COVID-19: RELAXATION IN START-UP LAWS

By Venkatesh Agarwal

Start-up Assistance Scheme

Recognizing the multiple financial and operating difficulties faced by start-ups, the Small Industries Development Bank of India (‘SIDBI’), which also acts as an implementation body for the ‘Fund of Funds’ for start-ups, has implemented the ‘COVID-19 Start-up Assistance Scheme’ (hereinafter “the Scheme”) which is intended to offer assistance to those qualified start-ups who have flourished.

The qualifying requirements under the Program shall comprise the following start-ups:

• A minimum of 50 employees;
• A positive net value;
• Received funding from SEBI approved alternative investment funds or VC / PE / Angel funds that invest in start-ups;
• Minimum turnover of INR 20-60 crores (for the financial year 2019 and the financial year 2020);
• Be registered for fewer than ten years; and satisfies the criteria of the promoters and/or the owners of the start-up to have invested their own money in the company.

As per the policy, start-ups that were EBITDA positive in December 2019 or a successful EBITDA estimate for the quarter ending June 2020 will also be included.

In addition, under the policy, working capital loans of up to INR 2 crores at an interest rate of 10.5% will be provided to qualifying start-ups for a term of up to 36 months

Relaxation to Listed Companies

On 6 May 2020, the Securities and Exchange Board of India (“SEBI”) allowed listed entities to submit a letter of offer on the question of share rights to shareholders through electronic means in view of the on-going situation arising from COVID-19. Pursuant to the SEBI circular, the Ministry of Corporate Affairs (“MCA”) released a circular on 11 May 2020 clarifying this, in the case of ownership rights (opening up to 31 July 2020) provided by listed firms, in the case that the firm complies with the above-mentioned SEBI Circular, it will not be treated as a violation of the provisions of section 62(2) of the Companies Act 2013 provided if the business were unable to submit a letter of offer to the shareholders via registered post or speed post or courier.

Additional relaxation in relation to compliance with certain provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 in light of COVID-19

On 12 May 2020, SEBI provided relief to specified organizations from some requirements of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (“LODR”). The following relaxations have been given to the organizations mentioned under the LODR:

Relaxations provided by the circulars released by the MCA-

i. The Ministry of Corporate Affairs, vide circulars of 8 April 2020 and 13 April 2020 issued other relaxations for businesses, including the holding of the Extraordinary General Meeting (EGM) by Video Conferencing (VC) or other audio-visual means (OAVM) (hereinafter referred to as ‘electronic mode’ in this Circular).

Further, vide circular dated 5 May 2020 also applied these relaxations to the company’s AGMs held during the 2020 calendar year; the circular further prohibited the printing and submission of annual reports to shareholders. Consequently, the following relevant requirements of the LODR are relaxed / have been waived:

1. Requirement to submit actual copies of the annual report to shareholders – This provision has been relaxed for specified companies who perform their AGMs within the 2020 calendar year (till 31 December 2020);
2. Requirement of proxy for general meetings – the requirement of sending proxy forms for general meetings if the meeting is held electronically has been dispensed with till 31 December 2020, and
3. Requirement of warrants for dividends / cheques. In cases where shareholders’ email addresses are available, the identified entities are advised to obtain bank account information and to use the electronic payment methods stated in Schedule I of the LODR.
4. Relief from the publishing of newspaper advertising-In consideration of the on-going lockout and the resultant bottlenecks related to print editions of newspapers, this exemption from the publishing of newspaper ads has been applied to all activities planned till 30 June 2020.
5. The requirement of publishing quarterly consolidated financial results for certain categories of listed entities has also been relaxed.

Relaxation from the applicability of SEBI’s earlier circular on non-compliance with the Minimum Public Shareholding (MPS) requirements

On 14 May 2020, SEBI provided relief to some listed entities from compliance with the earlier SEBI Circular of 10 October 2017 (which sets out the process to be adopted by recognised stock exchanges/depositories with regard to minimum public shareholding (MPS) non-compliant listed entities, their promoters and administrators, including fines levies, freezing of promoter assets, etc.).

