Road funding

Msmes contributions may take priority in bankruptcy resolution cases

NEW DELHI : Millions of Indian small businesses could be ranked above unsecured financial creditors in the bankruptcy resolution process if a proposed Union Ministry policy for Micro, Small and Medium Enterprises (MSMEs) is approved .

According to two officials familiar with the matter, the new draft MSME policy proposes priority payment of contributions over all other unsecured payments after the settlement of employee contributions when a company goes into insolvency. Currently, MSMEs are categorized as operational creditors, the lowest on the priority list when creditor assessments are settled under the Insolvency and Bankruptcy Code (IBC).

Placing MSMEs above unsecured financial creditors gives these companies, among the biggest job generators in India, the burden on settlement money after settling monies owed to secured financial creditors. Currently, there is very little left for operational creditors, including MSMEs, in any IBC resolution, as settlements occur at a huge discount and all financial creditors have priority.

Union MSME Minister Narayan Rane will meet ministry officials on April 28 to discuss the draft policy and related laws, payment delays faced by MSMEs and their access to the global market, said the people mentioned above. The new policy may also include measures to amend the law on MSME development. Mint saw the meeting agenda note.

The ministry has also invited key industry bodies to discuss the issue. Later, he will finalize the MSME policy and submit it for cabinet approval.

Questions sent to a spokesperson for the Ministry of MSMEs went unanswered until press time.

The change would be a major relief for MSMEs, as the sector is expecting dues totaling several hundred crores of rupees from companies in the process of resolving bankruptcy. If MSMEs can recover part of their contributions, their liquidity situation will improve, which will stimulate investments from this key segment.

The proposed MSME policy is also likely to reformulate the MSME Development Act 2006 for a comprehensive and holistic MSME code featuring a sunset provision on a plethora of complex laws. The MSME code will also provide a detailed procedure for the implementation of the law, which will clarify procedural aspects and standardize the implementation of the law at the state level and remove any ambiguity.

According to the agenda of the meeting, the government also proposes to adopt a cluster development approach for MSMEs in collaboration with companies offering innovation infrastructure, R&D institutions and universities specialized in an industry or a specific area of ​​knowledge. The Ministry of MSMEs is also expected to formalize loan restructuring programs for MSMEs after the meeting.

The draft policy, prepared by the Indian Institute of Public Administration (IIPA), indicates that this decision is in line with the measures aimed at promoting competitiveness, technological upgrading, infrastructure, development of clusters , dedicated credit, purchase of products and financial assistance to MSMEs.

To ensure that liquidity problems do not bog down MSMEs during the pandemic, the government introduced the Emergency Credit Line Guarantee Scheme (ECLGS) in 2020. In the same year, the Center also expanded the definition of MSMEs to cover more enterprises under its purview. Under the new definition, a business with up to 1 crore investment and up to 5 crores of income is considered a micro unit. Companies with an investment of up to 10 crore and earnings of up to 50 crores is classified as small. For medium-sized companies, the investment limit is 50 crore and turnover up to 250 crore.

Over 60 million MSMEs in India employ 110 million people (besides agriculture). The sector contributes nearly 30% of the country’s GDP and represents 40% of exports.

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