Udyam becomes mandatory: RBI clarifies Lenders’ stand

-Kanakprabha Jethani and Anita Baid (finserv@vinodkothari.com)

Background

On June 26, 2020, the Ministry of Micro, Small and Medium Enterprises (MoM) released a notification[1] changing the definition of MSMEs and introducing a new process for MSME registration. The notification also stated that the existing MSME registrations (i.e. Udyog Aadhaar Number (UAN) or Enterprise Memorandum (EM)) shall be invalid after March 31, 2021. While the enterprises have to obtain Udyam Registration, the RBI has also made it mandatory for the lenders to ensure that their MSME borrowers have obtained the registration. The RBI through its notification dated August 21, 2020, has provided certain clarifications on its existing guidelines and stated clearly the things to be taken care of by the lenders. The following write-up intends to provide an understanding of the said clarifications and analyze them at the same time.

Udyam Registration to be the only valid proof

Under the existing framework for MSME registration, MSME borrowers had an option to provide either their Udyog Aadhaar Number (UAN), Entrepreneurs Memorandum (EM) or a proof of investment in plant and machinery or equipment being within the limits provided in the erstwhile definition along with a self-declaration of being eligible to be classified as an MSME. However, since the MoM notification stated that the UAN or EM shall be valid only till March 31, 2021, the MSMEs will have to compulsorily get registered under the Udyam portal, as per the revised definition. Hence, the lenders shall before March 31, 2021, obtain Udyam Registration proof from their existing as well as new borrowers.

In case of loans whose tenure shall end before March 31, 2021, the above requirement may not be relevant i.e. to obtain Udyam Registration since the existing registration submitted earlier by the borrowers shall be valid till the expiry of the loan tenure.

Pursuant aforesaid notifications, it seems that from March 31, 2021, Udyam Registration shall be the only valid proof for an entity to be recognized as an MSME. In such a case, it is pertinent to note that a notification issued by Ministry of MSMEs on July 17, 2020[2], which provides a list of activities that are not covered under Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) for Udyam Registration. The list of activities is as follows:

  • Forestry and logging
  • Fishing and aquaculture
  • Wholesale and retail trade and repair of motor vehicle and motorcycles
  • Wholesale trade except of motor vehicles and motorcycles
  • Retail trade except of motor vehicles and motorcycles
  • Activities of households as employees for domestic personnel
  • Undifferentiated goods and services producing activities of private households for own use

A major section of Indian business in small or micro businesses involved in trading activities. Will keeping them outside the coverage of registration mean they don’t get benefits as that of registered MSMEs?

Let us understand the same by analysing the provisions of various schemes introduced by the Government.

Relevance of definition under the MSMED Act

The notification of Ministry of MSME dated January 10, 2017[3] provides that every micro, small and medium engaged in the manufacturing of goods or rendering of services with total investment in plant and machinery below the limit specified in section 7 of the said Act, shall file the memorandum. This makes it evident that the requirement for registration is mandatory for all MSMEs defined under section 7 of the MSMED Act.

However, various schemes introduced for MSMEs either refer to the definition of MSMEs provided in the MSMED Act or make reference to the limits specified under the MSMED Act or specifically include certain categories of entities under its scope. Let us look at some of these schemes[4] that are extending benefits to MSMEs and their eligibility criteria.

Bank loans to MSMEs under Priority Sector

Bank loans to MSMEs, for both manufacturing and service sectors, are eligible to be classified under the priority sector as per the norms provided by the RBI[5].

Till 2009, there was a separate category for retail trade which included retail traders/private retail traders dealing in essential commodities (fair price shops), and consumer co-operative stores. The same was included in the category of MSEs later through a notification[6] issued by the RBI.

However, from 2013 onward[7], for MSE lending, the reference was made to the MSMED Act for the investment limits in case of manufacturing and service sector.

However, the PSL Directions refer to the investment limits for determining the MSME classification and there was no explicit requirement to have UAN/URN. For the purpose of classification under PSL, it is implicit that the definition of MSME should come from the MSMED Act.

Post the amended definition of MSME and the procedure for filing the memorandum under the Udyam Registration, it seems that registration as an MSME shall be a necessity and accordingly be considered as a pre-requisite by lenders.

Interest Subvention Scheme

The ‘Interest Subvention Scheme for Incremental Credit to MSMEs, 2018’ was notified to Scheduled Commercial Banks and NBFCs which specifically required the MSMEs to be registered for being eligible under the scheme. The guidelines were further modified by SIDBI in December 2019 and notified by RBI in February 2020[8], wherein the requirement of Udyog Aadhaar Number (UAN) was dispensed with for units registered for Goods and Service Tax (GST).

Further, enterprises that are not registered under GSTN were allowed to either submit Income Tax Permanent Account Number (PAN) or their loan account should be categorised as MSME by the concerned bank. Trading activities without UAN were also allowed to avail the benefit under this scheme. Therefore, for the purpose of this scheme, the registration under the MSMED Act is not mandatory.

Consequently, enterprises engaged in trading activities can also avail the benefit of this scheme.

One-time Restructuring

RBI vide its notification dated February 07, 2018[9], provided relief for MSME borrowers registered under Goods and Services Tax (GST), to support these entities in their transition to a formalised business environment.

In furtherance to the aforesaid notification, the notification dated June 6, 2018[10] extended the scope to all MSMEs, including those not registered under GST, as a standard asset.

