24, 2020[4] has recommended IDs to share their views amongst themselves through telephone or e-mail or any other mode of communication if they deem it to be necessary. This is beneficial for companies as considering the lockdown imposed, and in order to contain the spread, the IDs may not have adequate time and relevant information at hand to conduct such meetings.

  • Extraordinary General Meetings:

In line with the aforementioned corporate compliance relaxation, MCA released circulars dated April 08, 2020[5] and April 13, 2020[6] which allow for Extraordinary General Meetings (EGMs) of companies to be conducted virtually through VC or OAVM, which will be complemented by the e-voting facility or simplified voting through registered e-mails. The circulars provide a welcome relief in light of the COVID-19 pandemic for the passing of resolutions of members concerned with special business, other than items of ordinary business or business where any person has a right to be heard. Initially, the relaxation was provided till June 30, 2020 but after receiving requests from several stakeholders, the deadline has been further extended till September 30, 2020 vide a circular dated June 15, 2020[7].

The circulars are crucially categorised into two parts:

  • (a) Companies which are required to provide the facility of e-voting under Section 108 of the “Act” or any other company which has opted for such a facility; and
  • (b) Companies which are not required to provide the facility of e-voting under the “Act”.

The rationale behind the relaxation is to allow companies to conduct EGMs for urgent and unavoidable business without requiring shareholders to be physically present. Hence, it can be concluded that companies shall use this measure as a last resort and as long as a matter is not needed to be taken upon on a compelling urgency, it should wait.

  • Annual General Meetings:

Through a circular dated April 21, 2020[8] MCA allowed companies whose financial year ended in December, to hold their first Annual General Meeting (AGMs) within the first nine months of their current fiscal which effectively means by September 30, without it being viewed as a violation under the “Act”. Many companies requested for this leniency to comply with the social distancing norms and the nationwide lockdown in order to reduce the compliance burden on the corporate sector.

On May 05, 2020 MCA had issued a circular[9] in line with the relaxations provided under the EGM circulars to hold AGMs through VC/ OAVM, wherein, the companies would consider only items, other than ordinary business, of special business, which are deemed unavoidable by the board. Firms would need to ensure that shareholders can cast their votes through the e-voting system in order to conduct successful virtual AGMs. Furthermore, the companies which are unable to conduct AGMs as per the aforementioned circulars are advised to prefer applications for extension of AGM under Section 96 the “Act”.

This will allow companies to conduct such meetings in a prompt manner and transact the important constituents of business while allowing the shareholders to participate virtually during the lockdown. However, the circular did not touch upon issues involving the recording of attendance of members, recording of minutes, raising queries and their responses.

Companies (Auditor’s Report) Order, 2020 (CARO 2020)

MCA had announced a new format of the report of the statutory audits of companies, namely Companies (Auditor’s Report) Order, 2020 (CARO 2020) on February 25, 2020 which replaced the earlier order under Companies (Auditor’s Report) Order, 2016. The MCA vide circular dated March 24, 2020[10] has made CARO 2020 applicable for all statutory audits to the financial year 2020-21 and not to the financial year 2019-20 as was decided earlier. This will significantly reduce the burden on the companies and its auditors to deal with under CARO 2020.

Declaration for Commencement of Business:

In case the due date of 6 months from the date of incorporation of a newly incorporated company for procuring certificate of commencement of business from the MCA is expiring soon, the Board need not be concerned about the violation under the “Act” in case of delay, as MCA has relaxed the period of procuring certificate of commencement of business from 6 months to 12 months from the date of incorporation of new entity.

Non-compliance of minimum residency by directors:

As per the “Act”, every company shall have at least one director who stays in India for a total period of not less than 182 (one hundred and eighty-two) days during the financial year. Considering the prolonged travel ban across several countries (including India) or in case a resident director who is a foreign national had flown back to his/her native country during this financial year and will not be able to stay in India for 182 (one hundred and eighty-two) days, MCA will not treat the non-fulfilment of the minimum stay as a non-compliance for the financial year 2019-20.

