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Fizzled out at NCLAT: No fizz for interest on unpaid MSME dues

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Neha Malu and Prerna Roy | resolution@vinodkothari.com

NCLAT in the matter of SNJ Synthetics Limited v. PepsiCo India Holdings Private Limited, rejected the section 9 application filed by an MSME operational creditor on the ground that the amount of default (excluding interest accrued as per sec 15 and 16 of MSMED Act) was less than the limit stipulated under section 4 that triggers IBC proceedings.

Brief Background:

The operational creditor in the present case was an MSME supplier which filed a section 9 application for an operational debt of 1.96 Crores which included 1.05 Crores as interest for the delayed payment in terms of the provisions of section 15 and 16 of the MSMED Act.

During the pendency of the matter, the parties reconciled accounts and revised the principal to around ₹77.37 lakh. Pursuant to directions from the AA, the CD paid this amount, which the OC accepted while continuing to press for interest at 24% pa in terms of section 16 the MSMED Act. Note, section 15 of the MSMED Act  makes it mandatory for the buyers to make payments to MSME suppliers on or before the agreed-upon date in writing. However, this period cannot exceed 45 days from the date of acceptance or deemed acceptance of the goods or services. If no such agreement exists, payment must be made within 45 days from the day of acceptance or deemed acceptance.

Section 16 prescribes that, upon failure to pay within the stipulated period, the buyer is liable to pay compound interest at three times the RBI notified bank rate. Crucially, this obligation applies notwithstanding any agreement to the contrary. Section 17 further confirms that both the principal and such interest are payable by the buyer.

The AA dismissed the application, holding that CIRP could not be initiated solely on the basis of unpaid interest, once the principal amount had been settled. NCLT observed:

“In the present case, the principal amount stands paid, therefore the CIRP cannot be initiated solely on the basis of the claim of interest component…”

On appeal, the NCLAT upheld this view and further stated:

“… We also notice that the Appellant has relied on the provisions of other laws like MSME Act or Interest Act to justify their claim of interest payment. Without making any observation on the merits of their contention, we would only like to add that neither the Adjudicating Authority nor this Appellate Tribunal is the appropriate forum for making any such determination on the liability of the Respondent- Corporate Debtor to pay interest under the MSME Act or Interest Act.”

While there may be facts specific to the case, for instance, comments of the NCLAT on the interest claim being unsubstantiated despite downward revision of principal, and whether the process was being abused as a debt recovery process, the only point of discussion in this article is whether only the interest component in case of an operational debt, particularly the interest arising under statute, can form sole basis for initiation of CIRP.

Interest as operational debt- A grey area?

While interest is explicitly included in the definition of financial debt under section 5(8) of IBC, the definition of operational debt under section 5(21) makes no such explicit reference. “Operational debt” u/s 5(21) is defined as:

“operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

This distinction in statutory language has raised questions on inclusion of interest on delayed payments as part of operational debt for the purpose of initiating insolvency proceedings, even though there are clear stipulations under the MSMED Act[1].

However, in so far as the interplay between IBC and MSMED Act is concerned, with respect to the statutory interest, judicial decisions indicate that for the purpose of interpretation, such interest, unless mutually agreed upon or expressly admitted, is not regarded as forming part of operational debt under section 5(21) of the Code.

In Vedic Projects Pvt Ltd v. Sutanu Sinha Resolution Professional for Simplex Projects Ltd., NCLAT New Delhi confirmed the view of the AA and held that,

“10. With regard to claim under the MSME, the Adjudicating Authority has observed that NCLT is not appropriate Forum to consider the issue pertaining to the interest, claimed by the Appellant under Section 16 of the MSMED Act.”

Further, NCLT Mumbai in KBC Infrastructures Pvt. Ltd v. Shapoorji Pallonji band Company Pvt. Ltd., held that in the absence of mutual agreement or any promise to pay interest for delayed payment, the claim of OC for treating the interest payable under MSMED Act as operational debt cannot be sustained. The Tribunal held:

“...However, it is now settled in the context of the Code that if interest is not agreed upon between the parties, it cannot form a part of ‘operational debt’ within the meaning of Section 5(21) of the Code and that no such interest can be claimed in an application under Section 9 of the Code. Interest under Section 16 of MSME Act can be claimed before the MSME Facilitation Council (MSEFC) in terms of Section 18 of the MSME Act. Thus, the correct forum for such claims shall be the MSEFC and not this Tribunal…”

A similar view was also taken by NCLAT in Coal India Ltd v. Gulf Coil Lubricants India Ltd. & Anr, NCLT Mumbai in the matter of Skoda Auto Volkswagen India Pvt. Ltd. v. Susee Automotive Pvt. Ltd.and  NCLT New Delhi in Lakshya Infrapromoters Pvt. Ltd. v. The Indure Pvt. Ltd.

