Legal & regulatory implications of Coronavirus on Indian Infrastructure

Led by Shardul Amarchand Mangaldas & Co.

Guidance through the legal & regulatory implications of Coronavirus on Indian Infrastructure

The meeting centred around three major discussion points: first, the impact of COVID-19 on ongoing and future M&A transactions and how various parties were mitigating such effects; second, the manner in which the regulatory measures are being taken in response to the pandemic; and third the contractual reliefs that could be sought by operating entities to protect themselves from the resultant impact of the virus.

COVID-19’s Impact on the Market and Changes in Transaction Structures

The discussion was initiated by an overview of the types of deals arising in the market these days. Although there has been an obvious impact on economic activity due to the pandemic, there are still various existing avenues of investment for individuals looking to purchase good assets at near-distress valuations, and companies seeking capital are actively seeking out promoters looking to increase their stakes.

The most evident COVID-19 impact on ongoing transactions has been on timelines, particularly for deals at preliminary transaction stages. There are now longer periods of time for term negotiations and to determine the appropriate term modifications in light of regulatory changes. For instance, changes in the periods for which representations, warranties and indemnities may be sought.

The pandemic’s impact on companies’ cash flows has also raised concern. To mitigate this, companies are now seeking to implement systems that include the provision of pre-closing financial support from investors, so as to tide over the difficulties ensuing as a result of the crisis. Investors plan to retain their liquidity in the market and account for the fluctuating valuations arising as a result of the outbreak and its subsequent economic impact.

Investors are looking for mechanisms such as:

• Acquisitions in multiple tranches
• Structures involving acquisition in part by equity shares and in part by compulsorily convertible instruments
• Deferred consideration structures, with the back-ended component, conversion price, or escrows linked to the target’s performance

The liquidity in the market is also being affected by the imposition of the government-approval mechanism for investments from companies of nearby countries, which has consequently affected the presence of Chinese entities participating in the Indian infrastructure space.

The Sufficiency of Regulatory Reliefs

While the moratorium to be placed on the initiation of insolvency proceedings was welcomed as a positive regulatory measure, it was noted that such a mechanism by itself would not protect the market from the vagaries of the ensuing economic slowdown. It was noted that a governmental push to restructure repayment obligations taken on by companies would be necessary to protect the economic health and viability of infrastructure entities.

It was noted that the issue herein is how comfortable lenders would be with the idea of allowing haircuts in payment obligations that did not come with the sanction of a court. The decision-making processes of lending entities and financial institutions would find it hard to allow the significant restructuring that would be required to ensure market stability, if not aided by pre-structured arrangements for altering payment requirements.

While the impending economic relief package to be brought forth by the Government of India was noted as a significant measure, the importance of allowing lenders and companies to restructure obligations outside the ambit of the Insolvency and Bankruptcy Code was also highlighted. Given the difficulties that companies may face during the insolvency resolution process, it may be of use to allow for alternative mechanisms, such as Swiss challenges or a white knight mechanism, to be utilized by companies to determine the best possible terms for renegotiating debt. The same would be of use in ensuring the continuing maintenance of liquidity with these companies, allowing them to commence and perform their commercial obligations while recovering from the impact of the coronavirus.

The discussion also involved significant engagement with the idea of ensuring that the decisions made regarding what haircuts should be allowed is kept streamlined, and decision makers are allowed to engage with financial realities in a manner that does not result in undue commercial scrutiny, which would otherwise paralyze such decision-making.

Viability of Contractual Remedies

There were two forms of remedies that were given significant consideration in this part of the discussion: force majeure protection and changes in law remedies.

Under the force majeure clauses of most concessions and power purchase agreements, a party that has been affected by a force majeure event would not be penalized for complying with its obligations thereunder for the duration of the event. This, in effect, would merely end up extending the period of the agreement under question, which does not significantly ameliorate the cash flow and reserves issues that most contractors would have during the intervening period.

On the other hand, a change in law clauses may provide protection to operators if the various lockdown orders issued by the Ministry of Home Affairs and other governmental bodies are taken as constituting a ‘change in law’ clause under the concessions and other agreements. In such a scenario, the counterparty may have the duty to restore them to the position they would have been in if this change had never occurred, which would be of significant financial help.

The position under the model NHAI concession agreement was discussed, wherein such a change in law may constitute a ‘political force majeure event’ which would allow for an extension of the term of the contract for a particular period of time, followed by significant termination pay outs if the force majeure is operative beyond a limited period of time.

The potential avenues of protection would have to be considered in light of the three phases of impact of the coronavirus. The first phase would be until March 24, where the impact of the pandemic disrupted supply chains and logistics, but without any legal recognition.he second phase would be between March 24 and April 20, which is when the lockdown was in effect, constituting the clearest grounds for a change in law claim The third would be from April 20 onward, where lockdown regulations saw significant changes and relaxations.

The need for significant precedent in this area was discussed, particularly the litigation and arbitration decisions taken after demonetization. The degree to which the aforementioned avenues may provide relief would have to be evaluated in accordance with the provisions of the operative contract.

Implications in the Aviation Sector

During the airport sector discussion, it was noted by airport developers that no sector has been hit by the coronavirus to the degree it has affected airports. While the government could revise tariffs to relieve some of the burden placed upon airport operators, the same would not be sufficient to deal with the costs and impact of the lockdown, as well as the long-term footfall reduction that airports may see. This will have a massive impact on the commercial non-aeronautical revenue they might generate. In such a scenario, measures such as providing loans or grants, as done by the US government, or allowing for deferral of revenue shares and similar payments, such as done in Brazil, may be of utility. Other potential relieving measures could include allowing for utilization of a greater percentage of non-airport land, for either usage for commercial purposes or for sale to third-party entities.

The session ended with a note that a more detailed discussion was called for, a month or two down the line when the lockdown situation in most parts of the country would have changed.