Corporate Social Responsibility:

MCA on March 23, 2020 had provided a clarificatory circular[11] concerning the spending of the funds set aside for Corporate Social Responsibility (CSR) activities, which is a continuing commitment by businesses to integrate social and environmental concerns in their business operations, for COVID-19. Furthermore, vide circulars dated March 28, 2020[12] and April 10, 2020[13], MCA provided further clarifications and answered the following FAQs on CSR:

Contribution that shall be considered as CSR expenditure

Contribution that shall not be considered as CSR expenditure

Contribution to PM CARES Fund as eligible CSR activity under item no. (viii) of the Schedule VII of Companies Act, 2013.

Contribution made to ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’.

Contribution made to State Disaster Management Authority to combat COVID-19.

Payment of salary/ wages to employees and workers during the lockdown period (including imposition of other social distancing requirements).

Ex gratia payment made to temporary / casual workers/ daily wage workers over and above the disbursement of wages, specifically for the purpose of fighting COVID-19.

Payment of wages to temporary or casual or daily wage workers during the lockdown period.

The market is descending rapidly and, there is a fear that an economic impact of the pandemic could last long. Hence, the battle against COVID-19 needs a large amount of money, and the aforementioned contributions would serve as a significant support to the healthcare sector and boost rehabilitation efforts. However, the NGO sector fears that as corporates would start diverting their CSR funds to PM CARES Fund as it’s a high-profile entity, NGOs dependent on the CSR funds for public service activities may not get adequate assistance.

Waiving of Additional Fees for late filing:

MCA vide circulars dated March 30, 2020 introduced a scheme namely ‘Companies Fresh Start Scheme- 2020 (CFSS-2020)’[14] and revised the ‘LLP Settlement Scheme, 2020’[15] under which any “defaulting company” has been permitted to file belated documents, which were due for filing with Registrar of Companies (RoC). There will be a moratorium from April 01, 2020 to September 30, 2020 (Moratorium Period) on levying any late/ additional fees upon filings of any returns, statements, document etc. by companies or LLPs on the MCA portal irrespective of the due date of such filings. The scheme provides immunity from initiating any proceedings for imposing a penalty only in connection with such delayed filings and such immunity is not against any substantive violation of the law. This relaxation also covers procedures related to the transfer of money remaining unpaid or unclaimed for a period of seven years in terms of the provision of Section 124(5) and transfer of shares under Section 124(6) of the “Act” read with IEPFA (Accounting, Audit, Transfer and Refund) Rules, 2016, which was clarified by MCA vide circular dated April 13, 2020[16].

The benefit of this scheme will be available for all defaulting companies which have previously failed to make the required filings under the “Act” as this scheme is applicable not only for the forms and returns which are due during the Moratorium Period but also for those which were already due prior to the Moratorium Period.

Through a circular dated June 17, 2020[17], MCA has now introduced another scheme namely, ‘Scheme for relaxation of time for filing forms related to creation or modification of charges under the Companies Act, 2013’ to condone delays in such filings for charges created or modified between March 01, 2020 and September 30, 2020, including those done earlier but whose filing deadline fell within this period. Hence, these seven months would not be counted towards the time limit for the respective filings. In terms of filing fees, the ministry circular said that for filings made within the mentioned period, fees as on February 29, 2020, will be payable per form. For filings made beyond this period, fees as on October 01, 2020 will be payable. The ministry took this decision as the benefit of waiver of the additional fees was not extended to charge related filings under CFSS-2020.

Creation of charge is crucial for companies that have raised funds from banks through loans or from investors through debentures. This move will benefit the investors while also protecting the companies’ officers in default from a penalty on account of non-compliance as registering such charges with RoC during lockdown posed a significant challenge on them. However, no such relief is provided in respect of the satisfaction of charge.

Relaxation to send a notice under Section 62(2) of the “Act”:

MCA vide circular dated May 11, 2020[18] announced that listed companies that come out with rights issues (an offering of shares made to existing shareholders in proportion to their existing shareholding) before July 31, 2020 would not be required to notify shareholders about the issue through postal or courier services and the same will not be viewed as a violation of Section 62(2) of the “Act”. It is pertinent to note that capital markets regulator SEBI has come out with guidelines that allow listed companies to serve the letter of offer, application form, and other offer material, electronically.