However, in other cases wherein the OC was not an MSME, the treatment of interest has seen divergent views.

In Prashant Agarwal v. Vikas Parasrampuria, the NCLAT held that when interest terms are clearly mentioned in the invoices and remain undisputed, such interest forms part of the debt and must be considered while computing the default threshold under Section 4 of the IBC.

“It is, therefore, clear from these facts that the total amount for maintainability of claim will include both principal debt amount as well as interest on delayed payment which was clearly stipulated in the invoice itself…”

Relying on the Prashant Agarwal judgement, NCLAT in Anuj Sharma v. Rustagi Projects Pvt. Ltd., held that:

“The above judgment of “Prashant Agarwal” clearly supports the submission of learned counsel for the Respondent that for calculating the amount for maintainability of the claim, for threshold purpose, both Principal Amount and Interest has to be calculated when the interest is stipulated between the parties.”

On the other hand, in Wanbury Ltd. v. Panacea Biotech Ltd. and SS Polymers v. Kanodia Technoplast Ltd., NCLAT  denied inclusion of interest in operational debt where there was no express agreement or where interest was unilaterally imposed through invoices not accepted or signed by the corporate debtor.

In Rohit Motawat v. Madhu Sharma, Permali Walla Ce Private Limited v. Narbada Forest Industries Private Ltd, also, the NCLAT reiterated that operational creditors cannot rely on unilaterally raised invoices to claim interest, and that once the principal is paid, section 9 proceedings solely for interest are not maintainable.

Further, in Swastik Enterprises v. Gammon India Limited, clarifying on whether interest should form part of the debt amount, held that:

“4. It is submitted that the ‘debt’ includes the interest, but such submission cannot be accepted in deciding all claims. If in terms of any agreement interest is payable to the Operational or Financial Creditor then debt will include interest, otherwise, the principle amount is to be treated as the debt which is the liability in respect of the claim which can be made from the Corporate Debtor.

5. In the present appeals, as we find that the principle amount has already been paid and as per agreement no interest was payable, the applications under Section 9 on the basis of claims for entitlement of interest, were not maintainable. If for delayed payment Appellant(s) claim any interest, it will be open to them to move before a court of competent jurisdiction, but initiation of Corporate Insolvency Resolution Process is not the answer.”

Our Analysis

It appears from the judicial precedents discussed above that, in case of operational debt, the judiciary is inclined to accept “interest” as a debt eligible to initiate CIRP, only when there is an explicit contract between the parties. However, the authors also submit that in case of MSME, the intent of the provisions in sections 15 and 16 is to ensure that the payments to MSMEs are not delayed. Such interest operates in the nature of a penalty[2], and thus there can be no question of any contract between the parties. Hence, going by the judicial precedents above, such statutory imposition of interest can never enable an operational creditor to initiate CIRP against the corporate debtor.

Further, the definitions of “debt” and “default” under IBC are quite broad. While “debt” is defined as  a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; “default” is non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor. Interest arising under section 16 of the MSMED Act would squarely fall under the definition of “debt” – hence, any non-payment of such interest as per statutory timelines should be considered as a default.

Also, in case of an application being filed by operational creditor, as referred in section 9(5), the AA shall admit the application when “no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility”, and shall reject the application when “notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility”. Therefore, unless there is a dispute, the AA does not have the discretion to reject the application – particularly on the grounds that such interest was not “contractually” agreed. Ofcourse, there can also be possibilities where the levy of interest by MSME is disputed by the corporate debtor, that is, there is a pre-existing dispute before the notice is given by the operational creditor under section 8 of IBC – in such cases, the AA should not admit the application, given that the very existence of such debt is in dispute.

Closing thoughts

The observation of NCLAT in the present case, read with the previous judicial precedents as well, has raised a significant concern i.e., whether statutory interest under laws such as the MSMED Act or the Interest Act is effectively excluded from consideration in insolvency proceedings?

This interpretation could have far-reaching implications. While such interest may be a rightful claim under special statutes, the exclusion of these amounts from the computation of default under section 9 in view of judicial interpretations, introduces a disconnect between substantive rights under one law and procedural access under another.

