INDIAN MSMEs AND THE EFFECT OF COVID

Over the last five decades, the Micro, Small and Medium Enterprises (“MSMEs”) sector has emerged as a significant contributor to the Indian economy by fostering entrepreneurship and generating large employment opportunities. As per the National Sample Survey (NSS) 73rd round, during the period 2015-16, there were 6.3 crores unincorporated non-agricultural MSMEs in the country which created 11.10 crores jobs in the rural and urban areas across the country[i] . However, the spread of Covid-19 pandemic and subsequent lockdowns have adversely affected business operations across the world. The Covid-19 lockdown triggered a range of problems for the Indian MSMEs. In terms of trade, the largest affected sector was exports which, especially from China, stopped[ii] . MSMEs in India had already suffered due to the sudden demonetization and chaotic implementation of GST.

For a majority of MSMEs in India, it has driven down sales and forced some businesses to even shut down since a lot of them do not have online presence. The number of closed companies account for 36.07% of the total 18,94,146 companies that were registered under Registrar of Companies, 2019[iii] . Further, there was a huge shortage of manpower since reverse migration of daily wage laborers took place on a very large scale. Therefore, it became imperative for the Government of India to protect the MSMEs by introducing relief packages and legal amendments.

Initiatives Taken by the Government of India:

Reclassification of MSMEs – Under the Atmanirbhar Bharat Abhiyan, the Government of India revised the classification of MSMEs by redefining the upper limit thus, covering more enterprises under its ambit. Hence, more enterprises can avail loans and schemes provided for MSMEs now[iv] .

Criteria	Micro	Small	Medium
Investment	< Rs. 1 crore	< Rs. 10 crore	< Rs. 50 crore
Annual Turnover	< Rs. 5 crore	< Rs. 50 crore	< Rs. 250 crore

The revision of MSME classification allows for further scaling of business and also increases healthy competition among businesses. It is a progressive change as it eliminates the distinction between manufacturing and service sector.

Three Lakh Crore Collateral-Free Loans to MSMEs – To provide additional funding to the MSMEs for meeting their operational liabilities built up, buy raw materials and restart businesses, the government announced three lakh crore loan relief named Emergency Credit Liquidity Guarantee Scheme (ECLGS) which was offered to the businesses to be availed till 31.09.2021[v] . The scheme provided for fully guaranteed and collateral free loans for amounts upto 20% of outstanding loans as on 29.02.2020. Borrowers with outstanding credit upto Rs. 50 crores as on 29.02.2020 and with an annual turnover of Rs. 250 crore in FY 2019-20 were eligible for loans under this scheme. The tenor of additional credit is 5 years, including a one year moratorium period on principal repayment.

Relief to MSMEs with NPAs – To support the 2 lakh MSMEs which are NPAs, the Government of India introduced the „Credit Guarantee Scheme for Subordinate Debt (CGSSD)‟ [vi]. This scheme provided for Rs. 20,000 crore subordinate debts for MSMEs which are NPA or are stressed. Banks provided the subordinate-debt to promoter/s of such MSMEs equal to 15% of the promoter‟s existing stake in the unit subject to a maximum of Rs.75 lakhs. Initially this scheme was valid till 31.03.2021 but now this has been extended till 30.09.2021.

Equity Infusion for MSMEs through Funds of Funds – The scheme is intended to help businesses, which are in their initial stages but have almost no prospects to raise funds through professional corporations or venture capitalists. The Rs. 50,000 crores Fund of Funds was approved last year which provides equity funding for MSMEs which have growth potential and viability out of which Rs. 10,000 crore is set to come from the government and the rest from venture capital and private equity firms[vii]. The fund will be operated through a mother fund and a few daughter funds to enable MSMEs to expand in size and capacity, and would encourage them to list on the main board of stock exchanges.

Steps taken by the Finance Ministry – The Ministry of Finance announced that the Debt related to Covid-19 would be excluded from the category of default. Further, the ministry said that the initiation of insolvency proceedings will remain suspended upto one year depending on the pandemic situation. Also, the Government of India directed for the suspension of fresh filings of CIRP applications in respect of defaults arising between the 25.03.2020 and 24.03.2021[viii] .

