Government Releases Draft MSME Policy

MSMEs’ Ease of Doing Business: India’s MSME Ministry has released a draught National Policy for Micro, Small and Medium Enterprises (MSMEs), which proposes a number of measures to boost competitiveness, technology upgradation, cluster and infrastructure development, MSME product procurement, and dedicated credit support. India currently lacks an MSME policy; however, attempts have been underway since roughly 2015, when the Ministry of MSME formed a One Member Committee under the chairmanship of former Cabinet Secretary Dr Prabhat Kumar to assist in the formulation of the strategy. The committee’s recommendations were submitted in January 2017.

Before 2017, a draught MSME policy consultation paper was also produced. The government has identified eight “particular action areas” to “create a healthy ecosystem for the rapid expansion of the MSME sector,” according to a new draught released last week by the Office of the Development Commissioner (DC-MSME), which is seeking feedback and proposals by February 28, 2021. These were some of the areas:

Role and responsibilities of national and state governments, as well as district-level authorities, at the intergovernmental level. The draught proposed developing Standard Operating Procedures (SOP) for MSMEs registration and reviewing the framework for regulating and funding arrangements covering the Reserve Bank of India, SIDBI, and other public and private lenders in line with incentives to promote competitive enterprises as one of the measures for the central government. The draught recommended that state governments adopt a State Policy on MSME in line with national policy and take steps to encourage businesses to register as MSMEs.

India’s MSMEs Legislation and Regulatory Framework: The draught policy proposed the introduction of more facilitation councils, preferably one for each district, to speed up the resolution of cases filed against delayed payments, rather than the current one council at the state level. Furthermore, when a firm goes into bankruptcy or seeks the National Company Law Tribunal, MSME dues shall be given priority above all other unsecured payments after resolving employee dues under the Insolvency and Bankruptcy Code, 2016. (NCLT).

The draught also proposed reframing the MSMED Act as a comprehensive and holistic “MSME Code” to bring clarity to the regulatory standards governing MSMEs’ entry, continuation, and exit, as well as paperwork and declaration procedures under several regulatory acts.

“District level FCs would be extremely beneficial because people would otherwise have to travel to state councils to make their cases.” The focus should also be on ensuring that councils are capable of making swift, actionable decisions. Although there has been improvement in the last two years, few state FCs are engaged in making decisions in a timely manner. Financial Express Online quoted Ashok Saigal, MD, Frontier Technologies and Co-Chairman, CII National MSME Council, as saying, “Decisions taken by FCs must be within a set timeline and implementable without MSMEs having to pursue their cases through the courts to obtain their reimbursements.”

To improve MSMEs’ access to finance, the draught suggested uniformity in loan application formats; developing customized products for financing needs based on expected cash flows; evaluating MSMEs’ creditworthiness using substitute information such as a bank statement, GST data, and standardized scorecards; and switching from balance sheet or turnover based working capital financing to cash flow based, or supple, financing.

“It’s critical to put MSMEs to the forefront. The policy also specifies the establishment of a marketing development fund. This is a critical step in increasing the visibility of MSMEs. Increased advertising and marketing banners, as well as new stores spread across cities, will raise awareness of MSMEs. Also, a crucial step would be linking them with the proper businesses,” Meghna Suryakumar, Founder & CEO of credit risk assessment startup Crediwatch told Financial Express Online.

Technology Upgrades: The draught proposed establishing a “focused institution” to promote technology development and R&D operations in the MSME sector. It also recommended establishing Centres of Excellence with specialist experts to investigate difficulties faced by MSMEs on a regular basis and create capacity through standard operating procedures, guidelines, manuals, and checklists. MSME Toom Rooms should be established at district levels across the country, according to the draught policy.

Knowledge Management: The draught proposed developing two sets of comprehensive databases in the central government with distinct verticals to make MSME-related data more cohesive and enable data analytics for government, banks, and other MSME stakeholders to make more informed decisions. First, all MSME-affiliated offices must be connected to a single network, which includes state and local government organizations. “This could include things like UAM registration, PAN applications, various clearances and NOCs, and so on. Second, a public cloud-based database featuring information on credit, payments, marketing, procurement, insurance, technology, training, and other topics. The India Enterprise Portal is now attempting to address some of these issues, but it is still a work in progress.”

Ease of Doing Business: For cross-border trade concerns affecting MSMEs, the draught advised connecting clusters and other key MSME centres to the country’s transportation infrastructure, with further links to export ports. A designated authority at the major ports should also investigate MSMEs’ export/import issues. In terms of contract enforcement, MSMEs should be able to obtain reasonable legal assistance at the district level for non-judicial tasks such as contract preparation, advise on techno-legal formalities, and so on. Furthermore, the document proposed a state-level helpline or nationwide chat service for contract advice.

Skill Development: The draught policy proposed establishing a Cell in the District Industries Centre to collect information from various training entities about the training programmes they plan to conduct in the next six months and to communicate with businesses about the types of skill training their employees require. “This Cell would also conduct awareness campaigns, particularly given the increasing number of tiny companies in the informal sector,” according to the proposal.

“Matching the supply and demand of talents has always been a challenge due to a lack of adequate linkage between businesses and training centres. The draught policy’s specified nodal centres are supposed to provide MSMEs with the necessary skilled labor. However, it would be more advantageous if the government could set up these cells in every cluster, as clusters always have a large density of MSMEs,” Murali Kasinath, Chief Operating Officer, Skills India Foundation, told Financial Express Online.

Exit Code: The draught proposes connecting small and medium enterprises with a Fast Track Corporate Insolvency Resolution Process under the provisions of the Insolvency and Bankruptcy Code, 2016, in order to offer MSME entrepreneurs with a smooth exit from their company. It advised that tiny businesses choose the district-level arbitration method because it is faster and more convenient, with the option to elevate the case under specific circumstances.