Stress in MSME Sector & Pre- Pack : Is that enough?
The Micro, Small and Medium Enterprises (MSME) sector plays a key role in the economic development of the society by significantly contributing to the GDP, promoting growth, generating employment opportunities and raising the standard of life. In terms of generating employment, it ranks next only to the agriculture though contributing much higher share of the GDP. MSMEs both as ancillary units to large OEMs and standalone basis produce diverse range of products and services, catering to the growing needs of local and global markets. The Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 was amended with effect from 1st July, 2020, to add turnover criterion to the existing definitions of Micro(Rs. 5 Cr.), Small(Rs. 50 Cr.) & Medium(Rs. 250 Cr) to help grow in size by availing benefits of collateral free loans and applicable subsidy.
2. MSME & Pre- Pack:
The GOI on the recommendations of expert committee report inserted an amendment in the Insolvency & Bankruptcy Code 2016, on 4th April 2021 with a view to provide an opportunity to the Stressed Assets Corporate Debtors, classified as a MSME under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006, to nurse back to health before inevitably slipping into CIRP. The amendment inserted as Chapter III-A with Sections 54A to 54 P of IBC lays down following guidelines to be eligible for Pre- Packs:
“(a) it has not undergone pre-packaged insolvency resolution process or completed corporate insolvency resolution process, as the case may be, during the period of three years preceding the initiation date;
(b) it is not undergoing a corporate insolvency resolution process;
(c) no order requiring it to be liquidated is passed under section 33;
(d) it is eligible to submit a resolution plan under section 29A;
(e) the financial creditors of the corporate debtor, not being its related parties, representing such number and in such manner as may be specified, have proposed the name of the insolvency professional to be appointed as resolution professional for conducting the pre-packaged insolvency resolution process of the corporate debtor, and the financial creditors of the corporate debtor, not being its related parties, representing not less than sixty-six per cent. in value of the financial debt due to such creditors, have approved such proposal in such form as may be specified.”
Pre -Package actually runs almost on the lines similar to CIRP barring the exception of Debtor continuing to be in possession of the business. In the event of failure to finalise Resolution Plan , Corporate Debtors slips into CIRP. However, Regulation 45 (5) (a & b) about the mandatory contents of Resolution Plan brings out the basic difference between CIRP & Pre -Pack as under:
“(5) The amount payable under a resolution plan – (a) to the operational creditors shall be paid in priority over financial creditors; and (b) to the financial creditors, who have a right to vote under sub-section (2) of section 21 and did not vote in favour of the resolution plan, shall be paid in priority over financial creditors who voted in favour of the plan.”
3. Progress under Pre- Pack
As per the available data on IBC Laws website so far only following 4 applications have been filed under Section 54C of IBC. Only in respect of 3 cases viz. 1) GCCL lnfrastructure & Projects Ltd.; No.: CP(IB)116(AHM)2021 dated14-Sep-21 by NCLT Ahmedabad bench 2) Enn Tee International Ltd; Application No.:CP (IBPP) No. 01(PB)/2022 Dated 10-Oct-22 by NCLT Principal Bench New Delhi and 3) Loon Land Developers Ltd; No: CP (IBPP) No. 03(PB)/2021 Dated 29-Nov-21 have been admitted. Going by the content of the application/order in the matter of Enn Tee International Ltd , it is apparent that the applicant had suggested inter-alia disposal of surplus assets/land properties and using the proceeds to settle dues of OCs over a period of time. It is not clear as to why CD didn’t suggest the same solution to the creditors in the first place and arrived at settlement outside IBC through a much cheaper option like Lok Adalat etc. However, information regarding filing of RP’ report after within 30 days of initial order confirming PPIRP arrangement in either of the cases is not available.