The latest circular notes that all companies for which the time period for compliance with the MPS requirements is between 1 March 2020 and 31 August 2020 will not be liable to disciplinary action by approved stock exchanges because they have not been able to comply with the MPS requirements. Therefore, any disciplinary proceedings, if any, taken by Stock Exchanges for the period from 1 March 2020 to the date of non-compliance by those listed organizations with the MPS specifications shall be suspended.

Relaxation relating to procedural matters Takeovers and Buy-back

On 14 May 2020, SEBI issued one-time relief to classified entities (effective with immediate effect) from certain regulatory provisions pertaining to competitive bidding and buy-back offers valid until 31 July 2020 pursuant to SEBI (Substantial Acquisition of Securities and Takeovers) Regulations, 2011 and SEBI (Buy-back of securities) Regulations, 2018. The Circular notes that:

a. The delivery to the shareholders of the letter of offer and/or tender type and other associated content of the contract can be carried out through electronic transmission subject to the fulfilment of certain conditions;

b. The purchaser/company and the bid advisor shall arrange for the online review of the content records.

c. Attempts should be made, as far as practicable; to conform to the current approved system.

Decisions For The Monetary Policy Committee In View Of The Covid-19 Pandemic

The RBI Monetary Policy Committee (MPC) conducted an off-cycle meeting between 20 and 22 May 2020 instead of the expected meeting between 3 and 5 June 2020. At the conference, the MPC discussed domestic and global trends and their consequences for recognizing the real wrath of the pandemic and for looking accordingly to put the economy back on its feet.

Consequently, the initiatives announced by the MPC on 22 May 2020 may be narrowly specified in the following four categories:

1. Measures aimed at enhancing the efficiency of businesses and business participants;
2. Measures to promote exports and imports;
3. Efforts to further ease the financial burden induced by COVID-19 instability by offering debt relief and enhancing access to working capital;
4. Measures to alleviate the financial pressures faced by the governments of the World.

Below are the main steps taken by the MPC to resolve the present crisis situation:

1. Reduction in the Loan rate-Repo rate was lowered by 40 basis points from 4.4% to 4.0% with immediate impact. As a result, the Marginal Standing Facility rate and the Bank rate decreased from 4.65 per cent to 4.25 per cent and the Reverse Repo rate decreased from 3.75 per cent to 3.35 per cent.
2. Steps for optimizing the operation of economies and business participants-
3. A special refinancing facility of 15,000 crore extended to SIDBI (at the policy repo rate of RBI for a term of 90 days for on-lending/refinancing) to be rolled over for a further duration of 90 days in order to provide greater stability to SIDBI.
4. In view of difficulties expressed by Foreign Portfolio Investors (FPIs) and their custodians under the Voluntary Retention Route (VRR) scheme on account of COVID-19 related disruptions in adhering to the condition that at least 75% of allotted limits be invested within 3 months, it has been decided that an additional 3 months’ time will be allowed to FPIs to fulfil this requirement.
5. Steps to boost imports and exports-
6. Increase in the overall permissible duration of pre-shipment and post-shipment export credit allowed by banks from the present one year to 15 months for disbursements up to 31 July 2020;
7. Extending the INR 15,000 crore credit line to the EXIM Bank for a maximum of 90 days (with a rollover of up to one year) to allow it to use the US dollar swap facility to fulfil its foreign currency capital requirements;
8. Extension of the time period for completion of remittances from regular imports (i.e. excluding imports of gold / diamonds and precious stones / jewellery) to India from 6 months to 12 months from the date of shipment for such imports made on or before 31 July 2020.
9. Measures to alleviate financial tension by delivering debt relief and enhancing access to working capital:
10. Earlier, on two different occasions (27 March and 17 April 2020), the RBI declared such regulatory steps relating to (a) the granting of a 3-month moratorium on fixed-term loans; (b) the deferral of interest for 3-month working capital installations; (c) the relaxing of the conditions for funding working capital through the margins or reassessing the working capital cycle; (d) protection from being listed as ‘defaulter’ of supervisory reports and reports to credit management companies; (e) extension of recovery deadlines for impaired properties; and (f) designation of assets, by removing a 3-month suspension duration, etc. by lending entities. In consideration of the duration of the lock-up and the on-going interruption of COVID-19, the above-mentioned steps will be prolonged by another 3 months from 1 June 2020 to 31 August 2020 and the maximum span of implementation of the steps will be expanded to 6 months (i.e. from 1 March 2020 to 31 August 2020).
11. The lending institutions are required to return working capital spreads to their original rates by 31 March 2021. Likewise, steps related to the reassessment of the working capital process are being expanded until 31 March 2021.
12. Lending institutions are now allowed to turn the accrued interest on working capital loans for cumulative deferment duration of 6 months (i.e. from 1 March 2020 to 31 August 2020) into a payable interest-bearing loan which will be completely repaid within the current financial year ending 31 March 2021. To order to promote a greater distribution of money to businesses, it was agreed, as a one-time step, to raise the exposure of the bank to a community of associated counterparties from 25% to 30% of the bank’s qualifying capital base. The upper cap will extend until 30 June 2021.
13. All other terms of the Circulars of 27 March 2020 and 17 April 2020 shall remain valid mutatis mutandis.
14. Steps to alleviate the financial restrictions faced by State governments-Relaxation of the rules regulating removal from the Consolidated Sinking Fund (CSF) but at the same time ensuring cautious depletion of the balance of the CSF, which allows States to reach some 45% of the balance of the CSF, due in 2020-21 and shall be effective immediately and valid till 31 March 2021.

Amendment of Schedule VII of the Companies Act, 2013

On 26 May 2020 the MCA amended the terms of Schedule VII of the Companies Act 2013 pertaining to Corporate Social Responsibility (CSR). Schedule VII has been updated to include any donation to the “Prime Minister’s Citizen Assistance and Relief in Emergency Situation Fund (PM CARES Program)” in the scope of programs that can be included by businesses in their CSR policies. Consequently, any donation to the PM CARES Fund will count as qualifying CSR spending. The law shall be considered to have been valid from 28 March 2020.

Reclassification of criteria for micro, small and medium enterprises

On 1 June 2020, the Ministry of Micro, Small and Medium Enterprises released a notification on the “Criteria for the Classification of Micro, Small and Medium Enterprises” which comes into force on 1 July 2020. At the end of the earlier notification of 30 September 2006, the Central Government notified the following conditions for the designation of micro, small and medium-sized enterprises, namely:

1. A micro-enterprise where the production in Plant and Machinery or Tools does not surpass one crore rupees and turnover does not surpass INR 5 crore (50 million);
2. A small company in which the production in Plant and Machinery or Machines does not surpass 10 crore rupees and turnover does not reach INR 50 crore (500 million);
3. Medium company, where the expenditure in Plant and Machinery or Machines does not surpass fifty crore rupees and turnover does not reach INR 250 Crore (2.5 billion).

The Companies (Share Capital and Debentures) Amendment Rules, 2020

On 5 June 2020, the MCA released the Companies (Share Capital and Debentures) Amendment Rules, 2020. The amendment provides that a start-up firm, as specified in notification number G.S.R. 127(E) dated 19 February 2016 released by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, may offer sweat-equity securities not exceeding 50 per cent of its paid-up capital up to 10 (Ten) years from the date of its incorporation or registration, which was pr. In turn, the amendment further modifies the rules pertaining to the bond redemption fund and the contribution or retention of the amount in view of the debts which have matured throughout the year.