Deposit Repayment Reserve and Debentures:

The requirement under Section 73(2)(c) of the “Act” to create the deposit repayment reserve of 20% of deposits maturing during the financial year 2020-21 before April 30, 2020 has been allowed to be complied with till September 30, 2020.

The requirement under rule 18 of the Companies (Share Capital & Debentures) Rules, 2014 to invest or deposit at least 15% of the amount of debentures maturing in specified methods of investments or deposits before April 30, 2020, may be complied with till September 30, 2020.

These extensions in deadlines were provided through circular dated June 19, 2020[19]. This is a welcome move. In the current market scenario, this extension will help those companies which have accepted the deposit, by facilitating the liquidity crisis. The relaxation on the timeline shall provide companies with the much-needed flexibility in these unparalleled times arising from this anomalous situation.

Measures introduced by ‘Insolvency and Bankruptcy Board of India’:

As IBBI is responsible for the implementation of the Insolvency and Bankruptcy Code, 2016 (IBC), it has shown flexibility in the form of the following measures to help businesses fight the tough period.

Increase of threshold:

Due to the large-scale economic distress caused by COVID-19, most companies are facing huge financial difficulties, hence vide notification dated March 24, 2020[20] IBBI and MCA had decided to raise the threshold of default under Section 4 of IBC 2016 to Rs. 1 crore from the existing threshold of Rs. 1 lakh. This move will reduce the burden on the National Company Law Tribunals (NCLT) across the country and also liberate entities from insolvency proceedings for meagre amounts.

It is interesting to note that while this move has been introduced to safeguard and protect the Micro, Small & Medium Enterprises (MSMEs) from being driven into insolvency during these onerous times, the measure may not be in line with the intent. This revision may provide relief to certain MSMEs who have financial or large operational debts. However, it fails to consider the numerous MSMEs which hold the position of “operational creditors” under the IBC whose claims are generally much below the new threshold and hence would not be able to initiate any proceedings under IBC due to the enhanced limits. This means that MSMEs will now have to look forward to civil remedies for debt recovery as the increased threshold limit would essentially drive out the operational creditors from the realms of IBC.

It is also pertinent to note that the stance on what happens to defaults in the range of Rs. 1 lakh to Rs. 1 crore that occurred before the outbreak remains ambiguous. The fate of operational debt claims where a demand notice has been issued, but insolvency has not been initiated also remains unclear. That being said, it can be opined that even if the notification will be deemed to be prospective on the basis of various judicial precedents pronounced by the Hon’ble NCLT of the Kolkata and Chennai Benches vide their Orders dated May 20, 2020 (M/s. Foseco India Limited v M/s. Om Boseco Rail Products Limited[21]) and June 02, 2020 (M/s. Arrowline Organic Products (P) Ltd v. M/.s Rockwell Industries Limited[22]), there still remains scope for interpretation of the notification and its wide-ranging implications would be revealed with time depending upon every particular scenario.

Exclusion of period of lockdown:

As per the new regulation ’40C’ of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 introduced vide notification dated March 29, 2020[23], the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak shall not be counted for the purposes of the timeline for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.

About 2,000 companies are currently undergoing resolution process under IBC. The board is of the view that given the strict timelines under IBC, it is difficult for the resolution professional (RP), the committee of creditors (CoC) and bidders to fulfil their respective obligations, during the period of lockdown. Moreover, the regulator realised that the primary duty of an RP is to make the company survive but if they did not grant the extension then all of the companies in insolvency will go into liquidation.

As per the new regulation ’47A’ of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 introduced vide notification dated April 17, 2020[24], the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak shall not be counted for the purposes of computation of the timeline for any task that could not be completed due to such lockdown, in relation to any liquidation process.

This move will prove to be of great assistance, as due to the lockdown the course of action which is to be performed as per the timelines provided under the liquidation process could not be performed and had this relaxation not been introduced NCLT would have been abundantly piled up with cases.

