India - Corporate House-Keeping During A Crisis.
Legal News & Analysis - Asia Pacific - India - Regulatory & Compliance
23 April 2020
Secretarial compliances, periodic reporting and disclosure requirements, programmed into the DNA of listed companies, often proceed seamlessly following protocols defined by the legal regime and industry best practices. However, with social distancing advisories changing the way in which corporate India goes to work, management and secretarial teams will need to re-assess established protocols and approach day to day internal housekeeping matters a little differently in the coming months.
Set out below are some of the key day to day management matters that companies will have to approach with pragmatism and ingenuity:
- Although regulators have relaxed the requirement for the mandatory number of board meetings during this period, the boards of companies are going to have to meet frequently (albeit virtually) to take stock of the situation periodically. Companies should anticipate increased scrutiny of management decisions taken during this period and ensure that all management decisions are recorded in adequate detail.
- Further, IT systems should be strengthened, and official communications should be facilitated via secured communication lines to ensure confidentiality of information. Employees and management alike, should be cautioned to exercise discretion while discussing business related matters.
- Companies will be required to closely monitor key developments likely to have a material bearing on its business and operations to be able to comply with the mandatory disclosure to stock exchanges as per internal disclosure policies and applicable SEBI regulations. For instance, temporary closure of plants/ facilities, termination or amendments to material contracts, disruptions in supply chains etc. on account of the pandemic will need to be communicated to stock exchanges in a timely manner. This will entail strengthening internal reporting frameworks to ensure swift escalation of important matters.
- Management should exercise caution and care with respect to forecasts and forward-looking statements proposed to be made to investors during this period. Companies should evaluate whether disclaimers and safe harbour provisions need to be updated/ nuanced in light of uncertainties surrounding disclosures .
- Risk factors, MD&A, market outlook and strategies should be carefully crafted to ensure that a balanced picture is presented. In addition to generic Covid-19 related risk factors, management should also disclose other known or reasonably anticipated company-specific risks which could have a material bearing on the business operations. Similarly, the MD&A presented in the annual report should also discuss any known or expected trends arising out of the pandemic which could have implications on business operations. Management should ensure that holistic disclosures are provided to investors after having evaluated the impact of the pandemic on the business.
- Management should also comb through past forecasts and guidance to assess whether these need to be withdrawn/ updated/ caveated in any manner. Globally, certain companies have, in good faith, withdrawn past guidance (with or without providing for updated guidance) in light of the Covid-19 outbreak. Companies should exercise caution in placing reliance/ reiterating past guidance where management are still assessing the impact of the pandemic on business operations.
- The audit process is also likely to throw up interesting challenges. In addition to addressing accounting questions and accounting estimates that are dependent on future forecasts including valuation of inventory, revenue recognition, modifications to remuneration policies etc., management will also need to evaluate how to get the audit process off the ground, given the work-from-home set up. Separately, the government has up until now not acceded to proposals to extend the current financial year. Should there be any change in position, management will need to evaluate the presentation of such financial information, including presentation of comparative financial information for ‘uncomparative periods’. In addition, companies seeking to raise capital during this period will also have to grapple with the question of disclosure of relevant financial information. With December 2019 financials becoming stale and FY 2020 financials being delayed or not being reflective of a company’s actual performance, companies will need to evaluate how best to position their financial health.
- Employees and management personnel are likely to deal with unsolicited queries from a number of sources including analysts and media houses. Companies will need to ensure that all official communication is first vetted by the management, and thereafter channelled through a designated spokesperson/ team to present consistent messaging to investors . It will be imperative to ensure that no selective information is passed on to media/ analysts during this period.
- Wide scale disruptions caused to day-to-day business operations coupled with uncertainties are likely to result in UPSI vesting in specific pockets of the workforce. Compliance teams should strictly monitor trading by designated persons and other connected persons during this period and ascertain that they are not in possession of any UPSI at the time of executing trades. Compliance officers will also need to monitor trading windows during this period. Companies should ensure that employees are alerted of their obligations under the Company’s Code on Preventing Insider Trading and issue a primer of do’s and don’ts, if required.
- Lastly, the SEBI relaxations currently contemplate an extension in timelines (until September 30, 2020) for holding AGMs only in respect of the top 100 listed companies by market capitalisation, which means the remaining listed companies will be required to comply with the existing August 31, 2020 deadline. The present relaxations provided by the MCA contemplate special business being transacted through postal ballot and e-voting and unavoidable EGMs being undertaken virtually until June 30, 2020. Should the need to practice social distancing continue, the regulators will need to consider permitting AGMs to be transacted virtually. Companies and regulators alike will need to come up with creative solutions to ensure that investors can meaningfully participate in these meetings – this could entail requiring investors to send in their questions before hand, organising a live Q&A session through virtual platforms, permitting investors to dial-in with their questions etc. Going virtual will entail significant planning on the part of Indian companies and, therefore, management teams should plan for such eventualities.
For further information, please contact:
Arjun Lall, Partner, Cyril Amarchand Mangaldas