[1] See FAQs  on delayed payment to MSMEs at: https://vinodkothari.com/wp-content/uploads/2019/05/Revised-FAQs-MSME-upload-1.pdf

[2] ITAT Bengaluru in Dy. CIT (LTU) v. Bosch Ltd, held that “…we further note that as per the Section 15 of the MSMED Act, the liability of the buyer to make the payment to MSME within the period as agreed between the parties or in case there is a delay beyond 45 days from the date of acceptance or date of deemed acceptance the interest payable as per Section 16 shall be three times of the bank rate notified by the RBI. Thus as per Section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest…”

Broadening the MSME landscape: Impact of revised limits

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– Sourish Kundu, Executive | corplaw@vinodkothari.com

The Ministry of Micro, Small, and Medium Enterprises (MSME), through its notification dated March 21, 2025, has revised the classification criteria for Micro, Small, and Medium Enterprises. While the proposed revision was mentioned in the Union Budget 2025, the formal notification confirms the upward revision of classification limits, effective April 1, 2025. This revision will permit several enterprises to qualify as MSMEs, as also allow existing MSMEs to expand, without losing their present classification. 

Need for revision: 

During the 2025 Budget Speech, the Hon’ble Finance Minister emphasized the critical role played by MSMEs in India’s economy:

“Currently, over 1 crore registered MSMEs, employing 7.5 crore people, and generating 36 per cent of our manufacturing, have come together to position India as a global manufacturing hub. With their quality products, these MSMEs are responsible for 45 per cent of our exports. To help them achieve higher efficiencies of scale, technological upgradation, and better access to capital, the investment and turnover limits for classification of all MSMEs will be enhanced to 2.5 and 2 times, respectively. This will give them the confidence to grow and generate employment for our youth.”

Revised Classification Criteria: 

CategoryInvestment in Plant and Machinery or Equipment (₹ crores)Annual Turnover (₹ crores)
CurrentRevisedCurrentRevised
Micro≤1≤2.5≤5≤10
Small≤10≤25≤50≤100
Medium≤50≤125≤250≤500

It is important to note that MSME classification follows a composite criterion, meaning that if an enterprise exceeds either the investment or turnover limit, it will be reclassified into the next higher category.

Applicability of the revised classification criteria

With effect from FY 2025-26, a substantial rise in eligible enterprises is expected, leading to a new influx of registrations on the UDYAM portal. The notification dated June 26, 2020 (the principal circular) prescribes the process for UDYAM registration.

A pertinent question arises regarding enterprises currently classified as Medium or Small Enterprises: Will they be downgraded to Small or Micro Enterprises due to the reclassification? Clause 8(6) of the principal circular clarifies:

“In case of reverse graduation of an enterprise, whether as a result of re-classification or due to actual changes in investment in plant and machinery or equipment or turnover or both, and whether the enterprise is registered under the Act or not, 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 such change took place.”

This means that enterprises eligible for reverse graduation will retain their existing status until March 31, 2025, with the revised classification taking effect from April 1, 2025. 

Impact: 

The reclassification is expected to have far-reaching consequences across various economic sectors. Some key implications include:

  1. Tax Implications & Payment Compliance

One of the major benefits for Micro and Small Enterprises (MSEs) over Medium Enterprises is derived from Section 43B(h) of the Income Tax Act, 1961, which allows deductions for payments made to MSEs only on a cash basis (i.e., upon actual payment rather than accrual). This provision aligns with Section 15 of the MSMED Act, 2006, which mandates payment within 45 days.

With a larger number of enterprises falling under the MSE category, buyers availing goods and services from these entities will need to ensure timely payments. Delays beyond the prescribed timelines may lead to tax disallowances and potential compliance issues.

In addition to disallowance of deductions under the Income Tax Act, 1961, such debtors, also have to comply with the requirement of filing Form MSME-1 on a half yearly basis, as discussed below.  

  1. Enhanced Regulatory Compliance

The Ministry of MSME, via its notification dated March 25, 2025, has mandated that companies receiving goods or services from MSEs and failing to make payments within 45 days must file Form MSME-1 on a half-yearly basis, disclosing outstanding amounts and reasons for delay.

The form was revised by MCA’s order dated July 15, 2024; however, the revised classification criteria will not impact filings for the six months ending March 2025. Companies must ensure that subsequent filings accurately reflect payments owed to newly classified MSEs.

  1. Enhanced Access to Credit

Furthermore, the Budget 2025 proposed enhancements in credit guarantee coverage:

  • For Micro and Small Enterprises: From ₹5 crore to ₹10 crore, facilitating an additional ₹1.5 lakh crore credit over five years.
  • For Startups: From ₹10 crore to ₹20 crore, with a 1% guarantee fee for loans in 27 identified focus sectors.
  • For Export-Oriented MSMEs: Term loans up to ₹20 crore.

