Friday, June 10, 2016

MSME Amendment Bill Destroys the Sector

MSMEs in India have great significance as they will be the drivers of ‘Make in India’, Start Up India, and Digital India strategies unfolded by the Union Government. They are governed by the provisions of MSME Development Act 2006, with the principal objective of promoting, developing and enhancing the competitiveness of the MSMEs.

Two years since the NDA government came to power MSME sector seems to be in a confused state with unresponding credit markets, slow moving equity, and adverse global positioning in spite of large potential for job growth.

MSMEs are redefined in September 2015 by way of amendment to rules to the 2006 MSMSE Act providing for vertical growth. Earlier definitions of SSI and MSMEs post 2006 accommodated horizontal growth and perverse incentives. But all the states have not fallen into grove.
New regulations and rules seem to be compounding the problems for the sector when it comes to revival and rehabilitation even as the Bankruptcy Law provides the long awaited relief for the large industry.

Draft MSME Development (Amendment) Act 2015 notified in November 2015 awaits cabinet approval for placing before the Parliament. This Amendment needs to be looked at from the point of view of basic tenets of regulations.

The institutional lenders invariably consider MSME sector as high risk. The Financial Stability Report throws up some interesting data in relation to the manufacturing MSMEs. Data on mortality in the sector is not also available.

The sector also suffers from the absence of exit route in case the unit fails. As if to rectify this, a Bill to amend the MSME Development Act, 2006 prepared by the Ministry of MSMEs in November 2015 providing for revival, restructuring and exit rules is awaiting introduction in the Parliament.

It is important that every authority empowered to make any rule which is reasonably likely to affect a significant number of MSMEs, should, before notifying the rule or at the time of notifying the draft rules/amendments to the existing statute, prepare an impact assessment analysis. The impact analysis report should clearly and concisely show the objectives and the legal basis for the rule.

It should also give a description of the record keeping and other compliance requirements together with an estimate of the classes of MSMEs will be subject to the requirements and type of professional skills necessary for preparation of report, return and /or record. Unfortunately, the Draft MSME Development Act (2006) Amendment Bill, 2015 targeting revival and rehabilitation of MSMEs does not satisfy these requirements.

The Bill also failed to mention the extant provisions for rehabilitation, revival and restructuring of MSMEs announced in its own Rules in June 2015.

It would have been better had the Bill provided for certification as to the ability and feasibility of different classes and sizes of MSMEs to comply with the requirement.

The Bill provided for appointment of Special Adjudicating Authority under Section 3 of the Act by the State Government in consultation with the Chief Justice of the High Court. Likewise it also provided for appointment of Enterprise Trustee. Both the appointments are to be made by the State Governments. There is no reference as to who will bear the related costs. The fate of DRTs is too well known to bear repetition in these columns that suffered for want of judges. One more judicial authority for the sector would remain on paper at least for another decade if not more.

‘Claim’ under the Bill has been defined as – “a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, un-matured, disputed,  undisputed, legal, equitable, secured or  unsecured.” Whether legally disputed claims can go beyond contest by the respondent under this Bill is a matter of doubt.

Section 2 (la) defines the sick unit: "sick enterprise" shall mean an enterprise which has failed to pay 
the debt of its creditors within 30 days of the notice of demand or to secure or compound it to the reasonable satisfaction of the creditors.'

RBI’s prudential norms suggest that the banks have 90 days time after the asset becomes NPA for taking any recovery measures. (It will take irregularity in payment of dues – principal and/or interest- 90 days to become NPA). This would mean that 180 days would be the effective time for initiating and implementing the rescheduling guidelines.

Declaring an enterprise as sick currently rests with the creditor under the rules of the RBI. There is no reference to the RBI regulations in the Bill. While the entrepreneur has the right to demand for revival, validation of the demand and conceding to it with such conditions as deemed necessary rest with the zonal committee set up under the extant rules of RBI.

Under Section 25B application for the scheme of revival and rehabilitation has to be submitted to the Authority under the Act and this Authority under the Act cannot bind the financing institution over his decision in regard to the application.

The Bill provided for appointment of Provisional Trustee from a Panel to be maintained by the State Government and it mentions in Section 25 E (3) the eligible persons for Provisional and Enterprise Trustee. The first level of appointment – Provisional Trustee and the second level – Enterprise Trustee, if different, whose decision on the course of action prevails is not clear in the Bill.

Section 25 E (6) provided for recovering any damages to the suffering unit caused by the decisions of the Enterprise Trustee have to be ordered by the Adjudicating Authority from the Trustee. The appointment conditions of Enterprise Trustee do not provide for any caution deposit or an affidavit from the Trustee to that effect.

Section 25N (a) of the Bill, while winding up the unit, exempts proceedings against certain properties and class of assets of which á single dwelling house of the house owned by the entrepreneur and his family is one. But it adds a proviso there under: ‘Provided that any dwelling unit of the owner which has been given on security for any loan shall not be exempt.’

The Amendment also ignores the RBI regulation that collateral free lending shall be made in respect of enterprises whose loan requirements are below Rs.100 lakhs at present but guaranteed by the CGTMSE. It should have provided that such dwelling house if obtained within this credit limit shall be excluded from the proceedings charged under the Act.

Jurisdiction of the Court has to be decided by the concerned State Government in consultation with the High Court as per Section 3 (Principal Act 20A) of the Act. It could have as well mentioned that the units established and running in a particular state and having its registered office located in that 
State as the jurisdiction for the purpose of the Act.

The Bill if takes effect will ensure death of a unit legally once it fails to respond to the notice of claim for payment of its obligations to the lender within 30 days. It not merely fails to conform to the basic tenets of legal formulations but also internationally accepted tenets of regulation.

Published in the Money Life on 8.6.2016