Insertion of Section 10A and Section 66(3) in IBC:

Under Article 123 of the Constitution, the power to promulgate ordinances when either of the two Houses of Parliament is not in session is conferred on President of India to deal with situations wherein urgent action is needed to be undertaken in case of an emergency in the country, which can righteously be referred to as the COVID-19 pandemic in the current situation. On account of the said power, the Hon’ble President of India has promulgated the IBC Ordinance 2020 on June 05, 2020[25] to effectively suspend the operation of Sections 7, 9 & 10 of IBC with respect to defaults arising on or after March 25, 2020 for a period of six months, extendable up to a maximum of one year from such date as may be notified. This has been effected by inserting new clauses, i.e., Section 10A and Section 66(3) in IBC. Section 66(3), a non-obstante clause, will provide protection to the directors of a corporate debtor as now under sub-section 66(2) no application can be filed by an RP, in respect of such defaults against which initiation of CIRP has been suspended under Section 10A of IBC. The instant Ordinance clearly enunciates that the newly inserted provision of Section 10A shall not be applicable to any defaults which were committed prior to March 25, 2020.

Firstly, this denotes that financial creditors, operational creditors and the company itself will not be able to initiate applications for corporate insolvency resolution process as long as Section 10A will be applicable. This would effectively mean that Section 14 cannot be invoked as the formation of the CoC will not take place as per the provisions of IBC. Resultantly, there would be no applicability of Section 14 of IBC as there will be the absence of moratorium for the benefit of the corporate debtor.

Secondly, this decision has been taken as due to COVID-19, the companies are facing financial stress. Hence this measure will provide relief to the corporate debtors who are facing widespread disruption of business operations across the country either in the form of finding adequate number of resolution applicants or ill functioning of logistics & poor cash flow, thus giving them a breather to revive their business.

Thirdly, this Ordinance would have more of an impact on the operational creditors which are mostly MSMEs who have been dealing with an increased amount of pressure. Considering, if buyers don’t step forward and invest into the insolvency resolution and the companies will eventually have to undergo liquidation, the instant Ordinance coupled along with the amendment increasing the minimum threshold of default from Rs. 1 lakh to Rs. 1 crore could have a disparate impact on MSMEs.

Fourthly, the present mechanism is aimed at reducing the burden of new suits before the NCLT, as only the cases pending which were filed before the suspension may continue. Hence, the corporate debtor may have to seek remedy under an alternative mechanism to enter any sort of negotiation to seek respite when the same is not available under IBC. While the present mechanism will protect the interest of small and medium enterprises by preventing fresh default and bankruptcy of entities that may become an NPA, the corporate debtor can eventually abstain creditors from selling or transferring their assets. However, it is yet to be seen that whether the intent of reducing the burden on NCLT will succeed as it is ascertained that once the expiry period is over the entire burden of the piled-up plethora of cases will fall upon the shoulders of NCLT.

Fifthly, the very foundation of IBC is based on the significant withdrawal from the debtor in possession approach to the creditor in possession and control approach. Hence, the regulatory needs to take into consideration the consequences flowing from the implementation of Section 10A by providing a median law until the suspension of Sections 7, 9 and 10 of the IBC is uplifted, otherwise entities will have to seek a remedy in the far more arduous, complex and costly provision of Section 230 of CA.

Lastly, As more clarity is being awaited from the concerned government ministry and IBBI on what could be an alternative platform for resolution of defaults going forward and the multi-fold implications of the Ordinance on various stakeholders, it is advisable for stakeholders to wait for some time rather than taking any immediate action based on the Ordinance.

Measures introduced by ‘Securities and Exchange Board of India’:

As vital economic activities require increased capital investment in businesses and processes, SEBI had announced a number of measures to ease liquidity constraints. Such regulatory relaxations will make funds more accessible to Indian corporates, individuals, etc and would support companies and other industrial bodies to function and meet the timelines during these unprecedented times. We discuss herein below some of the recent and vital relaxations granted by SEBI to ease out the compliance distress.

Advisory on disclosure of material impact of COVID–19 pandemic on listed entities under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’):

An unforeseen lockdown beyond the control of the entities, can lead to distortions in the market due to the gaps in information available about the operations of a listed entity. Hence, it is important for a listed entity to communicate to its investors and stakeholders all available information about the impact of such a lockdown on the operations of a company.