These initiatives are expected to bolster MSME financing through schemes like the Emergency Credit Line Guarantee Scheme (ECLGS), Credit Guarantee Fund Schemes (CGS-I & CGS-II), Credit-Linked Capital Subsidy Scheme (CLCSS), and the Micro Finance Programme. A comprehensive overview of these schemes can be accessed here.

  1. Increase in scope of Priority Sector Lending (‘PSL’)

The expansion of MSME eligibility is set to widen the scope of financing options available to these enterprises. Under RBI’s Master Directions on Priority Sector Lending, loans extended to MSMEs are considered part of banks’ priority sector obligations. The increase in eligible entities may result in higher loan disbursements across both manufacturing and service sectors.

As per the Master Direction – Priority Sector Lending (PSL) – Targets and Classification, domestic Scheduled Commercial Banks (SCBs) and foreign banks must allocate 40% of their Adjusted Net Bank Credit (ANBC) to priority sectors, including Micro, Small, and Medium Enterprises (MSMEs). Specifically, domestic SCBs and foreign banks with 20+ branches must lend at least 7.5% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure (whichever is higher) to Micro enterprises.

  1. Boost to Supply Chain Financing & Securitization

With a broader pool of eligible MSMEs, platforms such as TReDS (Trade Receivables Discounting System) and other supply chain financing mechanisms may witness an upsurge in receivables for securitization. This could lead to improved liquidity and lower financing costs for MSMEs. A detailed discussion on MSME receivables securitization is available here.

  1. Other benefits to MSMEs by Central/State Government(s):

Apart from credit-related benefits, MSMEs receive various non-financial support from the government. Some of these are highlighted below: 

  • The ZED Certification Scheme, launched by the Ministry of MSME, encourages small businesses to adopt quality manufacturing practices with a focus on energy efficiency and environmental sustainability. MSMEs registered under Udyam can apply, and eligible enterprises receive financial assistance covering up to 80% of certification costs for micro enterprises, 60% for small, and 50% for medium enterprises.
  • To foster MSME clusters, the Micro and Small Enterprises – Cluster Development Programme (MSE-CDP) provides financial assistance for infrastructure development, setting up common facility centers, and improving market access. Industry associations, state governments, and groups of MSMEs can avail of grants covering 70-90% of project costs, depending on the cluster’s location and nature.
  • Under the Public Procurement Policy for MSEs, all central government ministries, departments, and CPSEs must procure at least 25% of their requirements from MSEs, with sub-targets for SC/ST and women entrepreneurs.
  • The Lean Manufacturing Competitiveness Scheme (LMCS), MSMEs assists in reducing their manufacturing costs, through proper personnel management, better space utilization, scientific inventory management, improved processed flows, reduced engineering time and so on.

These targeted initiatives collectively strengthen MSME growth, market access, and technological advancement.

Conclusion

While the upward revision of MSME classification limits may appear to be a simple adjustment, its implications are widespread. The surge in registrations will not only affect enterprises seeking MSME benefits but also influence businesses procuring goods/services from them and financial institutions extending credit. Companies and financial stakeholders must revisit internal policies to adapt to the evolving MSME landscape and ensure smooth compliance with the revised framework.

Read more on MSMEs here:

The big buzz on small business payment delays

Primer on MSME Financing

Resources on MSME financing

Union Budget 2025: Key Highlights and Reforms focusing on Financial Sector Entities

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Securitisation of MSME receivables in India

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Vinod Kothari l finserv@vinodkothari.com

  1. Financing needs of MSMEs in India: Working capital constitutes a major part of SMEs’ funding requirements

There are considerable gaps in funding for SMEs: In India, the total addressable demand for external credit is estimated to be USD 173 billion[1] while the overall supply of finance from formal sources is estimated to be USD 441 trillion. The Expert Committee on Micro, Small and Medium Enterprises, constituted by Reserve Bank of India in December, 2018 has estimated the overall gap in India to be USD 238 – 298 billion[2].  

Read more: Securitisation of MSME receivables in India

Traditional sources of funding are working capital facilities with banks; however, given their unorganised nature, lack of formal financial statements, etc., many SMEs find it difficult to have formal lines of credit from banks.

