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Embracing a Wider Scope for TReDS

Transfer of Factoring Units to come under the purview of TLE in lieu of the regulator’s move to enhance TReDs Platform

– Anita Baid, Vice President | finserv@vinodkothari.com

The concept of Trade Receivables Discounting System (TReDS) was introduced by RBI to enable discounting of invoices of MSME sellers against large corporates, including government departments and public sector undertakings, through an auction mechanism to ensure prompt realisation of trade receivables at competitive market rates. 

TReDS transactions fall under the umbrella of “factoring business.” Factoring is a financial practice where a company sells its trade receivables, or outstanding invoices, to a third party at a discount in exchange for immediate cash. TReDS platforms provide a digital infrastructure for facilitating such transactions, enabling efficient invoice discounting and promoting liquidity for MSMEs.(Our FAQs on TReDS and the India Factoring Report 2023 can be read here and here)

In a move to further strengthen the TReDS and promote smoother financial transactions, the RBI has announced significant enhancements to the TReDS guidelines. These enhancements are in line with the announcement made by RBI in the Statement on Developmental and Regulatory Policies dated February 8, 2023, to address certain challenges faced by financiers while bidding for low-rated buyers’ payables on TReDS platforms. (Our article on the same can be read here)

This article intends to discuss the RBI notification dated June 7, 2023 on Expanding the Scope of Trade Receivables Discounting System, introducing the said enhancements.

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Ushering the new-age TReDS Platform

– Anirudh Grover, Executive | finserv@vinodkothari.com

Receivables or debtors though from the face of it is considered as a positive thing for businesses, however when you lift the tag of positivity one can assess the true color of trade receivables. This essentially means that despite it being classified as an asset it may not be helping the business when required. For instance, ABC Ltd has 1 lakh recorded as debtors in its financials however these debtors are of no substantial use unless it is converted into liquid forms of funds. This in essence is the reason why TReDS was introduced, RBI vide Guidelines for the Trade Discounting System (TReDS) opined that the scheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from Corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs), through multiple financiers is known as TReDS.

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Prepack for MSMEs – A Vaccine that doesn’t Work?

– Megha Mittal

(resolution@vinodkothari.com)

The Insolvency and Bankruptcy (Amendment) Ordinance, 2021 (‘Ordinance’)[1] was promulgated on 5th April, 2021 to bring into force the prepackaged insolvency resolution framework for Micro, Small, Medium Enterprises (MSMEs). While the Ordinance put forth the structure of the prepack regime, a great deal was dependent upon the relevant rules and regulations. On 9th April, 2021, the Insolvency and Bankruptcy (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (“Regulations”)[2] as well as the Insolvency and Bankruptcy (Pre-Packaged Insolvency Resolution Process) Rules, 2021 (“Rules”)[3] have been notified with immediate effect.

As one delves into the whole scheme of things, including the complicated provisions of the Ordinance and the even complication regulations, one gets to feel that the prepack framework will act only as a consolation for the MSMEs – while efforts aimed to increase the efficacy of insolvency resolution, the proposed Framework seems to do a little towards this end. In the author’s humble opinion, key elements of prepacks – cost and time efficiency and a Debtor-in-Possession approach, have been diluted amidst the micromanaged Rules and Regulations. In this article, we discuss how[4].

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Modes of Restructuring of Stressed Accounts

Our detailed write-ups on these frameworks may be referred here:

 

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

 

ECLGS scope expanded to cover business loan by individuals

-Financial Services Division (finserv@vinodkothari.com)

 The Finance Minister had announced several measures to provide stimulus to economy for providing a momentum after impact caused by Covid-19 and also to take further the mission of self-reliant India. Among various schemes introduced in the package, one was the Emergency Credit Line Guarantee Scheme (‘Scheme’), which intends to enable the flow of funds to MSMEs by providing additional loans to MSME’s covered by 100% government guarantee.

Under this Scheme, the Government of India, through a National Credit Guarantee Trust (NCGTC), will provide 100% guarantee on loans provided by banks and Financial Institutions (FIs) to MSMEs and MUDRA borrowers under the said scheme. The Scheme aims to extend additional funding of Rs. 3 lakh crores to eligible borrowers in order to help them through the liquidity crunch faced by them due to the Covid-19 crisis.