SEBI has observed that listed entities around the world have been making disclosures regarding the impact of the COVID-19 pandemic, including that on the financial condition and results of operations, future operations, capital and financial resources, liquidity, assets, etc. In light of the same, it is observed that many listed entities have made disclosures under LODR Regulations, primarily intimating shutdown of operations due to the pandemic. However, it was observed that very few entities have disclosed the financial impact of the pandemic.

On May 20, 2020, SEBI had issued an advisory[26] to listed entities to disclose the impact of material events of COVID-19 pandemic. As per the SEBI advisory, “while the lockdown and disruption are unanticipated and beyond the control of the entities, such events can lead to contortions in the market due to the gaps in the information available about the operations of a listed entity. Hence, a listed entity needs to ensure that all available information about the effect of these events on the company and its operations is communicated in a timely and efficacious manner to its investors and stakeholders.” On the grounds of this, entities are motivated to evaluate the impact of the COVID-19 pandemic on their business, performance and financials, both qualitatively and quantitatively, to the maximum extent possible and promulgate the same in a cogent manner by providing regular updates, as and when there are material developments by avoiding selective disclosures.

The illustrative list includes that companies will have to inform investors about the impact of COVID-19 on issues such as capital, financial resources, profitability, liquidity, ability to service debt and other financial liabilities, assets, internal financial controls, supply chain, demand for products and services and existing contracts that are not being fulfilled. Most importantly, they also have to assess and disclose the long-term impact on the business due to COVID-19.

This step will help in protecting the shareholders’, companies’ as well as the national interest. Not only will it provide the required information, it will also halt the unsubstantiated trading in stocks that may take place because of the impact of the COVID-19 on the financial performance of listed companies. However, it is pertinent to note that the entities will have to face the challenge of assessing the ever-evolving information.

Introduction of certain amendments relating to qualified institutions placement and voluntary open offers:

SEBI has introduced certain amendments to SEBI (Issue of Capital and Disclosures Requirements) Regulations, 2018 (ICDR Regulations)[27] and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations)[28] vide notifications dated June 16, 2020. SEBI has eased capital raising norms for listed companies by enabling the corporates to raise more capital even more frequently.

The following amendments have been introduced:

  • relaxing the norms for qualified institutions placement (QIPs) (a popular route to raise fresh capital from institutional investors) under the ICDR Regulations by easing the mandatory six-month cooling-off period between two QIPS to two weeks; and
  • amending the SAST Regulations to allow promoters to acquire beyond 5% but up to 10 % in a financial year without triggering an open offer (infuse fresh capital into their company) which can be done only through the preferential issue of equity shares.

After the latest relaxation, QIP issuances could accelerate as reducing the QIP cooling-off period will help companies raise capital at regular intervals. This will induce entities to pursue QIP as a source of raising capital instead of running into debts thereby benefitting even those listed entities who have undertaken a QIP prior to the beginning of COVID-19 pandemic. The relaxations to the SAST Regulations will allow promoters to participate in preferential issues without bothering about making an open offer. Furthermore, the relaxations open up the window for promoters who are looking forward to increase their stake during the current market situation by enabling them to infuse cash into their companies.

Proposal for Relaxations for Capital Raising by Stressed Listed Companies:

In order to facilitate fund raising by listed companies that have stressed assets, SEBI had come up with a consultation paper on ‘Pricing of Preferential Issues and exemption from open offer for acquisitions in Companies having Stressed Assets’ (Consultation Paper) on April 22, 2020[29]. In light of the aforementioned, the stock market regulator has decided to relax the pricing methodology for preferential issues by listed companies having stressed assets and exempt allottees of preferential issues from open offer obligations with immediate effect vide notifications dated June 22, 2020 by providing certain procedural relaxations under ICDR Regulations[30] and SAST Regulations[31], respectively.

To qualify as ‘stressed’, a listed company needs to satisfy two of the following three conditions:

  • (a) Disclosure of defaults on payment of interest / principal amount on certain loans and debt securities and such default should have continued for a period of at least 90 calendar days after occurrence of first such default;
  • (b) Existence of inter-creditor agreement in terms of Reserve Bank of India’s (Prudential Framework for Resolution of Stressed Assets) Directions 2019 dated June 07, 2019; and
  • (c) Downgrading of credit rating of the listed company’s financial instruments to “D”.

