Every
aspect of global commerce has been impacted by the COVID-19 Pandemic.
Businesses and the investors involved are no exceptions. While the governments
around the world are imposing strict limitations and restrictions on its
citizens in order fight the virus, the economy on the other hand is suffering
overwhelming losses. Contractual obligations are becoming impossible to perform
forcing the parties to invoke the clause of force majeure which allows the
parties to avoid liability in case of non-performance of a contract. The force
majeure clause which is usually included in all the long-term contracts only
covers governmental policies and Act of God (natural disaster). COVID-19 on account
of being declared a pandemic has been notified to be treated as natural
disaster. Therefore, force majeure can
be invoked in lieu of COVID-19 by parties. (For more information about Force
Majeure, please refer to: https://kpalegal.blogspot.com/2020/04/covid-19-force-majeure-and-contracts-in.html)
It
has become essential to draw a distinction between a contract which has become
“impossible” to perform and a contract that is merely impractical due to
increased cost and/or effort. Corporations and individuals have started using
this clause as a way to wiggle out of unfavorable old contracts. Hence,
determination of mitigating factors or substitution in order to avoid invoking
force majeure is integral.
Several
corporations dealing with private equity funds which were not finalized before
the imposition of the lockdowns and restrictions are considering triggering the
Force Majeure Clause or Material Adverse EffectClause in the transaction
documents. Many are taking this opportunity to walk out of the deal altogether
further worsening the condition of the global economy and market.
Being
one of the fastest growing economies, India has been recognized as the ideal
market for investors and venture capitalists. In 2019, India saw an investment
of INR 1,211 billion (growth: 60.5 per cent) in the form of private equity
investments with internet, computer software, utilities, financial services and
transportation among the top gaining sectors. Additionally, India successfully
materialized 616 deals with an average deal size of INR 1,967 billion. For India's venture capital industry, 2019
was a milestone year with $10 billion deployed into startups.[1]
Disruption
in the market due to the coronavirus outbreak is dampening the overall economic
activity, affecting the operations and economic health of startups. While
startups, being the most vulnerable and susceptible to the volatile market
risks, are responding to the chaos with belt-tightening measures, investors and
venture capitalists have taken multiple steps at a firm and a macro level, to
either withdrawn their funds or by helping the startups navigate through the
current crisis. Investors are extending support to startups in multiple
aspects, including technical advisory, mentoring, business continuity
assistance and in some cases, financial assistance as well.
In
only a month’s time (March 2020), Foreign Institutional Investors (FIIs) and
Foreign Portfolio Investors (FPI) have withdrawn around Rs. 63,000 crore ($8
billion) from the Indian market. Additionally, around Rs. 53,000 crore have
been withdrawn debt segment, taking the net outflow to more than One Lakh Crore
in just a month bringing the Indian market to its knees. One third of the
Indian equity market is controlled by the foreign capital which is why this
withdrawal of foreign capital is hitting the India currency Rupee hard which
has crashed 5% in a month.[2]
On
the other hand, the overwhelming withdrawal of foreign capital is not
unprecedented as a similar trend was witnessed by the nation during the 2008
global crisis.
Investor Trends AmidCOVID-19 Outbreak
Investors have been put in a difficult situation;
their investment has been put into a venture that has partially or completely
stalled with no estimation of when things will come back on track. In order to
secure their investment, continue their work with the start-ups and help the
company they have invested in, it is integral for the investors to keep certain
things in mind:
1.
Investors should ensure that their
contracts and agreements with the start-ups are properly analyzed and assessed.
This can help avoid unnecessary financial liability, point out clauses
requiring re-negotiation and prevent the party from taking undue advantage of
the situation.
2.
Staying connected in this digitized
world has never been a task and the investors are taking full advantage of the
technology and are continuing to interact virtually via video conferencing with
the entrepreneurs. Many accelerator firms and venture capitalist are also
taking to the podcast platform to reassure and provide guidance to Start-ups.
For
e.g. Brinc, a venture capitalist is hosting their Spring 2020 accelerator
programs entirely online. Kalaari Capital is hosting a virtual ‘Open Office
Hour’ with prominent investors.In an attempt to actively partake in the
digitization regime, Startup India also organized a webinar which was joined by
around 1300 people to start a dialogue about business continuity in the current
scenario.
3.
Investors are recommending that the
startups re-examine and re-assess their developmental plans and also revisit the
financial projections to make the possible adjustments for better control over
cash burn. They have also been advised to integrate the available tools and
resources into the regular workflow and ease the transition while maintaining
the productivity. While every investor has been consistently dedicating a
significant portion of their time to handhold existing portfolios to get out of
the existing crisis, some have decided to continue the evaluation of new
proposals in the slowing down investing landscape.
For
e.g. Matrix Partners India hosted a call for founders with the managing
director, Matrix Partners China and have shared an article which talks about
the startups' lesson from China in the wake of Covid-19 crisis.
4.
The current climate has the
fight-or-flight response triggered among investors. While companies are looking
for investment and help during this time, existing investors are looking for a
way out. It is necessary to obtain legal advice and opinions to analyze each
contract, business proposal and project. This can help find ways to reduce the
financial responsibility of the investor, understand how to negotiate a deal to
the investor’s benefit and how to aid stalled businesses. This one step can
help find alternatives to pulling out investments in a crisis.
Given
the above, it is clear that it has become necessary for investors to pull away
from the natural “flight” response and understand how to secure their
investment without immediately thinking of pulling out of the company. This not
only can cause the businesses to collapse but would make all the time, energy
and effort of the investor futile.
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