In order to ensure the full utilisation of the 100% government guarantee loans in times of such financial downturns, the scheme has been updated on July 4, 2020[1] to widen the scope and significant changes in the limits has been notified. It is evident form the amendments under revised operational guidelines that it is aimed at providing deeper benefit to the society, by expanding the borrower base to include individuals who have availed loan for business purposes under the scheme.

National Credit Guarantee Trust by a Notification date 31st October 2020 has extended the scheme up to 30th November 2020 or till the utilisation of 3 lakh crores, whichever is earlier.

This article discusses the changes and its impacts in detail.

Key changes under the new ECLGS

Eligible Borrower

The erstwhile operational guidelines only allowed Business Enterprises/MSME to borrow under the scheme which were having already existing loan facility with the member lending institution (MLI). The major change under the revised guideline is the extension of the scheme to the individuals who have existing loan facility with MLI. Such application of credit facility by an individual under the scheme shall be supported by Management Certificate to the effect that they have availed such loan facility for their own business purposes.

We had earlier also held the view that a loan taken by a business, even though owned by an individual and not having a distinctive name than the individual himself, cannot be regarded as a “loan provided in individual capacity”. And hence, must be covered under the ambit of the scheme.

For instance, many SRTOs, local area retail shops etc are run in the name of the proprietor. There is no reason to disregard or disqualify such businesses. It is purpose and usage of the loan for business purposes that matters.

The scheme now specifically includes individuals who have availed loans for business purpose, this would help business who are not incorporated or the owner had availed facility in its own name. This would also benefit professionals like Doctors, CA/CS/CMA, who have availed loans for scaling up their service businesses.

Increase in total outstanding loan limit for eligible borrowers

Under the previous operational guideline the total outstanding loan limit of an eligible borrower from all the MLI was caped at INR 25 crores which has now been increased up to INR 50 crores as on February 29, 2020. As the ceiling for maximum amount of loan is increased the maximum amount of guaranteed loan that can be issued under the guideline have increased from INR 5 crores to INR 10 crores.

Increase in turnover limit for eligible borrowers

The turnover limit of eligible borrowers has been increased from INR 100 Crores to INR 250 crores. This means eligible borrowers which were earlier having annual turnover inclusive of all taxes/GST more than INR 100 crores are now eligible under the new operational guidelines. Provided there annual turnover is less than INR 250 crores for financial year 2019-20.

Smaller companies were already covered under the scheme and so the aforesaid amendment would include larger companies as well.

Option to MLI providing ECLGS facility on behalf of other lenders

The erstwhile operational guideline provided for a borrower who wishes to take from any lender more than 20% of outstanding credit that the borrower had with specific lender, a NOC would be required from all the other lenders.

Revised operational guidelines has served as a clarification that NOC to be required in such cases only from the lender whose share of ECLGS loan is proposed to be extended by a specific lender. However, it would be necessary for the specific lender to agree to provide ECLGS facility on behalf of such of the lenders.

Conclusion

As per the news report, more than half of the amount of guarantee approved under the scheme remains unrealised till date. Hence, the increase in ambit of scheme would be beneficial to reach out to the businesses in the name of individuals as well. Further, it would help the larger businesses to avail funding, in these times when all businesses are facing liquidity issues.

 

[1] https://www.eclgs.com/documents/Operational_Guidelines_ECLGS_Updated_as_on_August_04_2020.pdf

 

 

Our FAQs on ECLGS:

 

Udyam Registration Process

Watch our Youtube video explaining the entire Udyam Registration process here: https://youtu.be/dqm64_oTbnQ

Read our other resources on related topics here –

Udyam Portal: The pristine MSME Registration Process

-Qasim Saif (finserv@vinodkothari.com)

The Indian government has been taking a number of measures to tackle the disruptions caused by the pandemic, giving special focus on small businesses. The small and medium size businesses form the backbone of any economy, specially developing economies like India, hence, the Micro, Small and Medium Enterprises (MSME) are seen as a key player in promoting momentum in economy once movement restrictions and social distancing norms are lifted. In order to stimulate the post-Covid economic scenarios, it is crucial to focus on the growth and development of the MSME sector.