The marketplace is trying alternative sources of working capital for SME. The avenues tried based on the different components of the working capital:
Accounts receivablesInventory
Trade Receivables Discounting System (TREDS) Factoring/ supply chain financingCredit period for accounts payable, funded by way of reverse factoring/ supply chain financing
  1. Trade Receivables Discounting System (TReDS/TREDS)

TREDS is almost India’s own innovation, though it was inspired by Mexico’s NAFIN Cadenas Productivas Program. TREDS as a mechanism for discounting and unitisation of trade receivables was launched in 2014. Currently, there are 4 of them – RXIL, M3, InvoiceMart and C2FO Factoring Solutions Private Limited. The first one is the largest.

Limited number of funding participants. However, given that there are quite a limited number of funding participants in the TREDS ecosystem currently (as informed by some of the participants in the TREDS platform(s), only 5-6 banks are currently actively bidding), there is very little competitive bidding for invoices currently. The cost of funding, we were given to understand, is about 0.25% – 0.40%  higher than bank finance, if the buyer happens to be a BBB rated entity.

Figure: Trend in TREDS over 3 years[3]

  1. Supply chain financing

Supply chain financing is growing, as present-day trade needs to move fast; working capital availability is key to achieving turnover with low spreads, to service the ultimate consumer affordably and efficiently.  Supply chain finance is a key mode of financing for upstream procurements as well as downstream supplies by an entity with a good credit standing, say Anchor. Usually, the financing is done by setting a limit based on the Anchor’s credit standing, with a bank or NBFC. Both banks and NBFCs are active in the space. Financing may be done by discounting of supply bills, either accepted by the Anchor as due for payment, or drawn by the Anchor on the dealers/ customers of the Anchor.

Most supply chain financing programs work on first loss guarantee by the Anchor. For the downstream supplies, Anchor usually has to provide a first loss guarantee support, to the extent of 5% to 10% of the pool of receivables funded by a lender under the facility.

  1. Factoring

Factoring law, intended to encourage factoring, has not lived to its purpose due to regulatory overtone. The Factoring Regulation Act was enacted to facilitate and encourage factoring; however, its regulatory stance has served to stifle factoring. Only a handful of NBFCs are currently registered as factors, while banks are not required to register[4]. As a result, the volume of factoring in India is trivial, as compared to global jurisdictions.

  1. Potential for securitisation of SME receivables

Direct securitisation by SMEs is not feasible. There are 2 ways in which securitisation of MSME receivables can take place: securitisation of trade receivables by SME itself; and secondly, receivables are funded by intermediaries (banks, NBFCs), aggregated by intermediaries, and securitised by them.

Securitisation by SMEs directly is not feasible, as volumes are not sufficient. Plus, it requires direct access to investors, which is unviable. Hence, the discussion below focuses on securitisation of receivables funded by intermediaries.

Intermediated securitisation is the way the world does it. However, regulations in India have scuttled the possibility. Acquisition of receivables by intermediaries (either on their balance sheet, or in the balance sheets of trade finance conduits) is quite common world-over[5]. However, this activity has not picked up in India, for several reasons:

  • There is a bar on securitisation of revolving credit facilities in the RBI SSA Directions. Naturally, a trade receivable funding program has to be structured as a revolving facility, to allow the SME continued and assured access to working capital. Issuance of asset backed commercial paper is also barred under the same Directions.
  • Regulated financial lenders cannot do a securitisation transaction outside of SSA Directions. If unregulated entities (not regulated by the RBI, say, a conduit vehicle) does a securitisation outside of SSA Directions, no regulated lender can invest in such a transaction, as any investment so made will be a full charge against regulatory capital.

As a result, securitisation of trade receivables is currently a near impossibility under the regulatory regime.

Will trade receivables securitisation help?

Table below compares securitisation with TREDS, supply chain financing and securitisation:

 TREDSSupply Chain FinancingSecuritisation
Consistent availability of fundingWhile the funding limits are established based on the rating and credit of the buyer, the funding happens on invoice-by-invoice basis. There is no assurance as to either availability or the cost of fundingAs limits are assigned for each vendor/ dealer, there is an assured availability at a pre-agreed cost of fundingAs limits are assigned for each vendor/ dealer, there is an assured availability at a pre-agreed cost of funding by the intermediary, who, in turn may take receivables to capital markets
DisintermediationInvolves financial intermediariesInvolves financial intermediariesInvolves intermediaries at the inception, but eventually, the intermediaries offload the receivables to capital market
Burden on banks’ balance sheetsReceivables are on the balance sheet of the lenderReceivables are on the balance sheet of the lenderReceivables are off the balance sheet for regulatory capital purposes
PricingWhile pricing is primarily done on the strength of the Anchor, at times, SME gets good pricing based on the liquidity in the banking systemPricing is done based on the FLDG support provided by the Anchor; hence, priced based on achor’s credit ratingAvailability of capital market access, coupled with credit enhancements may bring down the cost of funding

Policymakers need to enable alternative instruments, and leave the choice to the marketplace. The Table above makes a case for securitisation of trade receivables. Such securitisation does not conflict with TREDS; TREDS may continue as an option, leaving the choice to SMEs /lenders the benefit of choice.

