Shambhavi Mishra

During the wake of the financial crisis created by the pandemic, India’s government has initiated a slew of legal administrative and financial initiatives to strengthen the MSME sector. “The Micro, Small and Medium Enterprises Act, 2006” offers a pile of safeguards and benefits to the micro, small and medium enterprises (MSME)^[1]. The Covid-19 pandemic and the ensuing economic crises have adversely affected MSMEs.

Many of them experience severe organizational and monetary restrictions, including a lack of capital, challenges in retrieving debtors’ quantities, limited supply of raw materials and a labor crisis, leading to an existential crisis for others.

Government of India has launched a variety of measures under the ‘Atma Nirbhar Bharat Scheme’ to assist MSMEs and help them flourish and recovery from the pandemic. This report summarizes and analyzes the key improvements implemented under the system and discusses their consequences explicitly for MSMEs.

Major changes:

Revised MSME definition:

Eligibility requirements and lower Limit: An organization counts as a micro, small or medium-sized organizations, based on the number of investment rendered in respect of:

1. Plant and machinery in case of manufacturing; or
2. Infrastructure in case of service delivery.

A new criteria for turnover was introduced, in addition to this existing investment conditionally. Additionally, the recommended investment limits for inclusion in MSMEs definition have also been enhanced. The revised definition has broadened the scope of MSMEs while allowing more organizations to register as MSMEs and to take advantage of the Scheme and MSME Act.

Measures for Financing:

Several Financial initiatives have been proposed by the government to help introduce more funding and investment to MSMEs. Main measures include:

Emergency Credit Line Scheme (ELCG):

Government has announced this scheme ELCG to aid MSMEs with additional funding requirements during the Covid-19 crisis, in particular to meet their financial obligations, raw materials and restart their business. This scheme is being operated through “National Credit Guarantee Trustee Company Limited” (NCGTC).

The assured ECLG scheme is a loan which made accessible to MSMEs by “Member Lending Institutions” (MLIs), for which NCGTC will provide the MLIs with 100 percent guarantee.

Eligible to be MLIs are all scheduled commercial banks as well as Non-Banking Financing Corporations and financial Institution that follow required specifications. MLIs will extend this loan to MSMEs as either extra working capital or term lending loans.

As on a cut-off date of 29^th February 2020, the total amount of credit available per borrower will be 20 percent of the total outstanding credit up to Rupees 25 crores (with the exception of balance sheet and non-fund based exposure levels).

This means that MSMEs would be liable for extra credit amounting to Rupees 5 crores (i.e. up to rupees 25 crores, 20 percent of their cumulative borrowings). The ELCG scheme will refer to all loans approved or made available to MSMEs between 23^rd May 2020 to 31^st October 2020 and the Government has reportedly set an aggregate ceiling of Rupees of 3 lakhs crores on all loan granted under the ECLG scheme.

Offering of Rupees 20,000 crores as subordinate debt to provide equity support to stressed MSMEs:

Recognizing the MSMEs will need funding assistance in the terms of both equity & Debt, the Government has introduced a scheme to provide subordinate debt to MSME promoters which in effect, would have to be invested as equity in MSME by the promoter ensuring that a specified debt-equity ratio continues to be retained.

Under this scheme, the government approved an initial outlay of Rupees 20,000 crores for subordinate debt payment to troubled MSMEs. On June 25^th 2020, the Ministry of MSMEs launched the “Subordinate Debt Credit Guarantee Scheme” (CGSSD), also known as the ‘Distresses Assets Fund- Subordinate Debt’ for MSMEs. This program aims to provide assistance to promoters of highly stressed operating MSMEs that have been non-performing properties as of 30^th April 2020.

