Govt plans prepack insolvency process for MSMEs

Suresh P Iyengar Mumbai | Updated on March 13, 2021

As per RBI data, banks’ exposure to micro and small enterprises stood at ₹3,76,297 crore   -  The Hindu

Existing promoters may get to bid for their own entity

The government plans to come up with a new pre-packed insolvency process for micro, small and medium enterprises that are facing huge financial stress caused by Covid.

The government may amend the Section 29A of Insolvency and Bankruptcy Code to allow existing promoters to negotiate with banks and bid for their own company. However, it will prescribe certain default loan limit and turnover restrictions for companies to take advantage of MSME prepack insolvency, sources said.

As per RBI data, banks’ exposure to micro and small enterprises stood at ₹3,76,297 crore and that of medium enterprises was at ₹1,27,227 crore as of January-end.

Also read: Pre-packaged insolvency resolution process in the making for Covid-hit India Inc

The recent Financial Stability Report of RBI has estimated the gross bad loans of banks to raise to 15 per cent by September from 7.5 per cent in the year-ago month under the baseline scenario.

Viswas Panse, founder of NPA Consultant, an independent company advising stressed MSMEs, said the prepack insolvency process will have little success if banks continue to focus only on recovering money rather than revival of business.

An independent advisory body for each sector should be formed and they should be given the requisite concession and authority to revive the stressed business, he added.

Loan default

In recent times, after seeing the father struggling with bank loan default the second generation does not want to enter business and this is killing the entrepreneurial skill, said Panse.

Daizy Chawla, Senior Partner, Singh & Associates, said the prepack insolvency process carved for MSMEs intend to allow creditors and debtors to resolve the differences on an informal platform and avoid court procedures. This will also help in reviving MSMEs with the participation of existing promoters and creditors and avoidance of change in ownership.

Shiju PV, Partner, India Law LLP, said current IBC regime is highly antagonistic and prepacks can improve debtor-creditor relation. However, Section 29A (barring existing promoters from bidding) to be made more flexible for prepack regime to be successful besides safeguarding the interest of operational creditors is more important while implementing prepacks, said Shiju.

Resolving the default issue

Nadiya Sarguroh, Senior Associate MZM Legal, said the prepack insolvency would help MSMEs and banks resolve the default issue without being benched to rigours of IBC and promoters having full control of the entity at the same time.

The increase in turnover limit will broaden the horizon of the MSME entities and benefit more enterprises, she said.

As per the revised criteria, a unit with ₹50 crore of investment and ₹250 crore of turnover will fall under the ‘medium’ enterprise category while manufacturing and services units with ₹1 crore of investment and ₹5 crore of turnover will be classified as ‘micro’ and units with ₹10 crore of investment and ₹50 crore of turnover will be categorised as a ‘small’ enterprise.

Published on March 13, 2021

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