Role of credit enhancements in trade receivables securitisation

The potential structure of securitisation of trade receivables, as it commonly works in global jurisdictions, is as follows:

Figure: Structure of Trade Receivable Securitisation

In essence, there are two levels of credit support – one, at the level of each SME (seller), which sells receivables to the Intermediary/conduit. This is typically by way of over-collateralisation or a first loss facility.

Having thus acquired credit enhanced receivables from the SMEs, the intermediary arranges a program-wide credit enhancement. This enhancement essentially becomes a mezzanine support.

The entire program works as a revolving facility, such that the SME sellers continue to sell receivables on an ongoing basis. On the other hand, the securised paper has a fixed maturity, subject to roll-over at the discretion of the paper holders. Hence, there needs to be liquidity support provided to the conduit, typically by a bank.

Providers of credit enhancement:

  • SIDBI, as credit enhancer for SME funding, may provide the program credit support.
  • SIDBI, in turn, may be counter-guaranteed by MDBs

Policy/regulatory changes required:

The bar on securitisation of revolving credit facilities, introduced looking at the experience during GFC, needs to be withdrawn. There is an inherent liquidity risk on the part of the intermediary that does securitisation (the risk that early amortisation triggers may cause the facility to wind down, while the committed funding still will have to be continued by the intermediary), but this may be addressed by appropriate capital charge. Note that there is no bar on revolving credit securitisation either in the EU Capital Directions, or in Basel Securitisation Framework.

Likewise, the bar on issuance of asset backed commercial paper needs to be removed. The provider of liquidity facility needs an appropriate capital charge for the maximum value of the facility.

[1]https://www.ifc.org/content/dam/ifc/doc/mgrt/financing-india-s-msmes-estimation-of-debt-requirement-of-msmes-in-india.pdf

[2]https://dcmsme.gov.in/Report%20of%20Expert%20Committee%20on%20MSMEs%20-%20The%20U%20K%20Sinha%20Committee%20constitutes%20by%20RBI.pdf

[3] Source: RBI Statistics on TREDS: https://www.rbi.org.in/Scripts/TREDSStatisticsView.aspx?TREDSid=8, and VKC Analysis

[4] See blog by Vinod Kothari: https://www.linkedin.com/pulse/factoring-india-fractured-opportunity-vinod-kothari/

[5]https://www.euromoney.com/article/2cs68xnhl90cxtg3n64n4/treasury/trade-receivables-deals-buck-broader-market-slump

Read our other articles:

  1. Simple, Transparent and Comparable (STC) securitisation: Discrepancy in risk weights needing urgent remedy
  2. Indian securitisation enters a new phase: Banks originate with a bang
  3. Sustainable Securitisation – the next in filling sustainable finance gap in India

Transparency in lending: RBI Mandates KFS for Retail and MSME Loans

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– Chirag Agarwal, finserv@vinodkothari.com

The RBI has vide its Statement on Developmental and Regulatory Policies dated February 08, 2024, announced its decision to mandate Regulated Entities (REs) to provide Key Fact Statement (KFS) for retail and Micro, Small & Medium Enterprise (MSME) loans. 

What is KFS? What are its contents?

  • A crisp, clear and key information about loan terms. KFS typically includes details such as the all-in-cost of the loan, interest rates, fees, repayment terms, and any associated risks. 
  • Because KFS is standardised, it enables borrowers to make comparison with terms offered by other lenders. 
  • Plus, it is at-a-glance view, enabling the borrower to avoid the legalese.
Read more →

The big buzz on small business payment delays

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Mahak Agarwal | corplaw@vinodkothari.com

The Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) has been around for close to 2 decades now, providing for  penal interest for delayed payments to MSMEs; yet, it is only of late that there has been buzz around this. Why?

This attributes to clause (h) of Section 43B of the Income Tax Act, 1961 (IT Act, 1961), inserted  by the Finance Act, 2023, effective FY 23-24. That is to say, its impact will be faced for outstanding payments as on 31st March, 2024. Now, with the year end fast approaching, there’s a sense of confusion amongst taxpayers who buy goods or services from MSMEs. 