The 4th Case of Krrish Realtech Pvt Ltd is slightly different . On 08.10.2021, the Corporate Debtor filed an Application before the Adjudicating Authority to initiate pre-packaged insolvency resolution process under Section 54C. On 21.10.2021, the matter first came up for hearing before the Adjudicating Authority on which date several objectors appeared who opposed the Application. The Adjudicating Authority granted one-week time to the objectors to file their objections. On 09.11.2021, an application, bearing I.A. 5140 of 2021 was filed by the Objectors on which notice was issued on the Appellant. However , the decision of AA in not admitting the PPIRP application and instead issuing Notice in response to the objections filed by certain creditors was appealed against before NCLAT by way of series of Company Appeal (AT) (Insolvency) Nos. 1008, 1009 & 1010 of 2021 Arising out of Orders dated 21.10.2021, 09.11.2021 and 23.11.2021 passed by NCLT, New Delhi (Court-II) in Company Petition No. IB-(PP)-02/ND/2021.The Appellate Authority vide their order dated 21st Dec’21 rejected the Appeal by observing that there was nothing in the PPIRP scheme that prohibited hearing /disposing off objections before admitting the application. The case is yet to be admitted as the matter/objections are being heard by the Hon’ble AA at different stages.
Considering the present status and indications available , of the 4 cases admitted so far only Enn Tee International Ltd; Application No.: CP (IBPP) No. 01(PB)/2022, reported at (2022) ibclaw.in 819 NCLT admitted by Principal bench NCLT, New Delhi looks likely to succeed.
4. Reasons for the poor response to PPIRP
It is quite apparent that PPIRP Scheme has not been successful in either encouraging CDs to seek relief or to inspire confidence in the Creditors(Financial ) to support such a scheme. What are reasons for the failure of the scheme? Reasons for the inability of the scheme to take- off are two -fold. Firstly, the design of the scheme with a skewed preference in favour of OCs is a flawed , since it is the Financial Creditors who have to give nod and approve any plan. Unlike CIRP where the topmost priority is accorded to the FCs, PPIRP obligates CD to first settle the dues of OCs. Now if the Corporate Debtor has to offer any Base Plan to the FCs, while satisfying the above criterion then naturally he would seek more than fair share of haircut from FCs thereby burden of mismanagement completely devolving on FCs! Even if the FCs accept the proposal at admission stage there is a high possibility of its being rejected by 75% creditors thus pushing the account to CIRP. The moot question is why would any FC agree to sacrifice its interest only to help serve some third party( OC).
Secondly, PPIRP presupposes that the CD would be ready with all the necessary data and back up records to apply for relief under the scheme whenever situation so warrants. On the contrary MSMEs by their very nature are mostly lean structured and owner driven , maybe nominally assisted by their close family/spouse , short on resources both human and financial, incapable of complying with various regulatory regimes that are often insensitive and indifferent besides over dependence on external players for supplies and lack of factoring facilities etc. So, to overcome all these problems the entrepreneur generally prefers to play outside the system by heavily resorting to cash transactions albeit maintaining façade of compliance by outsourcing various functions to external consultants/ CAs etc. It would be naïve to approach NCLT for relief under PPIRP if basic books of accounts are not available or contain “spurious” transactions that are unable to pass muster.
However, both the reasons broadly explained above are not the cause but the effect of some deeper malaise in the system that needs to be diagnosed and treated.
5. What exactly ails MSME Sector ?
The basic reason for the relative failure of the scheme can be attributed to inherently weak structure of MSME borrowers reflected in their disorganised functioning .Their limited resources and knowledge limits their capacity to negotiate better credit terms from Financial Institutions forcing them to raise finance at market rates. So is the case with their buyers who are more resourceful and fix unfair trade terms and longer credit for payments . This hard truth must be acknowledged honestly and factored in , before framing any relief package. During demonetisation, many MSMEs suddenly found themselves saddled with huge cash or cash equivalent assets. They were unable to credit the same into their account nor utilise the same for sourcing RM thus severely hampering their normal activities. Many MSMEs simply booked losses by writing off their stocks. GST implementation , a long overdue and much needed Reform , was too complex to begin with for even a seasoned professionals like CAs to comprehend fully. Besides Regulations on monthly compliances, filing returns and harsh penal provisions thereon, complexities related to Input Tax Credit and Reverse Charge Mechanism, left even fully organised big Corporates baffled what to speak about poor MSMEs! As if these twin regulatory blows were not enough, Covid driven Pandemic that followed and paralysed the entire economy , crushed and literally wiped out many MSMEs. As per the RBI report , Pandemic has pushed the economy back by a decade. Government did come out with an Emergency Line of Credit to provide some succour to the Sector but it helped mostly better organised units even amongst MSMEs.