Companies that meet the above threshold are eligible for the following relaxations under the ICDR Regulations and SAST Regulations as has been enumerated in the Press Release dated June 23, 2020[32].

  • “Eligible listed companies having stressed assets will be able to determine pricing of their preferential allotments at not less than the average of the weekly high and low of the volume weighted average prices (VWAP) of the related equity shares during the two weeks preceding the relevant date.”

The earlier mandate of the issue price was at the higher of 2 week or 26-week VWAP which at the current scenario may not reflect the true financial condition of the company considering the fall in the stock prices due to the pandemic. This welcome move will allow ‘stressed’ entities to attract primary investments at current market price.

  • “Allottees of preferential issue in such eligible companies will be exempted from making an open offer if the acquisition is beyond the prescribed threshold or if the open offer is warranted due to change in control, in terms of Takeover Regulations.”

As per the previous SAST (Takeover) regulations, in case of change in management, it was mandatory for the acquirer to come out with an open offer to acquire the holding of those shareholders who wanted to exit the company. This offer is intended to provide the public shareholders with an opportunity to exit at the acquisition price. The proposed exemption is a relief for ‘stressed’ entities as it will protect companies in pre-insolvency and pre-debt restructuring stages.

Listed companies having “stressed assets” experience progressive fall in their share price. As a result of which the disclosures including financial results and default in servicing debts produced by such companies also infuriate the fall which leads to certain difficulties, for these firms to raise capital as per the standard norms. The Regulator seems to be keen to resolve the financial stress by allowing the listed companies to raise capital through timely financial intervention, avoid insolvency and take care of the interests of several stakeholders. It is worth noting that deprived listed companies, which do not qualify as ‘stressed’, may not be able to avail the benefit of raising capital from investors (domestic and foreign), more so because the companies need to satisfy two of the aforementioned criteria.

Operational framework for transactions in defaulted debt securities:

The current economic stress may place issuers in a position wherein they may default on their debt securities. The market regulator after receiving representations from market participants and investors vide notification dated June 23, 2020[33], introduced an operational framework for transactions in defaulted debt securities post maturity date/ redemption date under provisions of SEBI (Issue and Listing of Debt Securities) Regulations, 2008. SEBI also prescribed the obligations of issuers, debentures trustees, stock exchanges and depositories while permitting such transactions.

As per the current practices, the exchanges suspend trading/reporting of trades on debt securities before the redemption or maturity date. Depositories impose a restriction on off-market transfers that restricts transfers on and after the redemption date which essentially means the bondholders face a lot of restrictions while attempting to sell such bonds in the event of the occurrence of a default. SEBI as per the operational framework has decided to do away with these restrictions but with some checks.

According to SEBI’s circular, within 2 working days from the date of intimation from issuer or debenture trustee(s) that issuer has defaulted on its payment obligations, the depositories in co-ordination with stock exchanges shall update the International Securities Identification Number (ISIN), which is a code to identify a specific securities issue, master file and lift restrictions on transactions in such debt securities. The regulator has asked issuers, stock exchanges, depositories and debenture trustees to put in place necessary systems and infrastructure for implementation of this framework by June 29, 2020 and has also specified that the new guidelines would come into force from July 01, 2020.

This is a big relief for bond holders like mutual funds which may default due to distressed funds. This will help the owners of these defaulting debts to find a suitable market for them which is likely to be a distressed fund market for bonds as the regulator has put an end to the previous obligations of laying down a systematic procedure which was applicable in case of default.


MCA, IBBI and SEBI have been vigilant in understanding the impact of the COVID-19 pandemic and recognising the challenges faced by the stakeholders and various entities during these trying times. As a result, they have till now granted reliefs and relaxations, which will enable companies to avoid penalties on account of unavoidable delay in meeting their regulatory compliances. However, companies ought to comply with any other regulatory requirement, that has not explicitly been relaxed. Even if the effectiveness of these measures especially under IBC, remains to be seen due to the continuing threat of COVID-19 shortly, in the current scenario, the relaxations granted will ease the burden on the management of the companies, LLPs and stakeholders for a few months.

