GUJARAT NATIONAL LAW UNIVERSITY

MONEY BANKING FINANCE CONTINUOUS EVALUATION

PROJECT

RESEARCH ARTICLE ON IMPACT OF COVID-19 ON MSMES

SECTOR AND POLICIES AND REGULATIONS INTRODUCED IN

RESPONSE.

SUBMITTED BY: 1)Kashvi Vachhani

REGISTRATION NUMBER: 19B172.

EMAIL – kashvivachhani24@gmail.com.

SEMESTER: II

1
 TABLE OF CONTENTS

SRNO TITLE PAGE

1) ACKNOWLEDGEMENT 3

2) DECLARATION 4

3) INTRODUCTION 5

4) JUDICIAL/ REGULATORY RELIEF

- CHANGES MADE TO THE MSME ACT 2006.
8
- CREDIT GUARANTEE SCHEME 9
- FUNDS FOR FUNDS SCHEME
10
- PROVISION OF SUBORDINATE DEBT 11
5) SPECIAL RELIEF 12

6) AUTHORS’ OPINION./ CONCLUSION 13

7) REFERENCES 14

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 ACKNOWLEDGMENT

We thank everyone who has been instrumental in the preparation of this project. We would like
to specifically thank Mr Hitesh Thakkar, Assistant Professor of Economics for providing me
with an opportunity to prepare this Project. This project making process has been an enriching
experience and I’m grateful for this learning process which has provided us with a great
learning opportunity, as a student of Economics. This in-depth research has truly given us the
golden opportunity to get a closer look at the crippling effect of the ongoing pandemic on the
Micro, small and medium enterprises [ MSMEs] sector.

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 DECLARATION

I the undersigned solemnly declare that the research article is based on my own work carried
out during the course of this study. I assert the statements made and conclusions drawn are an
outcome of our research work.

I further certify that :

1. The work contained in the report is original and has been done by me under the
general supervision of my supervisor.
2. The work has not been submitted to any other Institution for any other
degree/diploma/certificate in this university or any other University of India or
abroad.
3. I have followed the guidelines provided by the university in writing the report.
4. Whenever I have used materials (data, theoretical analysis, and text) from other
sources, I have given due credit to them in the text of the report and giving their
details in the references.

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 IMPACT OF COVID-19 ON MSMES AND THE AMENDMENT IN THE ACT.

INTRODUCTION

Covid-19 has undoubtedly been nothing short of a catastrophe. It has become one of the most
calamitic medical and humanitarian crisis. No nation has been successful in escaping the
devastating effects of this lamentable and ruinous pandemic on its economy. Amidst this, it
becomes imperative to talk about the conditions of the sectors of the Indian economy and how
they have taken a hit as a result of this ongoing crisis. The health sector has been facing
detrimental consequences of this event. While the majority of sectors have experienced
"sizeable and immediate sales losses," and have been on the short end of the stick, the adverse
effect has been on sectors where "consumption expenditure is internally inconsistent,”
according to a latest systemic risk report done by the central bank. Over the next six months,
majority of the population believed that the recovery in the MSME market, which suffered
from significant labor migration, output stoppage and cash flow constraint during the
shutdown, will be gloomy.1
India's Micro, Small and Medium Enterprises (MSME) place is the biggest after China in the
world. They are undisputedly the backbone of the economy. The sector plays a prominent part
in accelerating the development of the Indian economic system. With 14.20 percent of the total
MSMEs in the country, the state of Uttar Pradesh i has the largest number of approximate
MSMEs. With a 14 percent share i, West Bengal is the closest second, followed by Tamil Nadu
and Maharashtra at 8 percent.2
Since MSMEs largely deal with essential products which are in daily use. These industries have
been facing low liquidity/cash crunch and lack of daily wage workers. This has reflected onto
the low production. Overall low production has caused low supply. This inevitably led to
inflationary environment of the market.

