Absolutely brilliant opportunities for change are lost because of poor supporting decisions.
It appears, GoI’s MSME liquidity stimulus is couched in a herd immunity logic.
- Have more included in the pie so that the crowd will eventually drown the issue.
- Expansion of definition of borders of MSME, accompanied with lockdown of the IBC. A perfect self defeating combination!
Proecting the design stimulus and discontinuation of a law which had picked pace, learnt to deliver in a timely efficient manner, made me realise lawyers are like the “Police” in Bollywood movies- who are brought in last!
Now, the lawyers will be called in to give legal language to the amendments and draft the revivals. Some will also be called to interpret the rules and guidelines required for implementation.
Net impact of the rescue stimulus
GoI’s moment of glory, for offering liquidty bailout to the MSME along with camouflaged frills of, definition alteration, promise of equity investment through Fund of Fund and preventing outsiders for Government Bids, in essence implies as follows-
A collateral free liquidity stimulus through 100% Government backed debt vehicles, with repayment embargo for 1 year from date of disbursement (coincide with rulling goverments 2nd year) + repayment over 4 years (coincides with General Elections). It was a bold step, considering the fiscal gap Government is facing, currently. Will this be played on front foot? we will see in 5 years- exactly in time for, general elections.
The Deal
- MSMEs makes for the “trunk” of economic growth for any society, India isn’t any exception. In some forms this ensures equitable development.
- Particularly for India, MSME‘s for last five decades, have sustained expansion visions of the GoI, created mid-segment employment, advanced sectors at lower capital intensive options, supplemented domestic demand, managed exports. MSMEs contribute 6.11% to the manufacturing GDP & 33.4% to India’s total manufacturing output with 24.63% of the GDP from services & around 45% of India’s total export.[1] In turn, they are benefitted from loan facilities, priority lending, mandatory sourcing of 25% procurement by government etc.
- MSME stability becomes vulnerable to external forces, easily with COVID-19 being one such. During this tragic time, the Government, has re-defined Micro, Small and Medium enterprises basedon investments and turnover. (Approved by Union Cabinet)
| Classification | Investment limit* | Turnover limit* |
| Micro* | Up to INR1 Cr. increased from INR 1- 2.5 Mln | Under INR 5 Cr. |
| Small | Up to INR 10 Cr. increased from INR 5 Cr. | Under INR 50 Crs. |
| Medium | Up to INR 50 Cr. increased from INR 50-10 Mln. | Under INR 250 crs. |
*India’s MSME market is dominated by the Micro Units-99.4% is micro units. Bringing in an investment and turnover limit makes the qualifying lot, miniscule
- The turnover thresholds are 5 times higher than the investment limits, which are not likely to be accurate yardsticks for efficient application of this change. The investment value will have elements of depreciated and new investments, which will fail to classify MSMEs based on their requirements. Taking away the difference between manufacturing and services is likely a bias impacting the manufacturing units registered under the Factories Act.
- Additionally, the revised threshold linked classification for investment and turnover will trivialize the crisis experienced by enterprises employing a larger number of people. While holding a measure based on employees is not too stable for the nation given the labour and employee culture being transient, in the current situation, it would have secured multiple areas.
- Expanding the composite thresholds for Micro enterprises has now opened the gateway for larger unts to be clubbed under Micro, causing dilution in the segment, also will expose it to false data capture issues. The previous threshold was was INR 25 Lakhs. These would have been units will special unique requirements which will go unmet under this rescue aid.
How these modifications get reflected as legal amendments is yet to be seen.
Fine Print
- In a concentrated focus on providing liquidity to MSMEs (which, is unlikely to boost deman), GoI has offered-
- Collateral free additional loan 20% of their loan outstanding for MSMEs with a 25 cr. outstanding of total borrowing,
- 1 year repayment discount and to be repaid over 4 years;
Glaring question –
How many MSMEs actually have a 25 cr. loan outstanding in the Micro segment which had a previous investment threshold of INR 25 Lakhs?
(7% of total estimated MSMEs could borrow 20% of their outstanding credit by Feb 2020.[2] )
- a 100% guaranteed by GoI, to be availed upto Oct, 31, 2020, of this INR 3 lakh crore. under Emergency Credit Line Guarantee Scheme;
- Equity infusion worth INR 500 bln through special fund.
Details of who would make these equity investments, what diligence will be conducted to assess and ascertain viability and withing what time frame these have to be completed, have not been clarified.
- Listing aspirations,
- A fund of funds with a corpus of INR 100 bln has been allocated to aid expansion and potential listing in markets (Approved by Union Cabinet);
- This provision can help larger enterprises, who now due to expansion of the thresholds get treated as Medium size enterprises and have grown close to venturing a listing exercise in term of business and compliance. This definitely will marginalize the Smaller enterprises. In crisis times, such incentives fail to meet the objective, getting listed on stock exchanges is not the exact aspirational value any SME is harbouring at thes times.
