Covid-19: As regulators ease rules for firms, investors aren't taking it easy

Companies battling to get in shape after a nationwide lockdown to contain the coronavirus pandemic devastated the economy have been helped by regulators, but investors are worried. Should they be?

“……and when the regulator dictates your investment policy, it’s called command capitalism.”
 
The caption appeared in a recently published pocket cartoon in a business daily, depicting a senior business executive giving a tip to his junior as they walk past the iconic BSE towers in Mumbai.
 
The Securities and Exchange Board of India (SEBI) since March this year has issued 40-odd circulars relaxing rules and compliance timelines for listed companies braving economic stress caused by the coronavirus pandemic. Two other key regulators, the Ministry of Corporate Affairs (MCA) and the Reserve Bank of India (RBI), too have issued dozens of similar notifications.

 

The regulatory relaxations range from diluting compliance requirements and timelines, filing of financial results, moratoriums on loan repayment, measures to help businesses raise money, temporary suspension of the Insolvency and Bankruptcy Code, and one-time re-structuring of stressed loans.
 
As companies revive demand and restore supply chains after the nationwide lockdown to contain the coronavirus, investors and other stakeholders fear that the relaxations could lead to reduced oversight by regulators. There is a need for greater scrutiny of financial numbers and business practices in an economic slowdown, said experts.
 
They fear that regulatory relaxations could undermine the progress in the compliance culture of corporate India. Debanshu Mukherjee, co-founder of Vidhi Centre for Legal Policy, said regulatory enforcement has improved dramatically in the last few years. This has helped compliance and investor sentiment.

 
“As India Inc. emerges from the after-effects of the lockdown, the real test for the government would be to balance the need for providing relaxations, and maintaining an appropriate level of enforcement intensity to ensure that there is no long-term erosion of investor interest,” said Mukherjee.
 
JN Gupta, managing director of Stakeholders Empowerment Services, a proxy advisory firm, said the onus lies on the board of directors of a company to decide whether to use concessions offered by regulators. Investors and other stakeholders should not panic about the relaxations but question a company's board and its actions in crises.

 
Experts said most relaxations are administrative—on account filings, restructuring, shareholder meetings—and keep the basic regulatory framework intact. “There has been no dilution in the standard of governance, the regulatory relaxations have largely been procedural in nature,” said Ajay Bahl, managing partner, AZB & Partners, a law firm.
 
Jyoti Prakash Gadia, managing director of Resurgent India, said accounting and audit standards have not been relaxed, ensuring that reported numbers have the requisite quality.
 
Regulators across jurisdictions have provided guidance to listed companies to disclose the impact of the pandemic on their business. “This ensures that there is no gap between information available to senior management and that which is available to all public shareholders,” said Yash Ashar, partner & head, capital markets at law firm Cyril Amarchand Mangaldas.

 
One notable relaxation is the MCA allowing companies to conduct general meetings and annual general meetings through video conferencing. This has enabled a larger number of investors and shareholders to participate in AGMs from various parts of the country and abroad. More than 300,000 shareholders from 473 cities and 41 countries logged into the virtual Annual Shareholders’ Meeting of Reliance Industries in July.
 
Globally, proxy advisory firms have given out guidance that companies must give more time to shareholders in such virtual meetings to ask questions of management.
 
Companies have time till December to hold their AGMs and then file financial statements and annual returns. This gives them more time before financial numbers become public and open to scrutiny.  “If there are any anomalies or discrepancies, the statutory authorities will start investigation after thorough research,” said Gaurav Pingle, a company secretary and a compliance professional.

 
For that to happen, investors have to be vigilant about disclosures made by companies and scrutinise their financial statements, said Rakesh Nangia, chairman, Nangia Andersen India.
 
An area where regulators could work on in the current times is to make disclosures by companies more regular, and on an ongoing basis. “While financial reporting is done on a quarterly basis, this still lacks the detail and insight that is present in more sophisticated markets,” said Ashar, of Amarchand Mangaldas.
 
Key regulatory relaxations given to companies for Covid-19 crisis:
 

• Companies allowed to hold general meetings through video conferencing, and given time till December to hold AGM
• Relaxation in timelines for filing of financial results
• Fresh Start Scheme and LLP Settlement Scheme introduced for companies that defaulted in filing statutory documents.

Additional fees waived off for belated returns and e-Forms

• Relaxed fund-raising rules, and disclosures under the takeover code
• Application of Companies (Auditor’s Report) Order (CARO) deferred
• Relaxation in mandatory meeting of independent directors

Extension of resolution timelines for stressed assets, followed up with one-time restructuring framework