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Analysis & Summary of Special Measures for MSMEs amid COVID-19 Outbreak

MSME - COVID-19 - Taxscan

Background:

The Micro, Small, and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over quite a few years. The sector has played a crucial role in providing large employment opportunities at comparatively lower capital costs. It has also helped in the industrialization of rural & backward areas. This has reduced regional imbalances, assured more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units. MSMEs contribute enormously to India’s socio-economic development.

The Ministry of MSME envisions a vibrant MSME sector by promoting the growth and development of the MSME Sector, including Khadi, Village, and Coir Industries, in cooperation with concerned Ministries/Departments, State Governments and other Stakeholders, through providing support to existing enterprises and encouraging the creation of new enterprises.

Introduction to the Act: The Micro, Small and Medium Enterprises Development (MSMED) Act was notified in 2006 to address policy issues affecting MSMEs as well as the coverage and investment ceiling of the sector. The Act seeks to facilitate the development of these enterprises as it also enhances their competitiveness. It provides the first-ever legal framework for recognition of the concept of ‘enterprise’ which comprises both manufacturing and service entities. It defines ‘medium enterprises’ for the first time and seeks to integrate the 3-tiers of these enterprises, namely, micro, small, and medium. MSMED Act also provides for a statutory consultative mechanism at the national level with a balanced representation of all sections of stakeholders, particularly the three classes of enterprises; and with a wide range of advisory functions. Establishment of specific funds for the promotion, development and enhancing the competitiveness of these enterprises, notification of schemes/programs for this purpose, progressive credit policies, and practices, preference in Government procurements to products and services of the micro and small enterprises, more effective mechanisms for mitigating the problems of delayed payments to micro and small enterprises and assurance of a scheme for easing the closure of business by these enterprises are some of the other features of the MSMED Act.

Classification &Definitions of ‘Micro’, ‘Small’ & ‘Medium’ Enterprises: Pursuant to the extant provision of MSMED Act, 2006, MSMEs are classified in 2 classes:

  • Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods pertaining to the specified industry or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use. The ‘Manufacturing Enterprise’ is defined in terms of investment in Plant & Machinery.
  • Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.

Under the extant provisions, w.r.t the ‘manufacturing sector’, micro-enterprise means an entity wherein the investment in plant & machinery does not exceed Rs. 25 lacs. Small enterprise means an entity wherein the investment in plant & machinery is more than Rs. 25 lacs but does not exceed more than Rs. 5 crores. Medium enterprise means an entity wherein the investment in plant & machinery exceeds more than Rs. 5 crores but does not exceed more than Rs. 10 crores.

Under the extant provisions, w.r.t the ‘sector sector’, micro-enterprise means an entity wherein the investment in equipment does not exceed Rs. 10 lacs. Small enterprise means an entity wherein the investment in equipment is more than Rs. 10 lacs but does not exceed more than Rs. 2 crores. Medium enterprise means an entity wherein the investment in equipment exceeds more than Rs. 2 crores but does not exceed more than Rs. 5 crores.

Scheme of MSME Ministry: The primary responsibility of the promotion and development of MSMEs is of the State Governments. However, the Central Government supplements the efforts of State Governments through various initiatives. The role of the Ministry of MSME and its organizations is to assist the States in their efforts to encourage entrepreneurship, employment, and livelihood opportunities and enhance the competitiveness of MSMEs in the changed economic scenario. The schemes/programs undertaken by the Ministry and its organizations seek to facilitate/provide:

  • Adequate flow of credit from financial institutions/banks,
  • Support for technology up-gradation and modernization,
  • Integrated infrastructural facilities,
  • Modern testing facilities and quality certification,
  • Access to modern management practices,
  • Entrepreneurship development and skill up-gradation through appropriate training facilities,
  • Support for product development, design intervention, and packaging,
  • The welfare of artisans and workers,
  • Assistance for better access to domestic and export markets and
  • Cluster-wise measures to promote capacity-building and empowerment of the units and their collectives.

PM Modi announcements on May 12, 2020:Prime Minister Narendra Modi addressed the nation and recalled those who have died battling the pandemic. He said that “The crisis that has emerged due to COVID-19 is unprecedented, but in this battle, we not only need to protect ourselves but also have to keep moving forward.” He announced a special economic package and gave a clarion call for Atmanirbhar Bharat. He noted that this package, taken together with earlier announcements by the government during COVID crisis and decisions taken by RBI, is to the tune of Rs 20 lakh crore, which is equivalent to almost 10% of India’s GDP. He said that the package will provide a much-needed boost towards achieving Atmanirbhar Bharat. He observed that the package will also focus on land, labor, liquidity, and laws. It will cater to various sections including the cottage industry, MSMEs, laborers, middle class, industries, among others. He informed us that the details of the contours of the package will be provided by the Finance Minister from May 13, 2020.

FM announcements on May 13, 2020:Smt. Nirmala Sitharaman announced measures focused on Getting back to work i.e., enabling employees and employers, businesses, especially MSMEs, to get back to production and workers back to gainful employment. Some of the important announcements are summarised as follows:

  • 3 lakh crore Emergency Working Capital Facility for Businesses, including MSMEs: With an objective to provide relief to the business, additional working capital finance of 20% of the outstanding credit (as on February 29, 2020), in the form of a Term Loan at a concessional rate of interest will be provided. This will be available to units with up to Rs 25 crore outstanding and turnover of up to Rs 100 crore whose accounts are standard. The units will not have to provide any guarantee or collateral of their own. The amount will be 100% guaranteed by the Government of India providing total liquidity of Rs. 3.0 lakh crores to more than 45 lakh MSMEs,
  • Rs 20,000 crore Subordinate Debt for Stressed MSMEs: Provision made for Rs. 20,000 crore subordinated debt for 2,00,000 MSMEs which are NPA or are stressed. The government will support them with Rs. 4,000 Cr. to Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE). Banks are expected to provide the subordinate-debt to promoters of such MSMEs equal to 15% of his existing stake in the unit subject to a maximum of Rs 75 lakhs;
  • Rs 50,000 crores equity infusion through MSME Fund of Funds (FoF): Govt will set up an FoF with a corpus of Rs. 10,000 crore that will provide equity funding support for MSMEs. The FoF shall be operated through a Mother and a few Daughter funds. It is expected that with leverage of 1:4 at the level of daughter funds, the FoF will be able to mobilize equity of about Rs 50,000 crores.
  • Other Measures for MSME: e-market linkage for MSMEs will be promoted to act as a replacement for trade fairs and exhibitions. MSME receivables from Government and CPSEs will be released in 45 days.
  • The new definition of MSME: Definition of MSME will be revised by raising the Investment limit, and an additional criterion of turnover also being introduced. The distinction between the manufacturing and service sector will also be eliminated.
Amended classification
Composite Criteria: Investment and Annual Turnover
Classification Micro Small Medium
Manufacturing and Service sector Investment < Rs. 1 Crore

and

Turnover < Rs. 5 Crores

Investment < Rs. 10 Crores

and

Turnover < Rs. 50 Crores

Investment < Rs. 20 Crores

and

Turnover < Rs. 100 Crores

The announcement by the Finance Minister w.r.t. change in the definition of MSMEs was a pleasant surprise, as the proposal was pending with the Parliamentary Standing Committee since July 2018. Apart from raising the investment limits for classifying MSMEs, the Finance Minister as an introduced an annual turnover feature for defining MSMEs. As per extant provisions, the existing definition relies on self-declared investment on Plant & Machinery and has wide variations based on the type of business (i.e. manufacturing and service). Since the investment limit for MSMEs has been revised upwards, the companies with more capital still avail of the benefits under the MSMED Act. With an objective to introduce the amendment, the Govt. will require the Parliament approval for the amendingMSMED Act, 2006. As the Parliament not in session, the Government may introduce an Ordinance for implementing the announcement.

Union Finance Minister Nirmala Sitharaman announced an action plan for the 3 months, as well, i.e. post-lockdown plan, which includes:

  • Priority in manufacturing of COVID related Items such as masks, gloves, PPE, ventilators, Testing Equipment, Infrared Thermometers, etc.
  • Supporting Mass Production CFCs for mass production of such products/intermediaries by MSMEs,
  • Emphasis on quick Industrial Infrastructure Development,
  • Consultation with stakeholders for setting up of CFCs & manufacturing of identified items for domestic,
  • Utilization as well as export purposes,
  • May require relaxed terms & conditions especially for the items which fall under medical/Auxilliary categories,
  • In respect of Government orders, PSUs, Railways, etc. where Liquidated Damages clause may apply as per contract terms, the Department of Public Enterprises (DPE), Railway Board and other Ministries having PSUs to be approached to allow relaxation inapplicability of Liquidated Damages clause for a period of 2 months from the scheduled date of delivery/execution of the order,
  • It was noted that MSMEs always suffer due to delayed payments and also do not possess sufficient funds to meet crises like COVID-19 Proposed Action. It was proposed that the DPEs, Railway Board to be approached for immediate intervention and release of all pending payments by CPSEs and Railways to the MSME, even if the related matter is pending with Micro and Small Enterprise Facilitation Council (MSEFC),
  • It was noted that most emerging challenges during the lockdown period as well as in the post-COVID-19 period would be meeting fixed costs. While this will be burdensome in the absence of regular funds flow, the problem will be more intensified if Banks/NBFC create pressure on MSMEs for repayments of the dues. In this regard, it was proposed that the State Governments be approached for taking suitable initiatives to exempt/reimburse the electricity and other fixed charges during this period,
  • It was noted that in the post-COVID-19 period, it will be obvious for MSMEs to face challenges from rising raw material prices. In this regard, it was proposed to deliberate with the Ministry of Finance to consider a reduction in GST rates on raw materials to partially compensate for the price escalations,
  • It was noted that the relaxation in statutory compliances like filing of GST returns in time, timely refunds of GST payments, and some other measures need to be taken. In this regard, it was proposed that the Department of Revenue be approached for examining the matter and providing suitable relief measures,
  • It noted that the moratorium period of 6 months for repayment of MSME loans and other forms of debts, together with a provision of ‘no change’ in the credit rating during the said period. The norms for declaring the NPA period in banks be extended to 180 days for at least the next 2 years as the MSMEs need uninterrupted banking assistance to deal with this crisis situation. The interest rate subvention @ 3% on loans to MSMEs that are healthy and not NPAs. In this regard, it was proposed that the deliberations with the Department of Revenue and the Department of Financial Services for bringing in suitable measures for the MSME sector.

From the perspective of the long-term sustainability of MSMEs, the FM announced several measures which include Smart Industrial Village Policy, Promoting Swadeshi Ideology via Policy & Strategy Drafting, Access to Information Technology Enabled Services at an affordable cost would bring the MSME sector on a level playing field with bigger players, to promote innovation and upscale MSMEs to withstand global competitions, Technological up-gradation of the MSMEs to minimize external risks to tolerable levels, encouraging corporatization of the MSME sector, encouraging innovations through setting up of a large number of business incubators in educational institutions, formulation of long term policies for the timely receipt of payments by MSMEs.W.r.t. the financial assistance to MSMEs, the measures include prioritizing lending to MSMEs from banks by including small enterprises in the earmarked priority sector and raising the sub-target limit to 10% from 7.5%, collateral-free & MUDRA small loans to encourage self-employment, relaxing ceiling on working capital by banks.

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