MSME-Samadhaan
Working Capital Management: The Lifeline of MSMEs
One such area where greater awareness is the need of the hour and a major area of concern for the MSMEs is ‘working capital management’. Extreme delays in customer recovery, disputed receivables, overdue receivables turning into bad debts and write offs literally destroys the working capital cycle of the business. If not controlled on time, this problem impacts the liquidity of the business adversely and starts eroding the profits.
What are the solutions? It’s simple, know your rights, be aware about the tools which are available for tackling this problem. There is a solution to every problem, need is to have a resolve and fight with confidence.
The most robust solution is The Micro, Small and Medium Enterprises Development (MSMED) Act, a welfare legislation for the MSMEs and Samadhaan Portal, e-initiative of Ministry of MSME, www.samadhaan.msme.gov.in.
Structural Scope of Analysis
For better understanding, the topic can be discussed in 3 different sections:
- Salient provisions of the MSMED Act.
- Complete dispute resolution ecosystem.
- The SAMADHAAN - Step-by-process of filing the claim online.
Salient Provisions of the MSMED Act
| Manufacturers & Service Providers | MICRO | SMALL | MEDIUM |
|---|---|---|---|
| Investments in Plant & Machinery or Equipment | Upto Rs. 1 cr | Upto Rs. 10 cr | Upto Rs. 50 cr |
| Turnover | Upto Rs. 5 cr | Upto Rs. 50 cr | Upto Rs. 250 cr |
The act provides for a maximum time limit of 45 days as credit period to the buyer for all purchases made from Micro and Small Enterprises (MSEs).
Yes, this benefit is available to Micro and Small Enterprises only; Medium enterprises are not covered.
The benefit is available only to manufacturing and service entities and not to trading entities.
If the payment is not made within 45 days, the buyer has to pay the MSE supplier interest at 3 times the bank rate (i.e., 13.95%, as present bank rate is 4.65%), compounded with monthly rests.
If the MSE is neither getting the payment nor the interest despite satisfactory delivery of goods/services, MSE need not go to any court but has to go to the MSE Facilitation Council (MSEFC). MSEFC is formed by each state government and sits at each District/block head quarter in every state.
MSEFC decides the matter as a conciliator as per the provisions of Arbitration and Conciliation Act 1996 and has the mandate to resolve the dispute within 90 days from the date of reference.
Supplier (MSE) should be registered under Udyam Registration at udyamregistration.gov.in.
The interest paid by buyer cannot be claimed as expense from his business income, (Non-deductible expense) under the Income-tax Act.
Overall Dispute Resolution Ecosystem
In business, maintaining healthy relation with all stakeholders is top priority, especially the customer supplier relations which are very crucial as well as complex. A trust driven, fair and equitable relation between the supplier and customer are the key to success for both the parties. It’s a quid-pro-quo relation, however precaution is necessary. Any supplier highly dependent on one single customer is highly avoidable. At the same time, having a nurturing attitude towards all suppliers even a small one, is a welcome corporate policy.
In cases when the supplier ultimately decides that there seems to be no option other than approaching a legal forum for recovery of its long outstanding dues, he needs to approach dispute resolution ecosystem created by MSMED Act.
Step-by-Step Claim Escalation Workflow (Pic-1 Architecture)
- Existence of Dispute: When an MSE concludes that there is something wrong with the buyer and time has come to go legal, it has to first approach the buyer through a simple letter on its own letter head, mentioning the basic provisions of MSMED Act.
- Samadhaan Portal: If the buyer pays, all is well and good, else the online petition must be filed on Samadhaan Portal, www.samadhaan.msme.gov.in.
- Instant Notice: As soon as the petition is filed, the buyer gets an auto generated notice from Ministry of MSME requiring him to pay the dues to his MSE supplier within 15 days, else proceedings of the MSEFC are initiated.
- Hearing: If the buyer still doesn’t pay the dues, he gets the notice for hearing in MSEFC.
- Mutual Settlement: At first hearing, the council asks the buyer and supplier to sit together and try to resolve the dispute mutually. If parties decide to mutually settle the matter, a signed MOU has to be filed so that the case can be disposed of by the MSEFC and updated online.
- Conciliation: If mutual settlement is not possible, then the council can provide a third party conciliator who guides the parties to come to some conclusion.
- Arbitration: If conciliation fails then the case is taken up for arbitration by the council and award is passed based on the merits of the case.
- Award: It is a speaking order of the MSEFC to pay the dues along with interest within a time bound manner.
- Appeal (Mandatory 75% Pre-Deposit): Buyer may challenge the award of the council but before that he is required to deposit 75% of the disputed amount in the court and part of such deposited amount is passed on to the MSE supplier.
- Execution of Award: If the buyer still doesn’t pay as per the award, then the supplier has to resort to execution of award with the help of a local court. Through executive petition, the supplier can get the assets of the buyer attached for recovery of dues. He can also get the buyer arrested till the dues are fully paid.
The SAMADHAAN: Step-by-Step Online Filing Process
www.samadhaan.msme.gov.in: Completely online, hassle free, cost effective and time saving method of dispute resolution and recovery of dues, specifically designed for the MSEs. The procedure of filing the case is very simple. This platform can be used by any MSE supplier, Pan-India.