By virtue of another notification dated January 1, 2019[11], RBI permitted a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a downgrade in the asset classification. This was further extended vide notification dated February 11, 2020[12] and August 6, 2020[13]. The extension notifications make reference to the initial January 2019 notification for the detailed instructions wherein it refers to MSME as defined under the MSMED Act. Further, the notifications require the MSME to be GST registered unless otherwise exempted from GST registration. Hence, GST registration is not mandatory to avail the one-time restructuring benefit. However, MSME registration seems to be compulsory given the reference to the MSMED Act.

Credit Guarantee Fund Scheme for Micro and Small Enterprises-I (CGS-I)

The scheme defines eligible borrower as-New or existing Micro and Small Enterprises, as defined in the Act, to which credit facility has been provided by the lending institution without any collateral security and/or third-party guarantees.

Subsequently, MSE Retail Trade was added vide a circular[14] issued by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) under its ambit for fresh credit facilities eligible for guarantee coverage. Explicit inclusion of retail trade clarifies that benefits of this scheme shall be available to retail traders as well, subject to conditions provided in the scheme.

Credit Guarantee Fund Scheme for Micro and Small Enterprises-II (CGS-II for NBFCs)

The definition of eligible borrowers under this scheme is the same as that of CGS-I. Initially, the eligibility criteria specifically excluded retail trade and registration was a mandatory requirement under the scheme. Later on, the scheme was amended to do away with the registration requirement and specifically include MSE retail trade in its ambit.

Given the August notification issued by RBI, it is clear that the intention of the RBI is to ensure that lending institutions, such as banks and NBFCs, obtain Udyam Registration Certificate from the borrowers to pass on the benefits provided by the RBI.

Hence, unless a scheme specifically provides the inclusion of activities that are not eligible for registration or does not mandate the requirement of registration as an MSMC, one shall refer to the definition provided under the MSMED Act. Further, in case of reference it made of the MSMED Act, it can be implied that registration is a mandatory requirement.

Is PAN and GSTIN mandatory?

Based on MoM notification, Udyam Registration can also be obtained on a self-declaration basis[15]. The notification states-

“The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory

Further, RBI notification states-

“Udyam Registration Certificate’ issued on self-declaration basis for enterprises exempted from filing GSTR and / or ITR returns will be valid for the time being, up to March 31, 2021.”

A plain reading of these provisions would bring one to a conclusion that in order to obtain registration as an MSME, one would be required to mandatorily obtain PAN and GSTIN. However, going by the principle, the law itself exempts certain classes of persons to obtain PAN and/or GSTIN. It would be counter-intuitive to draw upon a compulsion on such persons to obtain PAN and GSTIN for the purpose of getting registered as an MSME.

As discussed above, the one-time restructuring benefit introduced by RBI requires the MSME to be GST registered unless otherwise exempted from GST registration. However, for the purpose of the registration as an MSME without GST registration ( in case exempted), there is still a lack of clarity.

The lenders would obviously expect clarification from the MoF or the MoM on the applicability of this clause on persons not required to obtain PAN or GSTIN. In the absence of any clarification or leeway specified for such persons, the lenders would be bound to ensure that their borrowers obtain Udyam Registration using PAN and GSTIN.

Connecting the Disconnect

In 2017, the RBI issued a notification[16] providing a list of documents to be relied upon and method for calculation of the value of plant and machinery or equipment. As per the notification, the purchase value of the plant and machinery or equipment shall be considered and not the book value (purchase value minus depreciation).

However, the Udyam registration process considers the value of plant and machinery or equipment based on the ITR filed by the enterprise. The ITR contains the value of machinery left after deducting depreciation i.e. Written Down Value (WDV).

This created a disconnect between the earlier RBI guidelines and the process of registration. Considering this disconnect, the RBI on July 2, 2020, released a notification[17] with the updated definition and directives for calculation of investment in plant and machinery or equipment, which is in line with the MoM notification. Further, the RBI has clarified that the existing guidelines provided in the 2017 notification shall be superseded by the July 2, 2020 notification.

Conclusion

While the RBI has made an effort to clarify the stand of lenders and things to be done by them owing to the change in the definition of MSMEs, a few operational difficulties still persist, specifically relating to obtaining the PAN and GSTIN. It is clear that the motive of the government behind introducing consistent developments for MSMEs is to uplift the small businesses in the country. The lending market awaits clarifications/ reliefs from the government on these operational difficulties. A relief from the government will be a step in the direction of better financial inclusion.

 

[1] https://rbidocs.rbi.org.in/rdocs/content/pdfs/IndianGazzate02072020.pdf

[2] https://udyamregistration.gov.in/docs/OM_UAN_17_7_2020.pdf

[3] http://dcmsme.gov.in/Reviesd_UAM_Noti_222017.pdf

[4] Details of various schemes for MSMEs can be referred here- http://vinodkothari.com/2020/05/primer-on-msme-financing/

[5] The conditions may be referred to from the Master Circular for PSL- https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10497&Mode=0

[6] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=5280&Mode=0

[7] Refer notification- https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=8191

[8] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11803&Mode=0– the notification was however addressed to banks and not NBFCs

[9] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11216&Mode=0

[10] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11289&Mode=0

[11] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11445&Mode=0

[12] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11808&Mode=0

[13] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11942&Mode=0

[14] https://www.cgtmse.in/files/Circular_No.141.pdf

[15] Read the detailed process here- http://vinodkothari.com/2020/07/udyam-portal-the-pristine-msme-registration-process/

[16] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11050&Mode=0

[17] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11951&Mode=0

 

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