MSME Stress and its efficacy on prepacks

Dr. Monika Sharma

monika_gurgaon@rediffmail.com
9911900087

Dr. Vikas Madhukar

Dy. Pro-VC, Dean (FMS), Director, Amity Business School
9818153629
vmadhukar@ggn.amity.edu

Vibhuti Parashar
vibhutiparashar2916@gmail.com
9711810973
Abstract
The paper focuses on the debtor creditor’s debt relationship in trade and its recovery.
MSMEs and Insolvency code was enacted to mitigate MSME’s ever-growing assets stress,
timely and efficient resolutions in India. Indian government come up with pre- packed
solvency regimes bylaw amendment to curtail MSMEs stress due to Covid-19. The research
also aimed to explore government schemes and suggest some amendments in-laws. The
objective behind the research stressed to explore the major reasons for MSMEs’ stress and
available government measures for MSMEs, for this primary data would be collected from
sick MSMEs and secondary data would be collected from the MSME Ministry in the form of
available schemes for sick industries and their beneficiaries. Secondary data would be
collected as it would be difficult to collect responses from law and policymakers due to
reluctant behavior and shortage of time, only available data would be evaluated. Primary
Data in research, a Likert, 5 points scale would be in use for primary data collection in the
form of a structured questionnaire (15 Questions) for sick MSMEs. Convenient sampling
would be in research process to collect data from Gurugram and Faridabad as these two
regions contain a maximum number of industries in Haryana. A sample size of 5o MSMEs
from Gurugram and 50 from Faridabad would be appropriate for the research. Research
analysis would use EFA (Exploratory factor analysis) for determining the factors which
cause significant stress to MSMEs and factors would be confirmed through (CFA)
Confirmatory factor analysis. The research would be definitely beneficial for lawmakers,
policy makers, and, the politician in dragging attention towards sick MSMEs problems and
definitely to amend existing policy for the ease of MSMEs.
Introduction:
MSME lays the foundation stone for key drivers of employment, production, GDP growth,
entrepreneurship in Indian as well as in the world economy. The sector caters to the
requirement of around 110 million people and contributes 30% to India’s GDP expected to be
50% in the next five years (Annual Reports, 2020-21, Ministry of MSME, Government of
India) 1. Despite so many contributions, it is facing challenges in the insolvency system,
biggest one is delayed payment.

Definition
Revised classification applicable w.e.f. July 1, 2020
Composite Criteria: Investment in Plant & Machinery/equipment and Annual Turnover
Classification Micro Small Medium
Manufacturing & Investment: Investment: Investment:
Service Sector Less than 1 crore Less than 10 crore Less than 50 crore
Turnover: Turnover: Turnover:
Less than 5 crore less than 50 crore less than 250 crore

Source: MSME Ministry

MSME Employment
MSME share in different sectors
Broad Activity Employment (in Lakh) Share (%)
Category

Rural Urban Total

Manufacturing 186.56 173.86 360.41 32
Electricity 0.06 0.02 0.07 0
Trade 160.64 226.54 387.18 35
Other Services 150.43 211.69 362.22 33
All 497.78 612.10 1109.89 100
Source: MSME Ministry

Reasons for MSME stress:

1. Difficulty in accessing finance at a specific time in the right quantity
2. Difficult to attract and retain qualified personnel.
3. Difficulty in penetrating the national and International markets.
4. Difficulty in converting debtors into cash/ delayed payment

Objective:
1. To know the reasons for MSMEs stress
2. To explore the available government schemes for sick MSMEs.
3. To develop a model/framework for insolvency resolution.

Research methodology:
Primary data- Questionnaire from sick industries (50 respondents from Gurugram, and 50
from Faridabad as these contain the maximum number of MSMEs)
Secondary data- MSME Ministry
Sample size-100 sick industries (50 from Gurugram, 50 from Faridabad)

MSME and Insolvency

It is a need of the hour to detect the MSME sickness at an early stage and stringent actions
to prevent sickness. A major proportion of MSMEs belongs to private sector businesses.
The challenges are such as availability of collateral, unspecific, diversified nature. They
constitute the largest proportion of private sector businesses. The Insolvency regimes must
come forward for MSMEs’ requirements. A Few challenges are listed below:-
1. Complicated Insolvency system
2. Post insolvency financing
3. Lack of assets in a formal insolvency procedure
4. Insufficient information about the debtor
5. Creditor behavior
MSME Insolvency and government support

MSMEs development can be done through various legislations and directions of

government regulators. MSME development act 2006 (MSMED Act) was a major lead in
this process. MSMEs various challenges can be mitigated with proper government
insolvency regimes. IBC protects to small investors and easy exit out of the business. Thus
IBC Code, 2016 is protection against insolvency and bankruptcy.

Laws Analysis:-

MSMED Act, 2006

1. The act focuses to know payment delays and related disputes.

2. Disputes settlement between traders settle at Facilitation Council, which could impose
penalty, pass a decree or help in payment
3. Low success rate under this mechanism

IBC and Resolution

1. The act provides a comprehensive framework for the resolution of insolvency and
bankruptcy of debtors and creditors of MSMEs.

2. The act has brought relief to MSMEs by relaxation from section 29A.

3. It is applicable for corporate MSMEs.

 IBC Section 29 A

1. This section provides restrictive provisions of section 29 A with certain relaxations.

2. It provides relaxation to corporate MSME debtors.

3. It can prevent MSMEs from Liquidation due to government exemptions.

The Indian government is forced to revamp and restructure the present insolvency law to
shoot up economic growth. MSMEs sector faced stress and distress due to the Covid-19
crisis in 2020 and 2021. The Insolvency law had enacted in 2016 and amended several
times to safeguard the MSMEs. The ongoing pandemic has led the Government of India to
restructure, reset and revamp the present insolvency law to boost the Indian economic
growth prospect. The COVID-19 crisis has caused distress and failure in the MSME sector.
The insolvency law since its enactment in 2016 has been amended several times to protect
the interest of MSMEs. The code act as a pre-packs for MSMEs, but still there exists a
need to be deliberated upon. Micro enterprises suffer more as its number is also high which
usually have a sole proprietorship and single employee business out of 29.8 million
registered MSMEs as per The Working Group on Individual Insolvency. The structural
reforms in the MSME sector in the Union Budget 2021-22 targets for debt resolution and
robust NCLT framework for the MSMEs.

Bibliography
www.msme.gov.in
www.rbi.gov.in
Annual Report 2020-2021, Ministry of MSME, Government of India