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Measures for promoting MSMEs: credit guarantees and timely payments 

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The MSME segment represents 30%[1] of the Gross Domestic Product of the country and is a key to India’s vision to become a USD 5 trillion economy. As a result, this has always been a focus area so far as macro-economic policy-making is considered. 

During the present year’s budget, the FM highlighted that one of the key areas where the Government has worked on is ease of access to finance. 

Access to finance has always been a problem for the MSMEs in the country, and the reasons for this are many, including lack of standardisation of business processes, lack of credit history, lack of formal collateral, etc. To plug the demand and supply gap in MSME financing, the Government of India has over the years launched several schemes to directly or indirectly channelise institutional finance to this segment.

Of the several initiatives taken by the Government, the one which has gained the most popularity is the Credit Guarantee Scheme for Micro & Small Enterprises. To operationalise this, the GOI and SIDBI together formed the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The CGTMSE primarily extends guarantee in case of collateral-free loans and loans with insufficient collateral to micro and small enterprises. 

Read more →

Revision of criteria of non-company entities on which AS shall be applicable

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CS Aisha Begum Ansari and Harsh Juneja (corplaw@vinodkothari.com )

Introduction

For the purpose of applicability of Accounting Standards (“AS”), The Institute of Chartered Accountants of India (“ICAI”) has classified the entities into two segments – company entities and non-company entities. Non-company entities such as sole proprietors, partnership firms, trusts, Hindu Undivided Families, association of persons and co-operative societies are further classified into various levels. Currently, the ICAI has categorized non-company entities into 3 levels.

With increasing number of non-company entities, the ICAI has, now, further classified them into 4 levels. The amendments have been brought to reduce stringency on non-company entities which were earlier required to comply with all AS in pursuance of being level I entities as the norms for the same have been revised.

Since most of the Special Purpose Vehicle(s) (“SPV”s) are in the form of non-company entities, they were required to comply with all accounting standards as most of these were covered under level I category. However, with the proposed changes, the burden of strict adherence to AS will be reduced for SPVs falling under level I category.

This Article is an attempt to cover the proposed revision criteria for application of AS on non-company entities.

Proposed applicability

It is proposed that this scheme be made effective in respect of accounting periods commencing on or after April 1, 2020. However, the same shall be effective once the required changes are incorporated in the AS while publishing the updated Compendium of AS.

Non-company entities[1] on which Ind AS is not applicable. It should be noted that such entities have been classified in 4 levels basis different criteria including turnover and borrowing and classified as large – medium – small and micro entities- last three referred to as MSMEs.

Entities belonging to level II, III, IV have been granted certain exemption. It is to be noted that the applicability of AS has been made milder as one goes down the four level of entities i.e to say, maximum relaxations / exemptions are given to level IV entities.

Disclosures

All non-company entities which are covered under this Proposal, are required to make following disclosures:

  1. That the AS has been complied by the entity;
  2. The level to which the entity belongs and whether it has availed exemptions granted to such level;
  3. Availing of partial exemption – It is to be noted that the entities are allowed to cherry-pick the exemptions they intend to avail. However, such partial availing of exemption should not be misleading. That the entity has cherry-picked the exemptions and not availed all the exemptions granted to such level should be disclosed as to which all exemptions it has availed;

 Transition

The Proposal also talks about disclosure / rules of transition from one level to another, which are as follows:

  1. From transition from a higher level to a lower level – relaxations / exemptions of the lower level may be availed only on staying at such level for two consecutive years.
  2. From transition from a lower level to higher level – while the disclosures pertaining to the higher level becomes applicable, however no change / revision is required to be made in the previous year [where the entity was classified as a lower level, and had availed exemptions / relaxation as such] is required to be made. However, disclosure of such fact is required to be made in the notes to financial statement.
Levels Existing criteria for classification [2019][2] New criteria for classification Applicability
I

[Large]

 1.      Equity / Debt Listed / to be listed entity

a)     Entities listed on overseas exchanges also included

2.      Banks (including co-operative banks), FIs, Insurance entities

3.      Entities having [3]turnover in the (excluding other income) > 50 crores

4.      Borrowings (including public deposit) > 10 crores

5.      Holding and subsidiary entities of the above

 1.     Listed / to be listed entity

a)     Entities listed on overseas exchanges also included

2.      Banks (including co-operative banks), FIs, Insurance entities

3.      Entities having turnover in the (excluding other income) > 250 crores

4.      Borrowings (including public deposit) > 50 crores

5.      Holding and subsidiary entities of the above

 All 29 AS applicable in full.
II [Medium] 1.      Entities having turnover in the (excluding other income) > 40 lakhs ≤ 50 crores