Abir Dey is a Partner with L&L Partners with the Banking & Finance team who has a rich experience in banking, projects & infrastructure, project financing, structured financing, insolvency and debt restructuring across various sectors. He has written this article along with Arshi Siddiqui, a student of Government Law College, Mumbai.

Views are personal.

Picture Credits: Union Minister of Finance and Corporate Affairs Nirmala Sitharaman along with SEBI Chairman Ajay Tyagi. (Kunal Patil/Hindustan Times) 


[1] Ministry of Corporate Affairs, (June 23, 2020) available at

[2] Ministry of Corporate Affairs, G.S.R. 186 (E) (March 19, 2020).

[3] Ministry of Corporate Affairs, General Circular No. 11 /2020 (March 24, 2020).

[4] Supra note 2.

[5] Ministry of Corporate Affairs, General Circular No. 14/2020 (April 08, 2020).

[6] Ministry of Corporate Affairs, General Circular No. 17/2020 (April 13, 2020).

[7] Ministry of Corporate Affairs, General Circular No. 22/2020 (June 15, 2020).

[8] Ministry of Corporate Affairs, General Circular No. 18/2020 (April 21, 2020).

[9] Ministry of Corporate Affairs, General Circular No. 20/2020 (May 05, 2020).

[10] Supra note 2.

[11] Ministry of Corporate Affairs, General Circular No. 10/2020 (March 23, 2020).

[12] Ministry of Corporate Affairs, Clarification on contribution to PM CARES Fund as eligible CSR activity under item no. (viii) of the Schedule VII of Companies Act, 2013, eF. No. CSR-05/1/2020-CSR-MCA (March 28, 2020).

[13] Ministry of Corporate Affairs, General Circular No. 15/2020 (April 10, 2020).

[14] Ministry of Corporate Affairs, General Circular No. 12/2020 (March 30, 2020).

[15] Ministry of Corporate Affairs, General Circular No. 13/2020 (March 30, 2020).

[16] Ministry of Corporate Affairs, General Circular No. 16/2020 (April 13, 2020).

[17] Ministry of Corporate Affairs, General Circular No. 23/2020 (June 17, 2020).

[18] Ministry of Corporate Affairs, General Circular No. 21/2020 (May 11, 2020).

[19] Ministry of Corporate Affairs, General Circular No. 24/2020 (June 19, 2020).

[20] Ministry of Corporate Affairs, S.O. 1205(E), (March 24, 2020).

[21] National Company Law Tribunal (Kolkata Bench), M/s. Foseco India Limited v M/s. Om Boseco Rail Products Limited, (May 20, 2020).

[22] National Company Law Tribunal, (Chennai Bench), M/s. Arrowline Organic Products (P) Ltd v. M/s Rockwell Industries Limited, (June 02, 2020)

[23] Insolvency and Bankruptcy Board of India, No. IBBI/2019-20/GN/REG059 (March 29, 2020).

[24] Insolvency and Bankruptcy Board of India, No. IBBI/2020-21/GN/REG060, (April 17, 2020).

[25] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, §10A & §66(3), (June 05, 2020).

[26] Securities and Exchange Board of India, SEBI/HO/CFD/CMD1/CIR/P/2020/84, (May 20, 2020).

[27] Securities and Exchange Board of India, SEBI/LAD-NRO/GN/2020/17, (June 16, 2020).

[28] Securities and Exchange Board of India, SEBI/LAD-NRO/GN/2020/14, (June 16, 2020).

[29] Securities and Exchange Board of India, Pricing of Preferential Issues and exemption from open offer for acquisitions in Companies having Stressed Assets, (April 22, 2020).

[30] Securities and Exchange Board of India, SEBI/LAD-NRO /GN/ 2020/18, (June 22, 2020).

[31] Securities and Exchange Board of India, SEBI/LAD-NRO /GN/ 2020/19, (June 22, 2020).

[32] Press Release, SECURITIES AND EXCHANGE BOARD OF INDIA, June 23, 2020, available at

[33] Securities and Exchange Board of India, SEBI/HO/DDHS/CIR/P/103/2020, (June 23, 2020).

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