1
Sandeep Soni, Covid impact: MSME among most adversely affected sectors; recovery chances ‘bleak’ in 6
months The Financial Express (2020), https://www.financialexpress.com/industry/sme/msme-eodb-covid-
impact-msme-among-most-adversely-affected-sectors-recovery-in-6-months-likely-to-be-bleak/2036626/ (last
visited Oct 14, 2020).
2
Impact of COVID-19 pandemic on Indian Economy with special reference to Indian MSME Sector, (2020),
https://www.researchgate.net/publication/341775901_Impact_of_COVID-
19_pandemic_on_Indian_Economy_with_special_reference_to_Indian_MSME_Sector (last visited Oct 14,
2020).

5
As world economy is heavily impacted, the effects of the transmission of the disease is likely
to result in a massive setback. The Indian development model relies on export-led growth
(Mishra, 2019), and can therefore have a significant growth impact due to the lockout in the
transmission of the disease (Mishra, 2019).3

Empherically speaking, let’s take the figures from the Gross Value Added of the term 2016-
2017 to assess the approximate deficit and drops for the market of MSMes. Following this, by
implementing the reference year 2011–2012 GVA deflator, the actual GVA is received. The
MSME sector's effect analysis is based on a two-step process. First, by implementing the
proportions of the shares in the number of available institutions under the two segments
(production and services), we calculate the GVA for the manufacturing and services market.
Following the measuring the GVA of these two industries, the percent share of each is
contained in the nationwide GVA fori manufacturing and services. Then we measure the
substantial reduction for MSME by using expectedi percentage decreasei values of these two
sectors calculated by using quarterly data for 2020 in the first portion. The cumulative oeffect
on MSMEs is determined by weighted average losses for MSMEs inio the manufacturing and
services sectors.4

3
Mishra,B.R. (2019), Role of external and domestic demand in economic growth. A study of BRICS countries.
Global Business Review, 21(2),547-566.
4 Pravakar Sahoo & Ashwani, COVID-19 and Indian Economy: Impact on Growth, Manufacturing, Trade and
MSME Sector, 21 Global Business Review 1159-1183 (2020).

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Source : Pravakar Sahoo & Ashwani, COVID-19 and Indian Economy: Impact on Growth, Manufacturing,
Trade and MSME Sector, 21 Global Business Review 1159-1183 (2020).

In view of the above table, The decrease in rate of MSME sector GVA by usingi
comparative lossi of India's aggregate GVA iconducted in thei first segmenti.

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Source : Pravakar Sahoo & Ashwani, COVID-19 and Indian Economy: Impact on Growth,
Manufacturing, Trade and MSME Sector, 21 Global Business Review 1159-1183 (2020).

(b) A drop in the rate of growth of MSME 's actuali GVA. An estimation can be made by
calculating it by the iway of precluding the reduction of GVA (percent) from the aggregate FY
2016i and FY 2017i rise.

REGULATORY RELIEF PROVIDED BY THE GOVERNMENT

1. Changes made to the MSME Act,2006.

1.1 To overcome this downturn, the government has introduced “ Aatma Nirbhar Package”/
Aatma Nirbhar Bharat Abhiyaan” by issuing a notification under the MSME Act,2006.
Predominantly under this, the govt has expanded the definition of MSME.5

The existing definition which determines the requirements to qualify as a MSME:

Type of Entity Manufacturing Service

Micro Up to 2.5 million Up to 1 million
Small Up to 50 million Up to 20 million
Medium Up to 0.1 billion Up to 50 million

Source: Article- MSMEs- Future of the nation6

The differentiation between manufacturing and service enterprisesi has been removed with an
extension in the context of the concepti of MSMEs, and now the organizations (both
manufacturing andi service sectors) will have to meet the following requirements in order to
qualify as an MSME:

Type of Entity Investment in plant and Turnover

Machinery

5
MSMEs - Future Of The Nation - Coronavirus (COVID-19) - India, Mondaq.com (2020),
https://www.mondaq.com/india/operational-impacts-and-strategy/953902/msmes--future-of-the-nation (last
visited Oct 14, 2020).
6
Id.

