The spread of pandemic COVID-19 has left the entire world grappling with its negative impact on the socioeconomic 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. While economists and experts will discuss and debate on their assessment of the extent of repercussions on the overall economy, the signs of fiscal impact are for everyone to see. Albeit in varying proportions, all the sectors of the economy remain severely affected.

In these difficult times, the primary 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.

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. Such matters have forced the owners to take unpopular decisions of downsizing, initiating pay cuts, discontinuance of product lines, operations, etc.

Handling these challenging times may require the organizations to adopt proactive realignment/ restructuring/curative measures. In this article, we have tried to cover certain critical issues that are anticipated in these times. Some of these measures may be looked at along with the regulatory and tax aspects requiring consideration.

Business Sustainability

For organizations operating on a small scale, to sustain in this phase is indeed a challenge. From a survival perspective, achieving economies of scale, effective administration, consolidation strategy at a Group level may be looked at as a plausible solution. Merger, demerger, acquisition, or a takeover could be considered to achieve this objective. This step may be viewed after a thorough evaluation of the following areas:

  • 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, which would result in the need for identifying alternate financing modes. The determination of the most suitable mode would require evaluation of the permissibility, limits under Company Law, Exchange Control Regulations, and tax considerations.

In an Intra-Group scenario, while some of the entities may be in a cash surplus situation, others may require it urgently. Effective circulation/utilisation of the same within the Group would be the ideal solution. However, this calls for closer examination of the provisions dealing with inter-company funding and transactions under the Company Law, tax implications such as deemed dividend provisions, Transfer Pricing provisions.

Considering the overall objective, effective deployment and fund-raising strategies would be required to be devised. Even here, the consolidation of such entities could also 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, amendments in the same for relaxation of terms, or discontinuance of the entire agreement. This may also entail penal or default charges for breach of terms of a contract, default in compliance.

Along with the contracts pertaining to routine operations, even the key strategic agreements – Shareholders' and Share Subscription/Purchase Agreement, Joint Venture Agreement, etc. may stand impacted.

Compliance with a 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 key aspects that must be handled prudently. Considering the sensitivity, effective management, and delicate handling of the overall process would help in avoiding any impact influencing the control and management, governance issues, disagreements on key decisions, and deadlocks, especially in a Joint Venture scenario.

While this would be on the operational and commercial front, there could be a 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. With the inability of the borrowers/debtors to discharge the dues, the chances are high that they may have to settle for a haircut. This could be either voluntary or under the debt restructuring exercise through IBC proceedings. For the borrower/debtor, it would be write-back of the payables.

Write-backs, as well as write-offs, would require consideration of the 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 has started becoming a grave issue. This is expected to result in inventory obsolescence, impairment in valuation, etc. As per the Financial Reporting requirements, accounting entries for provision for obsolescence, impairments, write-offs would be forming a part of the financials.

Tax and regulatory implications on account of these provisions/impairments/write-offs 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 below aspects:

  • Ongoing litigations
  • Funds for distribution, capital, reserves and surplus position
  • Timeline
  • Tax and implementation cost
  • Cash flow considerations

Similarly, based on the impact on operations, profitability, and various other key considerations, Management at Group level may look at closing down of subsidiaries, branch offices, curtailing the operations at several locations. This may involve the repatriation of the closure proceeds. Entity closure and repatriation of closure proceeds have tax implications – dividend tax, capital gains taxability, etc. The involvement of overseas jurisdiction (either holding company/head office being overseas and Indian subsidiary/branch office or viceversa) would require a detailed evaluation of the Exchange Control Regulations as well.

Utilization of lockdown 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.

Any challenging situation comes with a 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 a very reasonable price. There are several benefits attached to restructuring, such as achieving competitive advantages, synergies of operations, unlocking shareholder's value, eliminating duplicate facilities/processes, diversification and sustainability in the long run.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.