CGSSDS’s main characteristics are as outlined below:

1. MSMEs promoters shall be given credit equal 15 percent of their stake (equity + debt) or Rupees 75 lakh whichever is less.
2. 90 percent guarantee provision would be issued under the scheme/trust for this subordinate debt and 10 percent will come from the promoters concern.
3. There shall be a seven year suspension on principal installments while the actual tenor for recovery shall be 10 years.
4. Infusion of Rupees 50,000 crores of funding for MSMEs through the Fund:

The Government also announced the planned creation of a fund of Funds that will invest directly in MSMEs and enable them to be listed on Indian Stock Exchanges. “The Funds of funds” is expected to be set up with a fund of Rupees 10,000 crores, and to provide equity funding to MSMEs with growth opportunities and viability, according to the government’s announcement^[2].

“The Fund of Funds” will be run by a “Mother Fund” and a few “Daughter Funds” from which Rupees 50,000 crores of funds are to be leveraged^[3]. The Cabinet Committee on Economic Affairs authorized this decision on 1 Jun 2020 and then further information on operationalization are awaited.

Amendments of procurement practices of the governments:

In accordance with the stated aim of the Government of India to promote local self-reliance and democracy, the Government released a circular dated 15^th May 2020 amending the 2017 General Financial Rules mandating that there will be no “Global Tender Inquiry” for government procurement of up to Rupees 200 crores.

An exclusion from this provision is only allowed in special situations only after receiving the permission necessary. The Rupees 200 crores procurement ceiling was explicitly implemented to largely favor MSMEs, which will now be willing to apply for such procurement without having to negotiate with global peers.

Measures related to IBC, 2016:

On 24^th March 2020, the Government raised the minimum default threshold from Rs. 1 lakh to Rs. 1 crore in order to begin the company insolvency settlement mechanism under the IBC (Insolvency and Bankruptcy Code, 2016). This provision is expected to help MSMEs who are in financial difficulty as a result of COVID-19 economic crisis.

Further amendments to the IBC, 2016 were also adopted by the government on 5 June 2020 to discourage corporates debtors from being drawn into the process of insolvency resolution during the COVID-19 pandemic. Moreover, the scheme states that the government is now proposing a separate insolvency resolution system for MSMEs under the IBC.

Guidance for public sector undertakings to make refunds on schedule:

Although The MSME ACT allows a 45-day payment cycle for buyers to MSMEs, the Government had obtained claims from stakeholders that government owned firms or public sector undertakings (PSUs) did not make payments to MSMEs in compliance with the MSME act itself. In addition, the Cabinet Minister, Expenditure Minster and Secretary, MSME, have given orders to all PSUS to pay unpaid dues to MSMEs within the specified 45-day time span.

Conclusion:

The relaxation of government procurement policies would also provide much needed boost to domestic manufacturing and dependence and hence raise the likelihood of MSMEs surviving through this pandemic.

Nonetheless, appropriate precautions should be placed in place to ensure the long-term viability of MSMEs in India is not impacted by these relaxations and the consequent loss of competition from global firms.

In India’s struggle against Covid-19 and its effort to stimulate its economy, the government had concentrated primarily on improving the MSME market, which is a positive change. A far-needed cure for MSMEs should be enforced quickly in practice and the government must guarantee that it strengthens long-term investor trust and the MSME sector competitive growth.

1. Sinha, D.K. Salient Features of on MSMED Act, 2006 – Explained! <https://www.yourarticlelibrary.com/law/salient-features-of-on-msmed-act-2006-explained/41018>

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2. Scribd. 2020. Fund Of Funds | Fund Of Funds | Institutional Investors. [online] Available at: <https://www.scribd.com/document/202111523/Fund-of-Funds> [Accessed 8 August 2020]. ↑
3. MSN. 2020. Fund Of Funds For Msmes: Govt’S Rs 50,000 Crore Equity Infusion To Benefit This Many Small Businesses. [online] Available at: <https://www.msn.com/en-in/money/markets/fund-of-funds-for-msmes-govts-rs-50000-crore-equity-infusion-to-benefit-this-many-small-businesses/ar-BB145lTp> [Accessed 8 August 2020]. ↑