8
 Micro Up to 10 million Up to 50 million
Small Up to 0.1million Up to 0.5 billion
Medium Up to 0.5 billion Up to 2.5 billion

Source: Article- MSMEs- Future of the nation7

These modifications to the vortex of MSMEs help to alleviate concerns that the services
obtained to MSMEs by the Government as well as the MSME Act are outgrowing or losing
out. The modern term has broadened the reach of MSMEs, enabling more organizations to
count as MSMEs and profit from the Scheme and the MSME Act.8

1.2 Through this notification, people are also required to pay their dues within the period of
45 days. If the. same is not done withing the time frame then any payout will trigger cumulative
interest at the rate verified by RBI three times. Additionallyi, such interesti is not permitted as
a preclusion at the time i of filing taxi returns It is indeed necessary to evaluate the payments
to MSMEs in the claimant's financial statements. An MSME also may inform the
appropriate agencies for the resolution of its debts on the MSME Samadhaan Portal;.9

1.3 There also has been an induction of a proposal increasing the level of initiating the
insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC)
against MSME to INR 10 million under its Atma Nirbhar Package. A separate debt recovery
system for MSMEs has been suggested.10

2. Credit Guarantee Scheme-The Credit Guarantee Scheme provides MSME companies with
unprotected credit facility. Under the framework, MSME companies may use term loans or
working capital loans. These loans would be security-free and would not require MSMEs to
pledge any collateral or arrange for third-party loan guarantees to be used.11

7
Supra note 5 at 8.
8
Key Reforms To Support Micro, Small And Medium Enterprises As A Response To Covid-19 And The
Economic Crisis - Coronavirus (COVID-19) - India, Mondaq.com (2020),
https://www.mondaq.com/india/financing/962194/key-reforms-to-support-micro-small-and-medium-
enterprises-as-a-response-to-covid-19-and-the-economic-crisis (last visited Oct 14, 2020).
9
Supra note 5 at 8.
10
Supra note 5 at 8.
11
Covid 19: Relief Measures To Small Businesses In India. Atmanirbhar Bharat Abhiyan. - Coronavirus
(COVID-19) - India, Mondaq.com (2020), https://www.mondaq.com/india/operational-impacts-and-

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Under this, the government has provided a package of Rs 3 lakh crore rupees for the assistance
of MSMEs which have an outstanding of Rs25 crore/ > Rs100 crore turnover. Essentially the
purpose is to keep up with day-to-day expenses and to kick off the operations. Highlights under
this bracket12:

§ “100% credit guarantee cover on principal and interest (earlier it was 75% credit
guarantee)
§ With a new 12i months moratorium on payment of principal
§ Tenor - 4 years
§ Last date to avail scheme - 31 October 2020i”

3. Creation of a Fund: There has been a formulation of a perpetual fund of fifty thousand
crores for enterprises of prospects of growth and profitability. The focus of this project is to
imbue capital to support thrive and enhance MSMEs. Although the state is anticipated to
produce Rs.10,000 crores, the additional balance is anticipated to be funded by other entities
like SBI and LIC. This investment will also enable MSMEs to be “listed on the main board of
stock exchanges, that would run via a parent investment and a few daughter investments”.
The foundational premise of this corpus of funds is to enable these companies to seek domestic
markets for their need for capital rather than resorting to banks. Here the government is likely
to acquire fifteen percent of the funds generated from this framework as equity investment.
This proposition displays a powerful signal to these MSMEs for the purpose of informing
the banks not to exploit the financial institutions’ funding and also their own. If not followed,
will ruin the capital structure of both the entities in question. 13

3.1 There has been an unjust and massive foreign competition that MSMes unfortunately
have to come to terms with. Hence, worldwide bids of close to Rs 200 crores in government
contracting tenders would be forbidden.14

strategy/949802/covid-19-relief-measures-to-small-businesses-in-india-atmanirbhar-bharat-abhiyan (last visited

Oct 15, 2020).
12
Supra note 9 at 9.
13
Supra note 9 at 9.
14
Id.