The definition of MSME comes from section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (‘Act’) . Based on the proposal of the Finance Minister, he Ministry of Micro, Small and Medium Enterprises on 1st June 2020 via notification, amended the definition of MSME in order to increase the scope and hence bringing larger number of firms within the ambit of MSME. As per the revised definition, the classification is based on the investment and turnover of the entity.

The latest definition of MSME as per the notification is as follows-

Revised Classification applicable w.e.f 1st July 2020
Composite Criteria: Investment in Plant & Machinery/equipment and Annual Turnover
Classification Micro Small Medium
Manufacturing Enterprises and Enterprises rendering Services Investment in Plant and Machinery or Equipment:
Not more than Rs.1 crore and Annual Turnover; not more than Rs. 5 crores
Investment in Plant and Machinery or Equipment:
Not more than Rs.10 crore and Annual Turnover; not more than Rs. 50 crores
Investment in Plant and Machinery or Equipment:
Not more than Rs.50 crore and Annual Turnover; not more than Rs. 250 crores

The aforesaid definition removes the bifurcation of investment limits for Manufacturing and Service industry which were previously existent. Hence, it is expected that large number of service providers would be covered as they tend to have lesser investment in plant and machinery or equipment and turnover as compared to Manufacturing entity with similar profits.

As the changes in classification are to be applicable from 1st July 2020, the Ministry of Micro, Small and Medium Enterprises have come up with a Notification dated 26-06-2020 which provide for a novel method of registration for MSME (‘Udyam Registration’).

The said notification provides for process for registration of MSME which shall become applicable from 1st July 2020, the requirement of Udyam Registration shall also be applicable on existing MSME’s.

Pursuant to the amendment in the definition of MSME and the introduction of 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 for availing benefit under the various schemes introduced by the Ministry.

The Process of Registration

Registration on the basis of self-declaration

As per the Udyam Registration requirement it is evident that Udyam Registration can be done on the basis of filing a self-declaration. The relevant extract of the notification states as follows-

“Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof.”

On review of the registration process on the Udyam Registration portal, it is been observed that the list of major activities contains a specific head for trading activities, land transport as well as an option for selecting ‘Others’. Thus, it may be concluded that trading, transportation and such other activities are included under activities of a service enterprise and shall be required to be registered as an MSME on the Udyam Registration portal.

Requirement of Aadhar

The Aadhaar of following persons shall be required for registration as an MSME.

Type of Entity Aadhar of
Proprietorship Firm Proprietor
Partnership Firm Managing Partner
HUF Karta
Company / LLP / Co-operatives / Trust / Organisations* Authorised Signatory

*PAN and GSTIN of enterprise shall also be required

Non-Availability of Aadhar

In case the person does not have Aadhar, he/she can approach MSME-Development Institutes or District Industries Centres (Single Window Systems) with his Aadhaar enrolment identity slip or copy of Aadhaar enrolment request or bank photo pass book or voter identity card or passport or driving licence and the Single Window Systems will facilitate the process including getting an Aadhaar number and thereafter in the further process of Udyam Registration

Calculation of Investment in Plant, Machinery and Equipment, and Annual Turnover

In order to determine whether the enterprise falls within the limits of MSME and under which category Calculation of amount for Investment in Plant, Machinery and Equipment, and Annual Turnover is required to be calculated.

Plant, Machinery and Equipment.

The Plant, Machinery and Equipment shall have same meaning as under Income Tax Rules, 1962 hence not include land, building and furniture and fittings. Further it shall not include items mentioned in Explanation 1 to Section 7(1) of MSME Act 2006 shall be excluded.

All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.

The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years. In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.

However, it shall be noted that in case of new enterprise without any ITR, where calculation is made on self-declaration basis, the purchase (invoice) value of a plant and machinery or equipment, whether purchased first hand or second hand, shall be taken into account excluding Goods and Services Tax (GST).

Turnover

On the similar grounds as investment the turnover shall also be calculated on collective basis for all units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) and all such units shall be treated as one enterprise and turnover figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.

Further it shall be noted that the Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise.
Information as regards turnover and exports turnover for an enterprise shall be linked to the Income Tax Act or the Central Goods and Services Act and the GSTIN. The figures of 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.

