India Grapples With First Tremors Of Economic Shake-up

BY  R.K.MISRA

India  grappling with the Covid-19 pandemic is beginning to feel the first tremors of the economic shake-up caused by the 21-day shutdown as corporates , business, trade and industry, even public sector undertakings are burning midnight oil to wriggle out of prior commitments.

The restriction on human movement  has had a spiraling effect on every aspect of human life  whether it is business or manufacturing, commerce or construction, trade or transport.

Once  the attention from the control of the virus shifts a swarm of issues is expected to occupy attention for quite some time to come. A  major one-amongst the lot of them- will be the delays caused in meeting contractual obligations. These will be spread over a huge canvass from construction contracts to manufacturing and supply agreements, from  professional service providers to engineering contractors and their suppliers and even financiers who will be grappling with cost over runs due to time slippages as well as those who will be seeking re-negotiations of prices and terms of contract. This will bring force majeure into play.

Force Majeure translates literally from French as superior force. In business, force majeure describes those uncontrollable events(such as war or natural disasters, even pandemics) that are not the fault of any party and  that make it difficult to carry out normal business. A company may insert a force majeure clause into a contract to absolve itself from liability in the event it cannot  fulfill the terms of a contract for reasons beyond its control.

Legal firms are under pressure for many Indian businesses are  reviewing old contracts to see whether Force Majeure can be invoked to find a way out of old agreements as manufacturing sector is hit, recovery cycles are stretched and raw material shortage is hitting consumption. Even Indian Liquified natural gas(LNG) importers have issued force majeure notices to suppliers as domestic gas demand  and port operations are hit by the countrywide lockdown, industry sources said. In short a welter of legal wrangles await corporate India and by implication all other facets of Indian life in the days to come.

According to an international financial news daily, signs of acute corporate stress is seeing  big Indian companies  invoking  force majeure clauses to halt payment to suppliers and these include Indian Oil Corporation, Adani Ports and Royal Enfield, among others.

Renewable energy developers and their bodies facing supply chain disruptions have also urged the Centre to invoke the clause  for time extensions on projects. The Ministry of New and Renewable Energy(MNRE) is reported to have agreed to time extensions subject to the condition that evidence is produced to prove supply chain disruption due to virus spread in China or any other country.

A case in point is corporate entities involved in infrastructure development, particularly road construction. Application of the  force majeure clause may give them temporary respite but will only add to their woes in the long run. The union ministry of road transport in a notification issued on March 25, has urged the National Highway Authority of India(NHAI) to stop levying toll charges for the period of the lockdown. It has stated that this period would be classified as a Force Majeure of concession contracts.

According to ratings agency ICRA, this will put toll collection into negative category for FY 2020 while collection in April and subsequently 2021 is likely to be affected adversely. ”In March 2020 the decline in toll collection is estimated to be  more than 40 per cent”, the statement said.

In effect-in a  tolled road project- the application of force majeure ensures 100 per cent of O&M and interest costs are reimbursed for affected period. This would cover 50 to 55 per cent of the loss of revenue, according to R.Burla , vice-president corporate ratings, ICRA. But then toll revenues constitute less than one- fourth of the consolidated revenues of  companies operating in this sector.

Trade sources say that It is expected to take  a minimum of one quarter to restore traffic levels and if the demonetization experience is taken into account, two quarters to do so. Besides the 40 per cent fall in toll collections estimated by ICRA, the constraint on vehicular movement likely to persist beyond April, the toll collections  for quarter 1 of FY 21 will also be adversely affected.

This implies  that Global  infrastructure funds who have invested heavily in India’s road assets are going to be facing heavy losses due to the toll collection slump. Most Indian toll roads are owned by private foreign investors. Global financial institutions such as Macquarie, GIC, Cube Highways and leading Canadian funds and pension groups-Brookfield, CPPIB,CDPQ and OMERS-have deployed more than $5 billion on Indian road assets in last few years , trade sources report.

This in turn is set to hit the country’s road monetization plan with investors turning wary  and adopting a wait and watch approach. The NHAI  has had to extend the  fourth round of auction to monetize operational highways to April. It had invited  bids  for its fourth bundle of TOT(Toll, operate, transfer)auction in October 2019.The initial plan was to raise at least Rs 4200 crores, but the floor price was eventually brought down to around Rs 2200 crores. Coronavirus has led to further postponement.