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 3.2 In the course of the following forty-five days, all the receivables due to these firms
will be removed.15

3.3 Introduction of a twenty five percent cut on the prevalent rate on Tax Deducted at
Source and Tax Collected at Source starting from 14th of March to 31st of march in the
following year.16

3.4 The Vivaad se Vishwas Scheme, which centers around indirect tax payment disputes,
has been prolonged until 31 December 2020.17

4. Provision of Subordinate Debt:

Under the relevant scheme, the administration introduced a preliminary investment of Rs.
20,000 crores for the provision of subordinate debt to frustrated MSMEs under the Scheme.
“The Credit Guarantee Scheme for Subordinate Debt (CGSSD), also called 'Distressed Assets
Fund-Subordinate Debt for MSMEs,' was launched by the Ministry of MSMEs on 25 June 2020.
This mechanism will be operationalized via the Trust for Micro and Small Enterprises Credit
Guarantee Fund.”18
Certain features of this scheme19:
(a) The developers of this sector will be provided with a 15 % credit of their share or seventy-
five lakhs, either one of these which is lower than the other.
(b) Under the arrangement / trust, 0 percent guarantee coverage would be issued for this
subordinatei debti and 10 percent will arrive from the developers involved.
(c) There will be a 7-year suspension on payment of principali, while the actual repayment
tenure would be 10 years.

15
Supra note 4 at 6.
16
Id
17
Id
18
Supra note 8 at 9.
19
Id.

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SPECIAL RELIEF
Notably, the ministries have been active in providing special relief to various industries
under MSMEs by issuing separate notifications.

1) In a notification/order issued on 28th of March,2020 that people have been unable to make
payments to the power distribution companies as a result of this global shutdown. Inevitably
this has caused a cash crunch in these companies which have further been unable to pay the
consequent dues to the power generating companies. In order to provide a speedy redressal and
solution to this plight, the Ministry of Power has come forward with the following proposition:
(a) “CPSU Generation / Transmission” companies would be able to deliver / transmit energy
even to distributors with high pending dues to the generation / transmission companies. There
will be no distribution restriction of any DISCOM during the current crisis.20
(b) -The paymenti protectioni system to be operated by thei distribution undertakings with the
generation undertakings fori the distribution of power shall bei limited by fifty per cent by 31
May 2020.The Central Electricityi Regulatory Commission wasi ordered to provide Discoms
with a three-month suspension to make paymentsi to generating companies and transmission
licensees and not to impose penalties for late payment surcharges. State governments are asked
to give identical directives to the Commissions for State Electricity Control.21

2). A response team to address the complaints and fix the issues faced by food processing
and ancillary industries was set up by the iMinistry of Food Processingi Industries through
iPressi Releasei of 30 March 2020. The Honourableo Minister of Food Processing Industries
also advocated the need for a standard way for the production and transportation of food
products throughout all istates.22

3) Order No. 40-3/2020-DM-I(A) of the Ministry of Home Affairs of 24 March 2020 (as
amended) permittedi the motion of essential services. In addition, on 24 March 2020, the
Ministry of Home Affairs released a Standard Operating Procedure for the Supply of Essentiali
Goods and instructed all the State / UT to establish a crisis hotline /control room / office to

20
Pandemic Legal Intelligence - Impact On MSMEs Amidst COVID-19 - Coronavirus (COVID-19) - India,
Mondaq.com (2020), https://www.mondaq.com/india/operational-impacts-and-strategy/921742/pandemic-legal-
intelligence--impact-on-msmes-amidst-covid-19 (last visited Oct 15, 2020).
21
Id.
22
Covid-19 Impact on Food Industry – Covid19 | Pandemic Legal Implications of Covid-19 in India,
Covid19.amlegals.com (2020), https://covid19.amlegals.com/covid-19-impact-on-food-industry/ (last visited
Oct 16, 2020).