6. MSME & Stress Within :
The Micro, Small & Medium Enterprises (MSMEs) have been contributing significantly to the expansion of entrepreneurial endeavours through business innovations. However, it must be acknowledged that MSMEs consists of large number of entrepreneurs and self- employed persons largely coming from the most vulnerable section of population. Lack of proper skill , insufficient training , lack of adequate financial literacy to deal with financial institutions make them easy prey to the clever manipulations of more the organised middlemen. There are several other regulatory requirements, multi layered multiple Governmental authorities that make ease of doing business very difficult for them. They have to often raise their own resources and fend for themselves at the time of cyclical downturn in the economy. It is no wonder that many entrepreneurs are forced to wind up their operations and migrate elsewhere. It is the bounden duty of the State to nurse such MSMEs back to health in the larger interest of the economy and the well- being of the society .
7. Relief and Rehabilitation schemes:
Some of the Relief & Rehabilitation scheme available, funds allocated and utilised are as under:
The Ministry of MSME Report for 2021-22 also refers to the huge disbursement totalling Rs. 1600 crores to 52002 units sponsored by KVIC as a margin money. However, it has never been an easy task to claim such benefits requiring loads of compliances and paper work. GOI’s emergency line of credit did report substantial utilisation as it was available upfront to the existing units , though it can’t be stated with certainty that the benefits have percolated to the deserving units. The relief measures formulated for MSMEs should translate into better liquidity for them and not become challenge as happened in the case of PPIRP .
Though the overall intent of the Government towards Atmanirbhar Bharat by providing financial, legal and statutory assistance to MSME can’t be doubted but at the implementation level bureaucratic lethargy and insensitivity kicks in and defeats the purpose. In the recent Budget speech , the FM proposed many new schemes viz. Entity DigiLocker to be setup for use by MSMEs, large business and charitable trusts to store and share documents online securely, 500 new ‘waste to wealth’ plants under GOBARdhan at total investment of Rs 10,000 crore, Pradhan Mantri Kaushal Vikas Yojana 4.0, to be launched to skill lakhs of youth for Industry 4.0 like coding, AI, robotics, mechatronics, IOT, 3D printing, drones, and soft skills., Revamped credit guarantee scheme for MSMEs to take effect from 1st April 2023 through infusion of Rs 9,000 crore in the corpus. All the above are excellent schemes . The World Association for Small and Medium Enterprise (WASME) organised a post-budget discussion and while generally welcoming the speech felt that there was lot of gap or lack of funds between Budget speech and Budget documents. No immediate solution to the perennial problems of such as working capital space, delayed payments, and handholding was suggested.
While there are no 2 opinions on the significant role of MSME in nation building , it must be acknowledged that its basic problem of finance , procurement and marketing have remained largely unresolved. MSMEs generally supply goods and services to the big corporates, which often delay their payments for months and more than a year in some cases. The scope of the present Article was basically focussed on the impact of PPIRP in addressing such issues. Going by the Regulations, Pre- Package is definitely not a panacea for the Stress in MSME Sector. However, it is suggested that the Ministry concerned take steps to make Trade Related Discount System universally adopted across Sectors encompassing the entire gamut of economy. TReDS is one of the 12 key announcements made by the PM in 2018 to cover units above Rs. 500 crores turnover. Out of these 4714 Companies identified by M/o Corporate Affairs for taking action, so far 1643 companies have registered themselves on the TReDS portal but only 195 have been onboarded. Since PPIRP relates to only Corporate MSMEs, we should look at strengthening TReDS system to encompass all existing MSMEs by automatic onboarding by extending legal status of Negotiable Instruments to all Sale Invoices. The Ministry will be required to bring in additional legislation to accord status of Negotiable Instruments to trade invoices enabling upfront credit to MSME vendors and entrepreneurs. Procedurally some tweaking in the existing GST Invoicing system may be needed to generate an additional copy of Negotiable Invoice thus enabling upfront credit. If Ministry of MSME takes steps to ensure these lifelines to the units , there would be no need for any relief package. So ,what MSMEs actually require are steady and timely supply of Raw Material and efficient Factoring services .
All data from Ministry of MSME Annual Report 2021-22 – Budget Speech
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