More Indian companies could head to insolvency as coronavirus spreads, predicts top law firm

Mar 12, 2020, 14:09 IST

One of India’s top law firms Cyril Amarchand Mangaldas said that in the times of Coronavirus, more distressed companies could go bankrupt.
Low consumer demand only makes the situation worse.
On Thursday morning, the Sensex crashed by over 2,000 points wiping away ₹8,000 crore investor wealth.

The Coronavirus pandemic has started impacting businesses. On Thursday morning, the Sensex crashed by over 2,000 points wiping away ₹8,000 crore investor wealth. And the situation is only going to get worse.

One of India’s top law firms Cyril Amarchand Mangaldas (CAM) predicts that more companies can go the insolvency route thanks to Coronavirus. “Companies may be forced to seek formal and informal protection from their creditors, and we expect to see, in more distressed cases, increased insolvency on the horizon,” the law firm said in a report.

Until December 2019, India reported 3,312 cases of insolvency.

The law firm, in a report on COVID-19, stated that companies are already experiencing financial distress because of supply chain issues that come with the spread of the coronavirus. Low consumer demand is only worsening the situation.

In addition to airlines, airports and hotels, the retail industry is also taking a hit due to lower footfalls. It has taken a hit on cash flow across industries.

“Companies with already high debt levels are finding existing credit lines withdrawn at a time when they are needing to pay suppliers who are able to deliver on time while not receiving customer payments,” said the report.

The impact is right there – the share price of Future Supply Chain was down by 20%, while Future Retail was down by 19.9%.

Delays in projects are also set to come in as companies facilitate work from home. Another factor that could bring in financial troubles for companies is stress in Mergers and Acquisitions.

The CAM report said that COVID-19 outbreak could also delay the closing of M&A activities, which would make it challenging to ‘to execute and implement time-critical turnaround plans’.

In such a scenario, where the closing of a deal is delayed, CAM advises that the parties involved should ‘manage expectations and negotiate the appropriate waivers’ as well.

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