Provisions in the Insolvency and Bankruptcy Code, 2016 (IBC) – On 04.04.2021, the Government of India notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 ("IBC Ordinance, 2021") amending the Insolvency and Bankruptcy Code, 2016 ("IBC") to introduce pre-packaged insolvency resolution process ("Pre-Packaged Insolvency") for Micro, Small and Medium Enterprises ("MSMEs")[ix]. The Government has also introduced the Insolvency and Bankruptcy (Prepackaged Insolvency Resolution Process) Rules, 2021 ("PrePackaged Insolvency Rules, 2021") with effect from 09.04.2021. The Bill was passed by Lok Sabha on 28.07.2021 and later by Rajya Sabha on 03.08.2021. Further, the Bill received the assent of the President on 11.08.2021, thus enacting the Insolvency and Bankruptcy (Amendment) Act, 2021 [“Amendment”] deemed to have come into force on the 4th of April, 2021.

The Ordinance dated 04.04.2021 provided a separate Chapter III-A in the Insolvency and Bankruptcy Code, 2016 (“IBC”) which provided for a pre-packaged insolvency resolution process which could only be availed by corporate debtors falling under the ambit of the definition of "MSME" under the Micro, Small and Medium Enterprises Development Act, 2006.

Pre-pack is a type of restructuring in which creditors and debtors collaborate on an informal agreement before submitting it for approval. Micro, Small and Medium enterprises companies are typically run by promoters, making it impossible to resurrect them if the administration is removed under the standard Corporate Insolvency Resolution Process ("CIRP"). The latest ordinance encourages current promoters to participate, with the board maintaining power and the debtor presenting the base resolution package, which will then be put to the bidding process through the Swiss challenge. As a result, pre-packs will assist corporate debtors in reaching an agreement with creditors and addressing the whole liabilities side of the company.

The option to initiate a PIRP lies solely with the MSME itself. It is also the MSME that prepares and submits a base resolution plan for consideration, although such resolution plan may be subject to a Swiss-challenge from potential investors if it hampers the interests of operational creditors. The PIRP is tailored to be cost-efficient and provides for a strict timeline (90 days for approval of the resolution plan by the CoC and 30 days for approval by the NCLT) to complete the process.

Conclusion – The introduction of various measures and revisiting the policies can make a huge difference in preventing the collapse of MSME sector in India. The steps introduced by the Government can boost recovery of small businesses which almost collapsed during the peak COVID-19 in India. However, we still need to wait-and-watch to see if the schemes are well implemented and if businesses are able to reap benefits out of them.

Footnotes:

i) https://mospi.gov.in/documents/213904/848928/Annual_Report_2020_21_Eng.p df/d448c47a-fa4e-17c5-7a34-e8fe3063b06a?t=1613993557446
ii) https://www.livemint.com/news/india/indian-firms-brace-for-china-supply-shockas-shutdown-extends-11581266850122.html
iii) https://retail.economictimes.indiatimes.com/news/industry/over-6-8-lakh-indiancompanies-shut-so-far-government/70034049
iv) https://msme.gov.in/sites/default/files/MSME_gazette_of_india.pdf
v) https://www.eclgs.com/documents/FAQs-ECLGS%20- Updated%20as%20on%2011.08.2021.pdf
vi) https://msme.gov.in/sites/default/files/SubdebtBookletversion2.pdf
vii) https://www.moneycontrol.com/news/business/economy/fm-announces-rs50000-cr-equity-infusion-through-fund-of-funds-for-msmes-5261681.html
viii) https://www.newindianexpress.com/business/2020/jun/08/ibc-amendmentordinance-2020-no-fresh-insolvency-for-default-after-lockdown-declaration2153907.html
ix) https://www.mondaq.com/india/insolvencybankruptcy/1111036/the-insolvencyand-bankruptcy-code-amendment-act-2021

Written by
Jyoti Kuwarbi