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resolvei the complaints or unnecessaryi problems experiencedi by essential goods or services
suppliers. Furthermore, under the Ministryi of Commercei and Industry, the Department for
the Promotion of Industryi and Internal iTrade (DPIIT) has established a control room to
regulate in actual the position of transport and delivery of goodsi, production , delivery of
important goods to ordinary people and the challenges faced by differenti interested parties
during the quarantine period.23

CONCLUSION

In the light of the recent event, it almost became imperative for the government to come up
with immediate reliefs. The transformation in the description of MSMEs is among the most
important modifications introduced since the ratification of the MSME Act to the legal
structure regulating MSMEs, as it gives hundreds of companies within the scope of the
MSME Act and empowers them to profit from the policy changes government has introduced
to the MSME sector during the outbreak.
Although the funding steps placed in level in the event of the ECLG scheme for MSMEs and
the equity and debt investments to be imposed by the company have the ability to reduce
credit constraints, it presents a concern to operationalize these changes and services for
MSMEs. In view of the fact that the Fund of Funds do inculcate growth potential/prospects
and profitability for MSMEs with equity financing and, in such a scenario, if the conclusive
requirements for 'growth and viability' are difficult to prove or if the covenants and
undertakings to be supplied by MSMEs are too costly, the realistic feasibility of the Fund of
Funds arrangements or other MSME financing programmes may raise some eyebrows.
Analogously, if the state's timely payment instructions for MSMEs, as well as other
opportunities extended to help MSMEs withstand the distress, are not rigorously regulated or
encouraged, the current attempts may well not give accurate results, and the recovery of
MSMEs may be too slow.
However, the country has explicitly aimed at providing aid to the MSME sector in India 's
fight against Covid-19 and its effort to boost its economy, is a definitely a pleasant change.

23
Supra note 22 at 12.

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REFERENCES

1) Articles

1. Covid 19: Relief Measures To Small Businesses In India. Atmanirbhar Bharat

Abhiyan. - Coronavirus (COVID-19) - India, Mondaq.com (2020),
https://www.mondaq.com/india/operational-impacts-and-strategy/949802/covid-19-
relief-measures-to-small-businesses-in-india-atmanirbhar-bharat-abhiyan (last visited
Oct 15, 2020).

2. Covid-19 Impact on Food Industry – Covid19 | Pandemic Legal Implications of

Covid-19 in India, Covid19.amlegals.com (2020),
https://covid19.amlegals.com/covid-19-impact-on-food-industry/ (last visited Oct 16,
2020).

3. Impact of COVID-19 pandemic on Indian Economy with special reference to Indian

MSME Secto, (2020),
https://www.researchgate.net/publication/341775901_Impact_of_COVID-
19_pandemic_on_Indian_Economy_with_special_reference_to_Indian_MSME_Secto
r (last visited Oct 14, 2020).

4. Key Reforms To Support Micro, Small And Medium Enterprises As A Response To

Covid-19 And The Economic Crisis - Coronavirus (COVID-19) - India, Mondaq.com
(2020), https://www.mondaq.com/india/financing/962194/key-reforms-to-support-
micro-small-and-medium-enterprises-as-a-response-to-covid-19-and-the-economic-
crisis (last visited Oct 14, 2020).

5. MSMEs - Future Of The Nation - Coronavirus (COVID-19) - India, Mondaq.com

(2020), https://www.mondaq.com/india/operational-impacts-and-
strategy/953902/msmes--future-of-the-nation (last visited Oct 14, 2020).

6. Pandemic Legal Intelligence - Impact On MSMEs Amidst COVID-19 - Coronavirus

(COVID-19) - India, Mondaq.com (2020),
https://www.mondaq.com/india/operational-impacts-and-strategy/921742/pandemic-
legal-intelligence--impact-on-msmes-amidst-covid-19 (last visited Oct 15, 2020).

7. Sandeep Soni, Covid impact: MSME among most adversely affected sectors;
recovery chances ‘bleak’ in 6 months The Financial Express (2020),
https://www.financialexpress.com/industry/sme/msme-eodb-covid-impact-msme-
among-most-adversely-affected-sectors-recovery-in-6-months-likely-to-be-
bleak/2036626/ (last visited Oct 14, 2020).

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2) Journal

1. Mishra,B.R. (2019), Role of external and domestic demand in economic growth. A

study of BRICS countries. Global Business Review, 21(2),547-566.

2. Pravakar Sahoo & Ashwani, COVID-19 and Indian Economy: Impact on Growth,
Manufacturing, Trade and MSME Sector, 21 Global Business Review 1159-1183
(2020).

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