The policy master-stroke has been creation of a Fund of Funds with a corpus of Rs.10,000 crore for infusing equity of about Rs.50,000 crore in the MSME sector...
In a bid to swiftly safeguard Indian Micro, Small and Medium Enterprises (MSMEs) from the onslaught of Covid-19,at the heart of the measures to revive the Indian economy lie the Government of India and the Reserve Bank of India's (RBI's) efforts to introduce, amend, and extend certain key MSME oriented policies and schemes. The most reported measures saw the Government initially increase the threshold of default under the Insolvency & Bankruptcy Code, 2016 from Rs. 1 lakh to Rs. 1 Crore and furthering the same is the proposed and awaited MSME insolvency resolution mechanism.
On the monetary policy end, the RBI declared a substantial cut in the repo rate by 75 basis points to 4.4% – the lowest it has been in a century and further declared infusion of Rs. 3.74 Lakh Crore to address illiquidity into the system. This was coupled with a 3-month moratorium on payment of existing term loans.
These were followed by more MSME-focussed reliefs when the RBI announced refinancing of All India Financial Institutions such as NABARD & SIDBI etc. with an amount up to Rs. 50,000 crore and reduced the fixed rate reverse repo under the Liquidity Adjustment Facility by 25 basis points from 4.0 % to 3.75 %.
Moreover, under the Government's "Atmanirbhar Bharat" Rs.20 Lakh Crore relief package, the Ministry of Corporate Affairs proposed a 6-step structure for revival of the MSMEs Sector.
The most significant development favouring MSMEs has however been the revision of the MSME classification by introduction of composite criteria of both investment and annual turnover; which is coupled with the removal of the distinction between the manufacturing and the services sectors to introduce greater parity. The revised MSME classification identifies Micro Enterprises as those with Investment below Rs. 1 Crore and turnover below Rs. 5 Crore; Small Enterprises as those with Investment below Rs. 10 Crore and Turnover below Rs. 50 Crore; and Medium Enterprises as those with Investment below Rs. 20 Crore and Turnover below Rs. 100 Crore.
The above change in classification not only widens the scope of the relief measures but also benefits the new upcoming entrants in markets, especially start-ups, as it does away with the requirement for them to make significant investments in machinery to fall under the MSME umbrella. Thus the old units would be considered smaller due to their historical book value of investments while the newer ones would be classified as much larger units.
A liquidity booster was introduced through collateral free automatic loans worth Rs. 3 Lakh Crore loaded with a 4-year tenure and a 12-month moratorium. There will be a 100% credit guarantee cover to banks and NBFCs on principal and interest and the scheme can be availed till 31st October, 2020 which is expected to enable 45 lakh MSME units in resuming business activity and safeguarding jobs of their employees.
On the recommendations of the RBI and the U.K. Sinha Committee, the Government provisioned Rs. 20,000 crores as subordinate debt for stressed MSMEs; under which the promoters of the stressed MSMEs will be extended debt which will then be infused by the said promoters as equity in their units. For this purpose, the Government will infuse Rs. 4,000 crore in Credit Guarantee Trust MSE which will then be able to provide partial credit guarantee to banks providing reliefs to stressed MSMEs.
The policy master-stroke however was the creation of a Fund of Funds with a corpus of Rs.10,000 crore for infusing equity of about Rs.50,000 crore in the MSME sector. The Fund shall operate in a 'Mother Fund' and several 'daughter funds' system where the amount is allocated in various funds. It shall provide benefit to the MSMEs which have growth potential and viable and require immediate equity.
This was followed by the Government of India amending the General Finance Rules, 2017, and thereby disallowing global tenders in government procurement up to Rs. 200 crore. The amendment adds a clause (b) to Rule 161 (iv) which prohibits Global Tender Enquiry up to Rs. 200 crore or such limit as may be prescribed by the Department of Expenditure from time to time.This has been done to overturn the previous situation of MSME's not being able to participate and being disqualified from government tender process due to unfair competition faced from large global companies. This measure is further envisaged to boost the Make in India campaign. This is coupled with the release of MSME receivables from Government and Central Public Service Enterprises in 45 days to help ease their working capital situation.
Finally, to avoid the obvious problems of post COVID-19 trade fairs and exhibitions, e-market linkages are in the pipeline for all MSMEs.
A few essential measures, however, that we need to revisit and address are the inherent labour law issues and enhancing intellectual property protections to robustly enable ease of operations for MSMEs. Consolidating labour laws into a single labour code dealing with all major verticals like wages, social security, industrial safety and welfare, and industrial relations for compliance through a single window mechanism is the need of the hour as the manufacturing and factory establishments in India are governed by a complex web of burdensome compliance legal framework. The other important measure would be to simplify the process for patent registrations as the existing long-drawn process coupled with lack of incentives and monetary benefits for research and development in India creates aserious legal impediment in the progress of MSMEs.
To ensure MSMEs are able to benefit from these relief measures, it is still the need of the hour to put a single window clearance mechanism in place for all approvals which can enable MSMEs to reduce the cost and time for applicable compliances. Easy access to the relief is essential under the prevailing circumstances. Additionally, Simplification of the legal and regulatory ecosystem can be achieved only alongwith complete decriminalisation of economic offences laws applicable to MSMEs, a MUST do to carry through the reliefs upto the last mile.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.
Dr. Manoj Kumar
Managing Partner, Hammurabi & Solomon Partners
Dr. Manoj Kumar is the founder and Managing Partner of Hammurabi & Solomon law firm. Dr. Kumar has been representing various leading Indian and International Corporates, Government Bodies and International Law Firms. An alumnus of prestigious world class institutions such as the Harvard Business School and the National Law School (NLSIU), Bengaluru, Dr. Kumar received his professional andleadership skills from distinguished & globally renowned Professors such as Padma Shri (Dr.) NR MadhavaMenon and Prof. Nitin Nohria, presently the Dean of the Harvard Business School. He is a recipient of theprestigious Mahatma Gandhi Samman 2017; was awarded at the House of Lords, London; he is included inthe A- List Lawyers rankings 2017 by India Business Law Journal (IBLJ) recognizing him as one of the top100 private practice lawyers in India. Dr. Kumar has been named as one of the 100 Legal Luminaries of India,published by LexisNexis in 2016. Known as the Best lawyer in the Corporate M&A, Strategy and Policy &Regulation Practice space in India, Dr. Kumar is known for his innovative, out-of-the box strategies pertainingto most critical and complex matters related to FDI, Cross-Border Transaction, Negotiations, Structuring, Restructuringand advising on the multitude of international agreements. Lawyer, Policy Expert, IndependentDirector, Author, Strategist, Columnist, Philanthropist, Thought Leader and Guest Faculty (at top of the lineLaw School & the prestigious Indian Institute of Management (IIM), Dr. Manoj Kumar has many introductions
Partner, Hammurabi & Solomon
John Thomas holds LL.B degree from Devi Ahilya University, Indore (M.P.) and LL.M from Mahatma Gandhi University, Kerala. He is a qualified lawyer having around 18 years of experience in advising residential/commercial/industrial, real estate companies, lenders, borrowers, retailers, developers, brokers, real estate, infrastructure, natural resources & energy, trusts, labor laws & dispute resolutions.