Indian economy and deal-making in the post-COVID-19 era – What to expect?

We are into the third week of the nationwide lockdown in India. As the enormity of the crisis unfolded by this global pandemic with no precedent in living memory slowly unfolds in India, its economic fallouts become more evident by the day. Notwithstanding the government’s financial and economic stimulus and the RBI’s timely intervention with reduced repo rates and the moratorium on loan repayments, industrial activity across several sectors in India have plummeted – with absolute standstill in travel, hospitality, construction, and the airline sector. Though there is still consistent demand for essential products, Indian media reports also indicate salary cuts across several companies, unemployment of the daily wage earners, increased uncertainty in the continued employment of the salaried class, the general decline in stock markets, and liquidity crunch for both entrepreneurs and industrialists who are buckling-in for tougher times. The Indian economy will also receive its share of the casualty as India’s projected GDP for FY 2020 is likely to dip to 2.5% and the world is threatened into a recession.

Once the dust settles and this pandemic eventually ebbs down, there is likely to be significant changes to the Indian economic and investment climate and the companies operating in India. I have set down my preliminary thoughts on how the Indian post-COVID-19 landscape is likely to be in the short to the medium term:

1. Significant performance disparity across sectors – Healthcare, pharmaceuticals, insurance, FMCG, and the technology sectors will emerge as the new hotspots with increased demand and investments. Their strong performances would be attributed to the overwhelming demand for these products and services during the lockdown and thereafter. This pandemic will among others, affect the performance of the airlines, automobiles, hospitality, travel, construction and the real estate sectors which may experience muted to sporadic demand, highly leveraged performance and increased need for funding and governmental support for delivering any meaningful performance.       
2. Embracing automation – Like their global counterparts, Indian companies too have been keen to adopt myriad technologies to increase productivity, boost manufacturing prowess, enhance customer engagements, cut fixed costs and reduce labour dependencies. The learnings of the lockdown in India – with the central and the state governments invoking the Epidemic Diseases Act, 1897 to mandate freeze in wage cuts and job redundancies – and the economic meltdown that may follow the lockdown may dissuade companies from hiring employees for non-essential services. These services may either be outsourced in the short run or automated in the medium to the long run. Contract manufacturing and outsourcing will increase in the short run and the widespread adoption of technology will benefit technology companies in a major way.
3. Improved contingency plans – Companies will strive to improve their business resilience and contingency plans to address the supply-side disruptions faced during the lockdown. The more responsive companies may even consider backward integration for the unabated supply of raw materials during a lockdown and/or localization in supply chains of essential raw materials. Though short-term challenges may be overcome through improved strategy and planning, any systemic issues experienced by companies would require more consistent efforts in developing suitable contingency plans.
4. HR policies – Companies would also closely monitor their employment policies and standardize and upgrade existing employment policies on working from home amidst a lockdown, manner of quarantining infected employees and office spaces, uniform safety protocols for employees deployed in infected hotspots while rendering essential services, upkeep of mental health of employees during a lockdown, and routine training of the workforce to deal with a similar long term crisis. Naturally, revision in HR policies would also need to consider state-specific issues and regulations.  
5. Increase in digital transactions – Digital transactions may also surge in the post-Covid19 era. The emphasis on maintaining personal hygiene and social distancing during the lockdown will continue to reverberate in the minds of the public. While cash transactions will continue, an overwhelming majority of the conscious Indian public may prefer transacting hassle-free through e-wallets, prepaid instruments and mobile banking facilities to reduce the risk of contagion.
6. E-courts – Justice delivery through video conferencing will receive increased impetus – the Supreme court and various Indian high courts have made a start! While in-person hearings may begin once the situation normalises, increased use of digitalized filing and justice delivery mechanism will avoid jostling of shoulders in a busy Indian courtroom. 
7. Expected deal trends –

• The deal completion timelines across sectors will be increasingly affected with fewer face to face meetings and discussions and negotiations being settled through video conferences.
• M&A and financial investments into the troubled sectors will be difficult in the short run because of financial underperformance and valuation mismatches. However, distressed acquisitions of targets in the troubled sectors will be on the rise. Though large companies will be more resilient to the economic fallouts of this crisis and survive the headwinds until normalization in services, small entrepreneurs and the over-leveraged companies will gasp for funds and may turn belly-up. Competition law concerns may also emerge particularly in the unregulated and unorganized sectors where several midsized existing players may get wiped out with the market reduced to a monopoly, duopoly or triopoly.
• Across sectors, deal-making will increasingly emphasize on the purchasers’ ability to readjust a target’s valuation for future uncertainties. Purchasers may deploy a variety of risk allocation measures both for the period between signing and closing and post-closing. There will be increased use and negotiation on MAE clauses with pro-purchaser qualifications on disproportionality, working capital adjustments, the requirement of parent guarantees, earnouts and deferred consideration structures, escrows, and specific indemnities to deal with the known and unknown exigencies.
• The conventional scope of due diligence will expand to enable a purchaser to evaluate the overall impact of the pandemic on the continued business operations of the target, assess the strength of a target’s balance sheet and its preparedness to black swan events, evaluate the adequacy of the target’s insurance cover and the physical safety and mental health conditions of the target’s employees. Target’s existing contractual arrangements with customers, suppliers, and other third parties will be a subject of increased scrutiny during the diligence, particularly where a counterparty may evoke force majeure and/or termination for convenience.
• In cross-border M&A transactions, post-closing integration will be increasingly challenging if a target’s operations are spread across countries, including in territories locked down. Practical challenges associated with acquisitions and post-closing integration will increase if the purchaser or the target is also subject to any data protection regime.
• An immediate fallout of this pandemic will be increased attention in designing robust force majeure provisions that enable suspension and/or termination of performance obligations during a pandemic. It is also likely that India will witness a surge in litigation after the lockdown is lifted. Many contracting parties may challenge and/or would need to defend invocation of force majeure under their existing contracts.

It is difficult to foretell the exact ramifications of this pandemic on the Indian ecosystem. The extent of its impact would among others depend on the extent and impact of the governmental financial package for the affected sectors, the duration of the nationwide lockdown and how soon India gets rid of this pandemic. I hope the challenges to the Indian economy will not be catastrophic and industries and sectors affected in the short run can soon stand on their feet with the governmental support and intervention.

The views expressed in this article are of the author and for general information only. It is not intended to constitute or be relied upon as legal advice