Synopsis–Costs for MSMEs to do business is rising in all sorts of ways. Unpaid dues are central to their woes.
For the financially starved MSME sector, securing outstanding payments from various businesses remains a challenging task-an issue that often affects their very survival.
Whenever an MSME does not receive payments for the goods or services rendered within the stipulated times, it certainly affects them in several ways. Besides crippling their liquidity, it brings down their motivation and also leads to a significant erosion of their trust in the wider business ecosystem.
Making no bones over the gravity of the issue, the Union MSME minister Nitin Gadkari last year pegged the MSME sector’s pending payments at a massive Rs 5-lakh crore. In October 2017, the Modi government also came up with the ‘MSME Samadhan’ portal, a delayed payment monitoring platform to enable recovery of delayed payments for MSME from government departments, etc. However, a cursory look at this portal reveals that despite having made considerable headway in terms of its intended outcomes, a lot of ground remains to be covered. As on February 10th, 2021, the portal shows 67,898 applications related to unpaid dues filed by MSME units, amounting to Rs 19005.15 crore.
So far, close to Rs 21,000 crores in MSME dues have been cleared during the last 7 months of the last year under the Atmanirbhar Bharat scheme, says the government data.
Industry observers, while appreciating these measures, flag the need for more measures to help the sector tide over this issue. Arvind Sharma, Partner at Shardul Amarchand Mangaldas & Co, says the government efforts have resulted in the central government agencies and CPSEs paying Rs 21,000 crores of MSME dues in 7 months. “The monthly pending dues by the central government ministries and CPSEs declined from 23.9% in May 2020 to 20.65% in October 2020. That said, the situation needs to be made better,” asserts Sharma.
In terms of safeguards to address the issue of outstanding payments, the government has put in place many frameworks. Practically, these appear to be toothless in helping MSMEs recover their dues. A business unit registered as an MSME and facing problems to recover pending dues from buyers may approach the MSME department to take action against them. But the million-dollar question is how many small businesses are really registered as MSME firms? As per official estimates, India has 6.33 crore MSMEs. Out of which, the number of registered MSMEs in FY20 stood at 25.13 lakh units, says the government. Hence, most of these redressal mechanisms are available to a small percentage of firms.
Since many MSMEs operate out of the informal economy, shouldn’t there be some mechanisms for them to ensure their dues from their buyers on time? Daizy Chawla, Senior Partner, Corporate Law, Singh & Associates, has a different take on this. She believes though it seems unjustified that those enterprises who are qualifying as MSME but not yet registered due to any reason, cannot approach MSME Department, but we also have to keep this in mind that to run a smooth system it is not expected to create an exception at all times i.e. those who are not registered should be given some other mechanism.
Laws and rules enacted to address the problem of unpaid dues have yielded little results.“There is some purpose for introducing MSMED Act and if the government will start creating exceptions for those who are not taking benefit of the specific enactment, it will be an endless process and everybody will eventually start looking for exception instead of formal mechanism in place. Having said so, for the enterprises they have other mechanisms of recovery under various laws including but not limited to I&B Code 2016, even though it’s not a recovery tool but yes can be used as a deterrent tool,” she adds.
Also notable is that despite provisions under the MSME Development Act, 2006 requiring buyers to make payment to MSMEs within 45 days, it is seen that these rules are hardly followed. Further, despite well laid out related regulations, whereby the corporate entities are supposed to file half-yearly returns with the Ministry of Corporate Affairs regarding the dues of MSMEs, it has, however, been noticed that several corporate entities do not comply with these rules.
So, what recourse MSMEs have, and can enforcing penalties help?
Experts believe until large businesses themselves get serious about honouring their payment dues, good industry habits won’t trickle down to smaller firms. Putting the onus on large businesses, Shardul Amarchand Mangaldas’ Sharma stresses that though penalties in such cases “do act as a deterrent”, large businesses will have to take more proactive steps. Further, as the government now admits that the slow pace of resolution through legal facilitation centre might be discouraging MSMEs to approach it, Sharma suggests that as an alternate, MSMEs may consider mutually settling payment disputes with buyers or procuring bank guarantees from buyers.
When large companies are involved, MSMEs fear a backlash in approaching the legal facilitation centres.Another relevant fact is that with the enactment of the MSMED Act in 2006, the government’s rationale was the provisions included would deter buyers dealing with MSMEs from committing payment defaults. But so far, very few cases have been brought to the concerned legal facilitation centres. This shows many MSMEs don’t prefer opting for the judicial route, fearing a backlash from larger counterparts and buyers. Unsurprisingly, as on 9th Feb, out of a total of 67, 898 applications filed by MSMEs, only 6,054 cases (meaning a dismal 8.91%) have been mutually settled with buyers.
Singh & Associates’ Chawla argues that not approaching the legal facilitation centres is a conscious decision of a particular enterprise keeping in mind all scenarios and government cannot do anything in this regard. In her view, this is the case in any business that the creditors at some point of time think that if any action it will initiate against the debtor, then it may lose business not only from the said debtor but also from other buyers in case the debtor is having any influence in the market. “The best way out to reduce such incidence of default is to have a good negotiating skill when entering into the business contract, especially regarding payment terms, credit period etc.,” she affirms.
Need to turn laws helpful
On the larger issue of delayed realisation of their bills and receivables, MSME firms also maintain that the existing Insolvency and Bankruptcy Code only add to their miseries. The IBC code is not in favour of small businesses and does little to secure lenders’ rights, they argue, adding when companies are rescued under bankruptcy laws, MSMEs as their vendors, aren’t offered a fair settlement deal on their pending dues, as they are taken for granted by investors rescuing ailing firms. This remains an often cited issue affecting many small businesses. This has, most times, resulted in piling of non-performing assets for them.
However, according to Utkarsh Sinha, MD of Bexley Advisors, operational creditors should not have parity with financial creditors. “There is a reason financial debtors take seniority in resolution processes globally, as that ensures the flow of growth capital. India’s revised bankruptcy laws have finally brought it closer to global norms, while also giving protection to operational creditors. Giving them parity will not prove effective, and in fact, hurt the system in the long term,” Sinha says. Financial creditors are those that have provided funds to, like a bank or PE, while we categorise businesses and individuals that have provided goods or services to a defaulting entity as operational creditors.
For enhancing the grievance redressal mechanism for MSMEs, the bills discussing platform TReDS can prove to be a big enabler, experts believe. Currently, the awareness around TReDS is low among the MSMEs. “By design, TreDs takes care of many of the woes faced by MSMEs, by giving them quick access to liquidity. But platforms like TreDs needs to achieve critical volume before they serve their intended purposes,” highlights Sinha, adding if the discounted bills are bought by finances with heft, they have increased bargaining power and wherewithal to ensure they can extract payments from corporates and/or the government, shifting the balance of power and improving grievance redressal.