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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.

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

  1. MSMEs makes for the “trunk” of economic growth for any society, India isn’t any exception. In some forms this ensures equitable development.
ClassificationInvestment limit*Turnover limit*
Micro*Up to  INR1 Cr. increased from INR 1- 2.5 MlnUnder INR 5 Cr.
SmallUp to INR 10 Cr. increased from INR 5 Cr.Under INR 50 Crs.
MediumUp 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

How these modifications get reflected as legal amendments is yet to be seen.

Fine Print

  1. In a concentrated focus on providing liquidity to MSMEs (which, is unlikely to boost deman), GoI has offered-

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] )

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.

https://www.cnbctv18.com/finance/rs-3-lakh-crore-msme-scheme-eligibility-procedure-rates-and-other-questions-answered-5996731.htm

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

  1. 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.

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.

IBC- the Golden Goose

  1. 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.

where would the MSME put the stimulus money?

In alluring labourers, sanitizing factories, implementing SOPs / guidelines, increasing credit lines, or simply not draw it?

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?

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.

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