2.      Borrowings (including public deposit) > 1 crores ≤ 5 crores

For turnover / borrowing criteria – only such entities shall be regarded which  are engaged in commercial, industrial or business activities

Holding and subsidiary entities of the above

 1.      Entities having turnover in the (excluding other income) > 50 crores ≤ 250 crores

2.      Borrowings (including public deposit) > 10 crores ≤ 50 crores

For turnover / borrowing criteria – only such entities shall be regarded which  are engaged in commercial, industrial or business activities

3.      Holding and subsidiary entities of the above

 A.      Accounting Standard(s) not applicable:

AS 3   – Cash Flow Statements

AS 17 – Segment Reporting

AS 20 – Earnings Per Share

 

B.      Accounting Standard(s) applicable with disclosure exemption:

AS 19 – Leases

AS 28 – Impairment of Assets

AS 29 – Provisions, Contingent Liabilities and Contingent Assets

 

C.      Accounting Standard(s) applicable with exemptions:

AS 15 – Employee Benefits

 

D.     Accounting Standard(s) applicable with Note: [following AS, being related to CFS, the same is not applicable to Level II, III, IV entities unless they voluntary decide to consolidate the financial statements]

AS 21 – Consolidated Financial Statements

AS 23 – Accounting for Investments in Associates in Consolidated Financial Statements

AS 25 – Interim Financial Reporting

AS 27 – Financial Reporting of Interests in Joint Ventures (to the extent of requirements relating to Consolidated Financial Statements)

 
III

[Small]

 Remaining non corporate entities 1.      Entities having turnover in the (excluding other income) > 10 crores ≤ 50 crores

2.      Borrowings (including public deposit) > 2 crores ≤ 10 crores

For turnover / borrowing criteria – only such entities shall be regarded which are engaged in commercial, industrial or business activities

3.      Holding and subsidiary entities of the above

 All exemptions provided to Level II shall be applicable. Further exemptions:

 

A.      In addition to full exemptions as given in Level II, further Accounting Standard(s) not applicable:

 

AS 18 – Related Party Disclosures

AS 24 – Discontinuing Operations

 

B.      In addition to disclosure exemption as given in Level II, further Accounting Standard(s) applicable with disclosure exemption:

 

AS 10 – Property, Plant and Equipment

AS 11 – The Effects of Changes in Foreign Exchange Rates
IV [Micro] There were only III levels Remaining non corporate entities All exemptions provided to Level III shall be applicable. Further exemptions:

 

A.      In addition to full exemptions as given in Level III, further Accounting Standard(s) not applicable:

 

AS 14 – Accounting for Amalgamations

AS 28 – Impairment of Assets

AS 22 is applicable only for current tax related provisions.

 

B.      In addition to disclosure exemption as given in Level III, further Accounting Standard(s) applicable with disclosure exemption:

 

AS 13 – Accounting for Investments

 

Conclusion

As discussed above, the intent to revise the criteria for classification of non-company entities is to provide exemptions/ relaxations from applicability of all AS to certain entities covered under level I as they will now be shifted to descending levels. These proposed amendments will also lessen the difficulties faced by non-company entities falling under the existing levels as they will be provided with partial or full exemptions by getting transferred to descending levels.

 

[1]This Announcement supersedes the earlier Announcement of the ICAI on ‘Harmonisation of various differences between the Accounting Standards issued by the ICAI and the Accounting Standards notified by the Central Government’ issued in February 2008, to the extent it prescribes the criteria for classification of Non-company entities (Non-corporate entities) and applicability of Accounting Standards to non-company entities, and the Announcement ‘Revision in the criteria for classifying Level II non-corporate entities’ issued in January 2013.

[2] https://resource.cdn.icai.org/56169asb45450.pdf

[3] For turnover / borrowing criteria – only such entities shall be regarded which  are engaged in commercial, industrial or business activities

 

Comments on Proposed Framework for Prepacks

/0 Comments/in /by

-Sikha Bansal & Megha Mittal

(resolution@vinodkothari.com)

While there had been murmurs of a prepack insolvency resolution framework, the Report of the Sub-Committee of the Insolvency Law Committee, on Pre-packaged Insolvency Resolution Process[1] issued on 8th January, 2021 (“Sub-Committee Report”/ “Report”) comes as the first concrete step in bringing prepacks to India. In an earlier write-up, we have discussed possible framework for bringing pre-packs in India; see here- Bringing Pre-Packs to India

Below we discuss the various facets of the Report in terms of application and feasibility, both legal and practical.

Read more →