Prior to the launch of this online platform in October 2017, the entire filing process was offline and had a lot of manual intervention. Hard copy submission, manual scrutiny, decision on claim validity, sending manual notice to respondent, this entire manual process is now abolished and is replaced by the SAMADHAAN Portal.
The initiative has established itself as the best tool to resolve disputed receivables, in a time bound manner and has created real ease in filing as well as resolution of dispute by saving a time of close to 6+ months in the entire resolution process.
Only PO and invoices required for filing of case. If there is no PO, an affidavit to that effect is also sufficient to file the case.
Online Processing, Scrutiny & Real-Time Tracking
- Processing: Application gets converted to case on scrutiny by the concerned authority and hard copy submission is called for. Case can also be rejected at this stage with sufficient reasons.
- Response: Buyer may respond by paying the entire dues or he may choose to fight the same by responding to the notice.
- Settlement: If parties decide to mutually settle the matter, a signed MOU has to be filed so that the case can be disposed of by the MSEFC and updated online.
- Tracking: Real time tracking of case status is possible through the 9-stage digital lifecycle (Application filed > Online Intimation > Mutual Settlement Option > Council Case Conversion > Council Rejection check > SMS/Email alerts > Online Case Entry > Hearing Schedule updates > Final Disposal Status).
Table - 1: Samadhaan Portal Performance & Case Disposal Statistics
| Details | Appl Filed | Appl Pending | Cases Pending | Appl Rejected | Mutually Settled | Appl Disposed |
|---|---|---|---|---|---|---|
| No of Cases | 108,990 | 30,502 | 29,493 | 23,856 | 10,579 | 14,560 |
| 100% | 28% | 27% | 22% | 10% | 13% | |
| Amt Involved (Rs. in Crores) | 28,161 | 6,775 | 10,383 | 5,146 | 1,465 | 4,392 |
| 100% | 24% | 37% | 18% | 5% | 16% |
Five Actionable Commandments for MSEs & Enabling Government Initiatives
Strengthen your working capital position with these five simple actionable steps:
Government Enabling Initiatives & Statutory Audit Disclosures
A lot of enabling provisions have been enacted in the recent past which strengthen the cause of the MSMED Act directly and build awareness across corporate buyers, MSEs, and statutory auditors:
- Section 22 of MSMED Act: Mandatory reporting of purchases from MSEs and overdue amounts/interest by every entity to which audit is applicable under any statute in India.
- Mandatory TReDS Registration: Companies with turnover exceeding Rs. 500 Crore must register on the TReDS platform to ensure instant payment to MSE suppliers (MSME Notification No. 5621 dated 2nd Nov 2018).
- Half-Yearly Form MSME-1 Filings: Mandatory reporting of outstanding dues to MSEs beyond 45 days by every ‘Specified Company’ through Form MSME-1 (MSME Notification No. 5622 dated 2nd Nov 2018 & MCA Notification No. 368 dated Jan 2019).
- 3 TReDS Platforms: Establishment of 3 operational TReDS platforms for quick and cost-effective bill discounting.
- Consequent Auditor Responsibility: Enhanced responsibility of statutory auditors in verifying dues to MSEs, verifying payments within 45 days, and reporting non-compliances.
Still a Long Way to Go: Five Strategic Reform Recommendations
Though the overall awareness about the importance of liquidity and initiatives of the government is growing and empowering the MSEs to a great extent, these developments are at their growing stage and require impetus. The following five critical suggestions should be implemented:
MSE Facilitation Council should have at least one fulltime member with judicial background. This will give a boost to the entire process, as being a quasi-judicial forum, it needs a judicial touch and consistency in the final awards. The rest of the composition is seamless.
Presently, by and large, hearings at the council are not held at regular intervals. Hearings happen once a month, and in a few places, only a few times a year. Considering the growing volume of cases getting filed, it would be ideal if the council hears cases preferably on a daily basis, round the year.
Presently, for execution of the council’s award, the MSE has to approach the local court. Due to inherent delays in the present judicial system, execution and recovery takes years together, thereby defeating the purpose of SAMADHAAN. Creating a separate execution mechanism directly at the MSEFC level will speed up recovery dramatically.
The Udyam Registration portal (udyamregistration.gov.in) should enable searching the MSE status of any entity based on PAN. This will help in two ways: buyers can check the status of all suppliers and classify them into eligible MSEs to facilitate timely payments; and statutory auditors of buyer entities can verify the status of all suppliers to form an informed opinion on MSMED Act compliance.
The current ‘Supplier’ definition makes it compulsory for the MSE to have Udyam registration prior to making supplies. However, registration under the MSMED Act is discretionary for Micro and Small Enterprises. Due to this contradiction, many MSEs are losing the statutory benefits of resolving disputed dues for supplies made prior to registration—which contradicts the true intent of the MSMED Act as a welfare legislation.
Conclusion: Nation Building & The Role of the CA Fraternity
The MSMED Act is here to protect the interest of MSMEs who are the backbone of our economy. Thin margins, stretched credit periods on one hand and lack of awareness about MSMED Act and MSME-SAMADHAAN on the other, it’s high time that MSMEs create an organised work culture.
At the same time, different regulatory requirements discussed in the earlier paras make it necessary for the auditors of buyers to report whether all MSE suppliers have been properly classified or not, amount paid within 45 days or not and whether interest is paid to them or not.
“As partners in nation building, continued participation of CA fraternity, in all welcome reforms, will certainly help the nation achieve all its ambitious goals in days to come.”