- Evaluating this against, the SME platform on NSE and BSE have largest of SMEs is in the range of 190 to 300 confirms that to some degree, GoI is hitting the wrong end of the problem.
- Embargo on global tenders for government procurement of upto INR 2 Bln.;
- Extended tax filing deadlines, EPFO relaxations, immediate tax refunds;
- Loan repayment embargo for 1 year from date of disbursement and repayment spread over 4 years.
- Look at FAQ on the eleigibility of receiving the GoI economic stimulus, it adds for perspective:
- Selectively, there has not been any reflection on the monies the government and the private sectors owe the MSMEs. An immediate repayment of these dues would have been the meaningful help, the nation could do with. This amount is about 5 lakh crore.
- It appears, GoI views employees only through PFs and EPFOs. Their fascination for altering / adjusting/ readjusting PF payments don’t seem to cease. Instead of displaying a reduction in PF contribution from 12% to 10% (which by the way, is only a matter of discussion for well settled MNCs) a true support in spirit for MSMEs could have been-to offer a wage guarantee commitment.
Another self deafeating act to wish for employees to dip into the PF funds, which for many are funds to be used at a time when active physical employment is no longer possible.
Reluctant Bull/ Confused-Adamant Bear
- Liquidity can help in de-clogging the last mile supply chain connectivity but the liquidity model could keep the financial exposure staggred and postponed. A suspended debt scenario is likely to attaract more of debt/ insolvencies and bankruptcies. For about a year, debtors have been low on cash and high on default. With no avenues supporting revenue generation, without constructive resolution for bad loans and liquidity stimulus embedded in debt, it indicates, not all brains worked together.
For many scenarios, the stimulus alone, as a collateral free (not interest free), support is unlikely to do the trick.
- Liquidity management is a huge component of Liquidity, itself. Even if we completely discount the outliers like the ones pilfering/ misusing/ dwindelling/ defaulting repayment, for large number of MSMEs to feel confident and committed to infuse this liquidity back into the market, a few critical aspects require balancing:
- Sustanance, growth and expansion options in a bear market;
- Attractive debt resolution;
- Quick debt recovery;
- Discount in rents, electircity.
While GoI has advocated the atmanirbharta as a main sentiment in announcing these aids, it has preferred to retain control over the growth and expansion and create dependency through debt. By suspending IBC, in absence of supplemntary & supporting options, GoI has deflected MSME expansion avenues, remedial choices, legal recourse from a self sufficient /confident model.
IBC was an established oportunity for GoI to support confidence. Dismantling has placed variables to deal with in already uncertain times.
- The Problem surrounding bad debts has not been allievated. The bad asset problem of the MSME’s might become incremental in time, the assets of such already distressed MSME’s will lose its value and objectives of restructuring models to maximize value will be missed.
IBC- the Golden Goose
- Initially, GoI toyed with permeable provisions, like suspension for 6 months, moving thresholds, but those were abondoned in favour of a complete suspension of the code for 1 year.
Retaining IBC, in permeable forms along with the economic stimulus, would have offered an economic safety net. Special insolvency framework is yet to be announced under section 240A of IBC for MSMEs, which will determine the options Micro enterprise will have. A delay in such operational framework is likely to add to the conundrum with much uncertainity to navigate, risks to be mitigated and a Pandemic to be survived.
- MSME stimulus package held next to the suspension of IBC-
- IBC was a recovery tool for Financial Creditors, infact to be a part of CoC, the operational creditors would have to form 10% of the total debt exposure;
- So while principally, IBC was not a recovery mechanism for operational creditors, it paved way for promising resolutions, efficient asset acquisition / restructuring / expansion opportunities;
- A buyer favouring market;
- With 1 year suspension and 240A remaining un-announced, asset value erosion is a likely reality.
- Without a clear handle on control of the pandemic, suppressed demand and new guidelines, we could ask this question aloud-
where would the MSME put the stimulus money?
In alluring labourers, sanitizing factories, implementing SOPs / guidelines, increasing credit lines, or simply not draw it?
- In about 10-14 months[3] most businesses will start becoming anxious on recovery. It may not be a dominant desire any MSME is harbouring, but it will soon. To some degree, by discontinuing IBC[4], GoI has attempted a deflection from debt recovery as an option all together. It has come forth to say, we are getting financial creditors to drop their options for a year, in exchange for you to get enthralled with the liquidity stimulus. The Federation of Indian MSMEs states that, dues of 25,000 vendors is caught with Companies under insolvency resolution process[5].
- Comprehensive debt recovery mechanism for registered MSME vendors including startups is available in this MSMED Act.
