In a dusty industrial town outside Coimbatore in Tamil Nadu, Srinivas runs a small tool-and-die unit. He doesn't have investors or a board. He files his goods and services tax promptly and pays his workers. Like most micro, small and medium enterprises, he is part of the micro-enterprise structure, and his business is mainly built on relationships.
Then came Covid-19 pandemic. The aftereffects of this over the years meant that his business saw a gradual decline. There is no empirical data to suggest as to how many MSMEs were affected in India during the pandemic. However, a study undertaken by the Institute for Studies in Industrial Development, India, shows that the highest decline in turnover was observed in small and micro enterprises, which was around 60.75% and 43.47% respectively.
Then came Covid-19 pandemic. The aftereffects of this over the years meant that his business saw a gradual decline. There is no empirical data to suggest as to how many MSMEs were affected in India during the pandemic. However, a study undertaken by the Institute for Studies in Industrial Development, India, shows that the highest decline in turnover was observed in small and micro enterprises, which was around 60.75% and 43.47% respectively.
Let's see what the government has tried. There has been no shortage of support under the credit guarantees and the Reserve Bank of India's priority lending schemes. There is no dearth of liquidity. For example, the Government of India, through their Budget, allocated around Rs 9,000 crore towards CGTMSE in 2023-24. The heart of the problem is understanding if there exists a regime that offers support for revival of his business when it is affected by financial distress.
Then what options does he have for reviving his business in the current world? Almost nil! The RBI's framework for debt resolution might assist him to a certain extent if he is part of the formal economy. But what if he was operating under an informal economy as a part of the unorganised sector? There is no insolvency regime that could assist him to revive his business. This is exactly how the system works. The system fails him completely and he must close down!
The enactment of the Insolvency and Bankruptcy Code of 2016, often hailed as a significant turning point in the evolution of Indian jurisprudence, was meant to provide solutions to all sectors.
In the present times, the corporate insolvency is available for companies in distress and the personal insolvency chapter is yet to be fully notified. For now, let's get this straight: the IBC applies only to "corporate person" and "personal guarantors of the corporate debtors". And yet, businesses such as Srinivas' are very real like everyone else who run the MSMEs in India.
There are around 6.23 crore MSMEs that make up 99% of India's business ecosystem (Ministry of MSME, 2023). Most of them are micro enterprises and in turn majority of these operate under an informal economy. Such enterprises remain undocumented and invisible to the IBC.
Let's be clear: the IBC was never designed for MSMEs. It was designed with a standardised approach of 'one size fits all' and with the aim of maximisation of creditor returns. MSMEs operate in a completely different universe — one of informal credit, patchy documentation, limited legal literacy and deep promoter dependence. Expecting them to survive the IBC process even if it applies to them, is a far-fetched idea.
The Pre-Packed Insolvency Resolution Process under the IBC was supposed to provide the answer for the MSMEs. But sadly, it has very limited application and has miserably failed to perform. Burdened with unrealistic expectations like obtaining 66% consent from unrelated financial creditors before even filing — it's a textbook example of policy disconnected from ground realities of MSMEs. This has literally killed the corporate MSMEs — if there are any!
When an MSME is in deep financial distress and needs a clean reset — a formal way to restructure debt or negotiate with creditors, the IBC fails them as it completely ignores them.
Contrast this with other countries like Australia. They have designed a tailored law for MSMEs under Part 5.3B under the Corporations Act, 2001, which offers a low-cost, timebound and out-of-court mechanism that saves businesses and respects the realities of MSMEs. Can India learn from this ? Yes, most certainly. This mechanism has a lot to offer in terms of valuable lessons for India.
MSMEs, which form the backbone of our economy, are unfortunately bleeding to death, one by one. Not because they are inefficient or unviable. But because the IBC system fails to protect them and doesn't give them a real way to survive distress. Simultaneously extending credit and applying defunct legislation such as the IBC is untenable.
The truth is harsh: time for a change and time to accept the harsh realities of our MSMEs. India needs a separate, simplified and non-judicial restructuring path for MSMEs — fast, cheap and focussed on saving businesses. We must stop pretending that the law that applies to Jet Airways would provide an effective solution to people like Srinivas. No amount of amendment to the law will help. Any such minor legal alterations are largely irrelevant to, and ineffective for, the practical needs of MSMEs.
We need a distinct framework — one that is outside the National Companies Law Tribunals, debtor-in-possession in style and driven towards restructuring rather than mere recovery. We need a system that will incentivise the MSMEs to revive their businesses and become more self-reliant.
It's time to stop pretending that the IBC is a one-size-fits-all solution. It's also high time we stop the celebration of IBC's premature success. Time to conduct a reality check on its fitness of purpose. Let's ask the real question, does it help sectors like MSMEs that form our economy's backbone?
No! So, what next? And until we acknowledge this and work towards an effective framework, we will continue watching our MSMEs bleed out — one silent failure at a time, one death by a thousand cuts!
Preeti Nalavadi is an Indian qualified lawyer and a PhD candidate, University of Adelaide-Law School, Australia.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
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