Registration by existing MSMEs

In case of existing MSMEs, the registration shall be valid till March 2021. They are required to register themselves under the Udyam Registration portal before the expiry of their registration under Udyog Aadhaar or EM-II.

Updation of information

The registration as an MSME may be obtained based on a self-declaration by the applicant, without submitting any other documents, certificates or proofs of investment in plant and machinery or equipment or turnover. However, once the URM is granted, the MSME is required to update details on the portal, including details of the ITR and the GST Return for the previous financial year and such other additional information as may be required, on self-declaration basis.

Failure to update the relevant information within the period specified [to be specified] in the online Udyam Registration portal will render the enterprise liable for suspension of its status.

Changes in classification

On the basis of information furnished and updated from time to time as well as information from Government sources including ITR/GSTR the classification of enterprise may be changed to a lower to higher category (graduation) or from higher to lower category (reverse-graduation).

In case of graduation an enterprise will maintain its prevailing status till expiry of one year from the close of the year of registration. In case of reverse-graduation of an enterprise, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1st April of the financial year following the year in which change happened.

Accordingly, it can be inferred that the limits of investment and turnover shall be reckoned on the basis of the ITR and GST returns filed for the previous financial year.

Grievance redressal

The Champions Control Rooms functioning in various institutions and offices of the MSME-Development Institutes along with District Industries Centres in their respective districts shall act as Single Window Systems for facilitating the registration process and further handholding the micro, small and medium enterprises in all possible manner.

In case of any discrepancy or complaint, the General Manager of the District Industries Centre shall undertake an enquiry for verification of the details of Udyam Registration and thereafter forward the matter to the Director or Commissioner or Industry Secretary concerned of the State Government who after giving an opportunity to present its case and based on the findings, may amend the details or recommend to the Ministry of MSME’s, Government of India, for cancellation of the Udyam Registration Certificate.

Further it shall be noted that, if provision for registration under MSME Act, 2006, is violated Section 27 of the Act, provides for a fine which may extend upto one thousand rupees for first conviction and a fine ranging from one thousand to ten thousand rupees for second and subsequent conviction.

Conclusion

The new process provides an easy, quick and simple method for registration that will be linked to information submitted under Income Tax and GST, hence being user friendly as well as keeping a check on reliability of information. The move is intending to promote ease of doing business in lieu of the introduction of Atmanirbhar Bharat scheme.

This process and amended definition would help more MSME to take benefit of government schemes for MSME hence providing them an elevated pedestal to provide a push to kick-start economy after the covid restrictions are lifted.

 

Our other relevant articles may be referred here:

 

Another couple of stepladders for the MSMEs

-Kanakprabha Jethani (kanak@vinodkothari.com)

Background

On June 24, 2020, Ministry of Finance (MoF) issued two press releases with respect to further measures to support the MSME sector during the current situation of crisis. One of these launched the Credit Guarantee Scheme for Subordinate Debt (CGSSD)[1] (‘Debt Scheme’) and the other one announced an interest subvention of 2% for a period of 12 months, to all Shishu loan accounts under Pradhan Mantri Mudra Yojana (PMMY) to eligible borrowers[2] (‘Subvention Scheme’).

The COVID-19 disruption and subsequent downfall of the economy has impacted the MSME sector drastically. MSMEs are a crucial component of the Indian economy and hence, it is necessary to uplift them, so as to bring the economy back on track. In this backdrop, the Government of India (GoI) has been taking various measures and introducing schemes to provide the much needed liquidity to MSME sector. The recently introduced schemes are yet another step in that direction. The following write-up provides runs through the basics of these schemes focusing on the practical issues that may arise while implication.

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IBC and related reforms: Where do MSMEs Stand?

The MSME industry, colloquially referred to as the power engine of the economy has been a focal point of several reforms over the years. The recent reforms w.r.t. MSMEs and the Insolvency and Bankruptcy Code, 2016 (“Code’) has altered the stance of MSMEs, both as creditors and debtors. In this article, we shall discuss some significant reforms/ amendments w.r.t. MSMEs (due to COVID, or otherwise), and those under the Code and analyse the cumulative impact of these reforms on the sector in the prevailing scenario