- Making buyer liable to pay before the date agreed in writing for goods or services;
- Incase of absence of such date, buyer must pay within 45 days of acceptance or deemed acceptance of such.[6]
- If buyer fails to make the payment, then liability to pay compound interest, at three times from the bank lending rate.[7]
- Reference to Micro and Small Enterprise Facilitation Council (MSEFC), which can initiate conciliation either itself or refer the dispute to an institution for conducting the conciliation as per section 65 to 81 of the Arbitration & Conciliation Act, 1996. Though, there are differing views of different High Courts[8] on the status of an independent arbitration agreement in view of Section 18 of the MSME Act (which provides for a forum for arbitration). Petition for setting aside of the decree/award is not entertained by the courts unless the appellant (not being the supplier) furnishes 75% of the decree amount.[9]
- Recovery applications can be filed, on the Samadhaan portal online. References of dispute made to council have to be settled within 90 days of such reference.[10] MSME Samadhaan portal, launched in October, 2017 reveals that out of 13,190 cases filed after October, 2017, 3149 cases has been already adjudicated worth Rs. 598.90 crore.[11]
- The liquidity stimulus could lose its sheen, if it had any to start with.
MSME Non-Performing Assets have risen by 50 basis points to 12.2% as on September, 2019, against 11.5% in September, 2018.[12] India’s Purchasing Manager’s Index, signifying the economic trend in manufacturing & services sector has dropped by 43.9 points to 5.4 in April, 2019, the lowest in the world[13], making growth, a distant dream. There are a few fragmented and sporadic solutions like RBI’s one time debt-restructuring scheme for MSME’s which has helped in improvement of the balance sheet for the purpose of raising new funds.[14] But these fail to be significant.
Resolve Order?
- How this liquidity is deployed, will determine will India be part of the New World Order.
- Surely Christmas is over, Santa is long gone.
- Whether COVID-19 ready or not, GoI, after announcing rescue aids had to vocalize Unlock 0.1- while we await the missing piece to the jigsaw!
Thanks for reading.
[1] Confederation of Indian Industry , Micro, Medium & Small scale Industries https://www.cii.in/Sectors.aspx?enc=prvePUj2bdMtgTmvPwvisYH+5EnGjyGXO9hLECvTuNuXK6QP3tp4gPGuPr/xpT2f
[2] LiveMint 2020
[3] summary suits, Commercial Courts Act, Arbitration
[4] IBC Suspended for a year, Covid 19 related debt exempted from default, ( May 17, 2020 ) https://www.business-standard.com/article/economy-policy/ibc-suspended-for-a-year-covid-19-related-debt-exempted-from-default-120051700543_1.html
[5] 25,000 MSMEs stuck in Companies under CIRP, says FISME, ( December 31, 2019 ) https://knnindia.co.in/news/newsdetails/economy/25000-msmes-stuck-in-companies-under-cirp-says-fisme
[6]The Micro, Small and Medium Enterprise development Act, § 15 (2006)
[7] The Micro, Small and Medium Enterprise development Act, § 16 (2006)
[8] BHC has upheld the view that that merely because Section 18 of the MSME Act provides for a forum for arbitration, an independent arbitration agreement between the parties will not cease to have effect; Microvision Technologies Pvt. Ltd. vs. Union of India (15.05.2020 – BOMHC). Allahabad & Gujarat High Court have held that the MSME Act and, in particular, Section 18 thereof, confers exclusive jurisdiction on MFEFC to first conciliate and later adjudicate the disputes or refer them to arbitration;
[9] The Micro, Small and Medium Enterprise development Act, § 19 (2006)
[10] The Micro, Small and Medium Enterprise development Act, § 18 (2006)
[11] Ministry of Micro, Small and Medium Enterprises, MSME Samadhaan-Delayed Payment Monitoring System https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_Welcome.aspx
[12] George Mathew, Despite overall fall in commercial bas assets, MSME bad loans on the rise, ( January 10, 2020) https://indianexpress.com/article/business/banking-and-finance/despite-overall-fall-in-commercial-bad-assets-msme-bad-loans-on-the-rise-6208802/
[13] World worst PMI signals 15% contraction in India’s economy, ( May 6 2020) https://economictimes.indiatimes.com/markets/stocks/news/worlds-worst-pmi-signals-15-contraction-in-indias-economy/articleshow/75583438.cms?from=mdr
[14]RBI One time restructuring a big move; already given relief to 5 lakh MSME’s liquidity problem, ( February 19, 2020) https://www.financialexpress.com/industry/sme/cafe-sme/msme-fin-rbis-one-time-restructuring-scheme-already-given-relief-to-5-lakh-msmes-liquidity-problem/1873066/
Disclaimer: This Note is for general information only and not intended for solicitation. Please do not treat this as a legal advice of any sort. Views contained in this, are personal with interpretive value of the author and teams assisting the author. Readers are encouraged not to rely solely on these contents before making any decision.