SME can call out big firms for dues, thanks to a tweak in IBC

The (IBC) has provided small enterprises in India the window to force large to cough up pending dues.

Information utility National e-governance Services (NeSL) will now make public the names of which default on payments. The details will be shared with all creditors that have exposure to the company.

The managing director and chief executive officer (CEO) of NeSL, S Ramann, says it would make banks and other financial institutions that deal with the defaulter company ask questions.

“If a company has the reputation of holding up payments to its operational creditors, it would raise questions among its financial creditors,” he explains.

The Insolvency and Bankruptcy Board of India, headed by M S Sahoo, has now tightened a piece of subordinate legislation to make it mandatory for that receive queries from NeSL-like information utilities to confirm that there is a bill pending against them from operational creditors. The list of operational creditors often includes small and medium enterprises.

NeSL has been set up by India’s leading banks and public institutions and is incorporated as a central government company.

This effort coincides with the concerns raised by Finance Minister Nirmala Sitharaman, who has flagged the problem of companies holding up payments to micro, small and medium enterprises (MSMEs).

She has estimated companies can clear Rs 40,000 crore to small suppliers and has asked the Ministry of Corporate Affairs to push big companies to do so. It was a one-time effort to clear the dues before Diwali.

The data on the success rate is yet to come.

Dues to small and medium enterprises are much larger, at about Rs 6 trillion, says Sundeep Mohindru, CEO of M1xchange.

His company runs the biggest factoring service for this sector. Small enterprises can discount their receivables from the big firms on his platform. By doing so these small enterprises can sell those receivables at a discount to banks or other financial companies. The cash they get restores their liquidity.

MSMEs in India land in debt traps on a massive scale because of unpaid dues. This has defied solutions though the government has created plenty of alternatives to tackle it.

“Companies cannot wilfully ignore such messages now,” says Ramann. If they do so, after 15 days of the last reminder the bill is deemed to have become a verified piece of paper. The bill becomes a piece of tradable financial instrument that a small enterprise can hawk on platforms like M1xchange to prospective buyers like banks.

This was the missing link in the factoring market. Mohindru points out that his company had been asking the ministry to provide a similar support but had not been successful so far because it did not have the powers. The problem has now been recognised by the Ministry of Corporate Affairs, more specifically the IBBI, and the regulations have been changed.

On the basis of this change, the factoring market, or the Trade Receivables Electronic Discount System (TReDS), can expand massively. The Reserve Bank of India set up TReDS in 2014 as a set of rules to facilitate the trade receivables financing of MSMEs from corporate buyers through multiple financiers. It did not take off and even now the turnover of the business of competing companies like M1xchange on the TReDS platform is just about Rs 10,000 crore annually.

“The big constraint was the slow pace at which big companies would acknowledge they had a bill raised against them,” says Mohindru. Even if MSMEs produced bills on companies they had supplied goods to, in the absence of corroboration from the other side, it was not enough. The IBBI tweak has solved the problem to a large extent.

NeSL is planning to get support from the Samadhan website of the ministry to collect the data. This was a primary recommendation of the UK Sinha committee, appointed by the RBI. The ministry will provide the data about invoices of small companies raised on big companies for the goods they supply. NeSL will aggregate the data before making the list public. It is up to banks now to recognise the papers and buy those at a discount from MSMEs.

Mohindru expects banks to raise the limits of their exposure for the bill-discounting business from the current Rs 5 crore to more liberal levels.

At present, it restricts the scope of the trade on the factoring markets. It will be the next battle for MSMEs.


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