Key reforms to support Micro, Small and Medium Enterprises as a response to Covid-19 and the economic crisis

 

Key reforms to support Micro, Small and Medium Enterprises as a response to Covid-19 and the economic crisis

          

July I, 2020 The Government of India has introduced a slew of legislative, regulatory and financial measures to support the MSME sector amidst the financial crisis created by the COVID-19 pandemic.

 

Background

         The Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) provides a draft of protections and incentives for micro, small and medium enterprises (MSMEs).

         MSMEs have been disproportionately impacted by the Covid-19 pandemic and ensuing economic crises .To support MSMEs and help them survive and turnaround from the pandemic, the Indian Government has introduced a host of measures under the 'Atma Nirbhar Bharat Scheme'. This update summarises and analyses the key changes introduced under the Scheme and specifically looks at their implications for MSMEs.

 

Key Changes

 

1.      Revised Definition of MSME

 

       Eligibility criteria and threshold: An enterprise qualifies as a micro, small or a medium enterprise depending upon the amount of investment made with respect to (i) plant and machinery in case it undertakes manufacturing; or (ii) equipment in case it provides services. In addition to this existing investment conditionality, a new criterion for turnover has been introduced. Further, the prescribed investment thresholds for being included within the definition of MSME have also been increased. Additionally, the distinction between manufacturing and services industries has been done away with.

 

     The table below shows a comparison of the previous position under the MSME Act against the new categorisation.                                          

2.  Financing Measures

           The Government has announced several financial measures to help bring additional liquidity and stimulus to MSMEs. Key measures include:

(a)  Emergency Credit Line Guarantee Scheme

          To help MSMEs with additional funding requirements during the Covid-19 crisis, particularly to meet their operational liabilities, purchase raw materials, and restart their business, the Government has announced the Emergency Credit Line Guarantee Scheme (ECLG Scheme). This scheme is being operationalised through the National Credit Guarantee Trustee Company Limited (NCGTC).

        The total amount of credit available per borrower will be 20% of the borrower's total outstanding credit up to Rs. 25 crore (excluding off-balance sheet and non-fund based exposures) as on a cut-off date of 29 February 2020. This implies that MSMEs will be eligible to receive additional credit of upto Rs. 5 crore (i.e. 20% of their total borrowings upto Rs. 25 crore).

       The ECLG Scheme would apply to all loans sanctioned or made available to MSMEs between 23 May 2020 and 31 October 2020 and the Government has presently imposed an overall cap of Rs. 3 lakh crore for all loans disbursed under the ECLG Scheme.

 

 

(b)  Rs. 20,000 crore as subordinate debt to provide equity support to stressed MSMEs

           Acknowledging that MSMEs will require financing assistance in the form of both equity and debt, the Government has proposed a scheme for providing subordinate debt to promoters of MSMEs which will, in turn, have to be infused by the promoter as equity in the MSME ensuring that a prescribed debt-equity ratio continues to be maintained

c)  Equity infusion of Rs. 50,000 crores for MSMEs through a Fund of Funds

         The Government has also announced the proposed establishment of a Fund of Funds that will directly invest in MSMEs and encourage them to list on the Indian stock exchanges.

3.  Amendment to Government Procurement Policies

           In line with the Government of India's stated aim of encouraging domestic self-reliance and independence, the Government has issued a notification dated 15 May 2020 amending the General Financial Rules 2017 to mandate that there will be no 'global tenders enquiry' for government procurements of a value of upto Rs. 200 crores

 4.Measures relating to the Insolvency and Bankruptcy Code

         The Government on 24 March 2020 increased the minimum threshold for default from Rs.1 lakh to Rs.1 crore to initiate corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC)

5.  Directions to Public Sector Undertakings to make timely payments

         Directions have been issued by the Cabinet Secretary, Expenditure Secretary and Secretary, MSME to all PSUs to pay outstanding dues to MSMEs within the prescribed timeframe of 45 days.

             To summing-up India fights against Covid-19 and its attempt to revive its economy, specifically focused on providing relief to the MSME sector which is a welcome move. However the much-needed panacea for MSMEs should be swiftly implemented in spirit and the Government should ensure that it reinforces investor confidence and the dynamic growth of the MSME industry in the long run.