Construing the Revised Changes in the Definition of MSME and Evaluating Other Incentives for MSMEs

–Roopal Tripathi

On May 13, 2020, Finance Minister, Nirmala Sitharaman by virtue of Atmanirbhar Bharat Abhiyan stimulus package has introduced various incentives for the Micro, Small and Medium Enterprises and the directions formed the first tranche of the financial package of Twenty Lakhs crores, announced by the Prime minister of India on May 12, 2020, and one of them is the change in the definition of MSMEs and as per the new definition; the MSMEs will be defined by the ‘investment and annual turnover’ instead of ‘investment in plant and machinery or equipment’.

According to the Micro, Small and Medium Enterprises Development Act, 2006 the three kinds of enterprises were classified into two categories manufacturing enterprises and service enterprises. The Manufacturing Enterprises are defined in terms of Plant and Machinery and the Service Enterprises are defined in terms of investment in Equipment according to the Micro, Small and Medium Enterprises Development Act, 2006.

In the new definition, along with revising the investment criteria and escalating it upwards, another criterion that is an annual turnover has been introduced to classify the definition of MSMEs and the Government has eliminated the distinction between the Manufacturing and Services Enterprises.

According to the new definition of MSME, Manufacturing and Services Enterprises with an investment up to Rs. 1 crore and turnover up to Rs. 5 crores will be classified in the category of Micro Enterprises as compared to existing investment up to Rs. 25 lakhs and Rs. 10 lakhs in the Manufacturing and Services Enterprises, respectively. For, the Small Enterprises revised investment is up to Rs. 5 crores and annual investment is up to Rs. 50 crores as compared to existing investment in Manufacturing Enterprises up to Rs. 5 crores and with an investment of Rs. 2 crores in Service Enterprises.  And, for the Medium Enterprises covered under MSME, the revised investment escalated up to Rs. 20 crores from existing investment up to Rs. 10 crores and 5 crores in Manufacturing and Services Enterprises, respectively and the new addition to the criteria of revised MSME which is turnover was capped at 100 crores.

However, on 19 May, 2020, Minister of Micro, Small and Medium Enterprises and Road Transport and Highways Nitin Gadkari, enumerated a decision to further revise the investment and turnover of the Medium Enterprises covered under MSME to investment up to Rs. 50 crores and turnover up to Rs. 200 crores.

The Union Minister further specified that the criteria should be based on investment “or” turnover instead of “investment and turnover” and the Minister was open to considering the suggestions of increasing the threshold limit of an annual turnover of Medium Enterprises covered under MSME to be 250 crores instead of 200 crores. Mr. Gadkari elaborated about the Government plans of raising the MSMEs contribution to ameliorate export from 48 percent to 60 percent and even boost MSMEs contribution to GDP of the Indian economy from 29 percent at present to 50 percent.

While encouraging the exporters, Mr. Gadkari was keen on developing MSMEs of International standards.

Evaluating the other incentives announced by Finance Minister for MSMEs

Apart from the changes in the definition of MSME, there were five other incentives following which was announced to ease the functioning of MSMEs:

1. To sanction collateral-free loans of Rs. 3 lakh crores, with a tenure of 4 years, which even includes a moratorium on the repayment that means if there is a default on repayment of the loan, the Government will repay those loans to the banks.
2. Equity infusion of Rs. 50,000 crores
3. Subordinate debt for stressed MSMEs by infusing Rs. 20,000 crores
4. Disallowance of the global tender for Government procured tenders requiring the amount of up to Rs. 200 crores
5. E-market linkages and payment of outstanding dues to MSME, by Government/ CPSEs within 45 days.

Since, several MSMEs were interested in expanding their business but because of the existing investment criteria that were attached to the micro, small and medium enterprises they restricted their investment capacity so that they can remain within the realm of the requisite criteria of the micro, small and medium enterprise and avail the benefits and exemptions that were provided for the three respective enterprises under Micro, Small and Medium Enterprises Development Act, 2006. Now, that the definition of MSME has expanded and an additional criteria of “annual turnover” has taken a place to determine the category of enterprises and the classification of manufacturing and services enterprises have been removed, MSMEs which earlier had inhibitions for falling out of the category of MSME once they expand their investment in their enterprises can now invest up to 4 times more as compared to the existing investment of 25 lakhs in Micro Enterprises, 5 times more as compared to the existing investment of 5 crores in Small Enterprises and 10 times more as compared to the existing investment of Rs. 5 crores in Medium Enterprises.

By disallowing the global tender for projects up to 200 crores, the Government has indicated growth for the Indian enterprises who are not yet, equipped with adequate capital, technological and manpower resources as compared to the global entrepreneurs and enterprises enriched with abundant capital, technological and manpower resources. Since, Indian enterprises do not have to compete with the entrepreneurs across the globe, they can thrive on the projects which require the investment of the capital up to Rs. 200 crores.

Since, due to COVID-19 and the challenges that come along with lockdown and social distancing, by providing E-market linkages for the MSMEs, Government is allowing them to function in the absence of trade fairs, exhibitions and mass participation events of industries, it is an affirmative step and it reflects that the Government is preparing to trade electronically for the upcoming times given the situation that has arisen due to COVID-19. By infusing Rs. 50,000 crores as equity for MSMEs which have the potential to grow, the fund will encourage MSMEs to get listed Government is trying to expand the standard of MSMEs.

Although, the Government has announced several incentives to be availed in the future for MSMEs to cope with the financial crisis that has arisen due to COVID-19 however, due to lockdown most entrepreneurs do not have the liquidity to pay salaries and wages to their employees. The schemes laid down by the Government for the growth of MSME are not in nature which can bring immediate relief to the MSMEs even though, the incentives and reliefs that were announced by the Finance Minister as the first tranche of the financial package of twenty lakh crores were made keeping in view of the loss of cash inflow in the market due to the National lockdown.

However, the measures are in no manner suggests that it can curb the financial crunch which are being currently faced by the MSMEs either by keeping their enterprises operational because of less liquidity in the market or by aiding the micro, small and medium enterprises entrepreneurs in paying salaries and wages to their employees.

Conclusion

The Government by sanctioning collateral-free loans to the MSMEs for a time period of four years and along with it even providing one-year moratorium in case, if enterprises default to pay the loan the Government will repay the loan amount to the lending bank. The effect of this measure would be that either enterprise will become lenient and may cause a prolonged delay in repaying the loan amount or may even intentionally default in repaying the loan to the bank considering that the Government will repay the loan amount to the bank.  Banks, on the other side, will sanction loans to MSMEs irrespective of the credit rating of the enterprise and the Government will clear all the outstanding receivables within the next 45 days and an infusion of Rs. 20,000 crores as subordinate debt for stressed MSMEs by the Government for which SMEs with NPA or stressed functioning will be eligible for the same, these two incentives are made to increase liquidity in the market.

Therefore, it can be said that incentives taken by the Government are laudable but they do not provide an instant measure to ease the business operations of MSME in terms of providing them sufficient liquidity in this pandemic crisis.

The author of this article is Roopal Tripathi. She is a practicing advocate at the Allahabad High Court.