[This guest post dated May 15, 2020 is authored by Deep Roy, Managing Partner & Nupur Malde, Partner, Equilex, Mumbai. Any query regarding this article can be addressed to them at email@example.com & firstname.lastname@example.org]
PART I – FOR BUSINESSES INCLUDING MSMEs
On May 13, 2020, India completed 50 days of lockdown. While providing his message to the nation on May 12, 2020, the Hon’ble Prime Minister of India has clearly indicated about a lockdown 4.0, which would be the possible fourth stage of lockdown. This definitely seems to be the need of the hour as there seems to be no reduction of cases in several pockets of the country. With the number of cases reaching 75,000 in India, it is clear that the fight against the virus continues, and the situation is more sensitive than before. However, the Government of India has provided a positive message that ‘life must go on’. It is no way being said that life will be the same, however, it has to be appreciated that extra measures have to be taken to stay safe and continue. It has become extremely important to tend to the economy while looking after the safety and fighting the health issues. The Prime Minister has indicated that India should work to be self-reliant. In order to support the financial stress and the issues being faced by the Indian economy, the Hon’ble Prime Minister announced a financial stimulus package of INR 20 lakh crore, which included the previous stimulus and those announced by RBI already. The details of the measures were thereafter announced by the Hon’ble Finance Minister. On May 13, 2020, she announced part I of the measures. We hereby provide you with our brief analysis of the measures announced as part I.
I. Collateral-free Automatic Loans for Businesses including MSMEs
As a measure to assist in funding operational liabilities that have built up, the purchase of raw materials and the restart of businesses, an emergency line of credit of INR 3 lakh crore has been introduced for businesses including micro, small and medium enterprises (“MSME”), up to 20% of the entire outstanding credit as on February 29, 2020. This facility is to be made available to standard MSMEs who are facing problems because of Covid-19.
The key features of the said emergency line of credit are as follows:
- Borrowers that have up to INR 25 crore outstanding and INR 100 crore turnovers shall be eligible.
- The loans shall have a 4-year tenor with a moratorium of 12 months on principal repayment.
- The loans shall be secured by a 100% credit guarantee cover on both the principal and interest.
(i) Although several measures like the emergency line of credit are being introduced for the MSME sector, there is no clarity and direction about prioritising the relief to the entities who are really in need of the relief. There are more than 6 crore registered MSMEs in India. With the change of the definition proposed by the finance minister, this number is going to rise. Not all of them require the same amount of attention. Several entities that are in the business of providing essential services or are in the agriculture sector, may not be in need of such a line of credit, as their businesses may not have suffered on account of the Covid-19 pandemic. On the contrary there are MSMEs like those in the retail sector (like jewellers etc) who have had negligent business till a few days before lockdown and no business from the beginning of lockdown. Such retail MSMEs whose products are luxury or items being purchased as savings, will at least take another year to have any possibility of normalcy to their business. Such MSMEs need relief in priority and would need assistance to cut through all the red tape. It would therefore be preferable to have guidelines and directions to prioritise applications made to financial institutions by certain sectoral MSMEs. The financial institutions should also be obligated to report the details of loans provided to the government under each of the schemes. A proper MIS should be submitted to ensure due compliance.
(ii) It would be key to take note that the moratorium for repayment extends only to the principle amount of the loan and not to the interest component. It may be realistic that most MSMEs may need the respite from making the interest payments as well for the first year. It is anyway part of a stimulus package and therefore adequate comfort would be available to the financial institution. Only receipt of interest would no way be making up for the fund requirements of the financial institutions. However, by providing complete reprieve for a year, the risk of default would have reduced and so would have stress on the government credit guarantee.
II. Subordinate Debt for Stressed MSMEs
The Government of India shall facilitate provision of INR 20,000 crore as subordinate debt to functioning MSMEs that have been declared to be a non-performing asset “NPA”, or which are stressed. The ‘Credit Guarantee Fund Trust for Micro and Small Enterprises’ (“CGFTMSE”), will be funded by the government, which shall in turn provide a partial credit guarantee as support for the banks who extend such subordinate debt to stressed MSMEs. The subordinate debt is to be provided to the promoter of the MSME, who shall infuse the said funds into the MSME as equity.
(i) The present measure is in effect increasing the debt taken by the promoters. It is not an exposure on the relevant MSME but the promoter, which may or may not be an MSME. We would understand that the financial institutions may be doing its own credit analysis of the promoter company. Thereafter, because of issues at the promoter level, the MSME may not end up getting the relief. However, it may be important to appreciate that such a mechanism may have been suggested as under the current prudential norms, financial institutions would not be funding NPA or stressed companies. Therefore, there is an insistence of routing the money through the promoter. However, there is no clarity on what is to be done in case the promoter companies are also NPA.
(ii) The financial institutions are supposed to provide a subordinate loan to the promoters and the CGFTMSE is supposed to provide a partial credit guarantee. The question arises that in case the financial institutions are being asked to lend to stressed group or an NPA, the security cover may not be adequate and government is only covering partially, what would be the basis of recovery to the financial institution for the remainder amount? The present situation will not fall into all the board policies formulated by the financial institutions, qua credit risk and recovery, as insisted on by RBI. Accordingly, the above measure may be required to be followed with some direction and guidelines from RBI to the financial institutions.
III. Equity infusion for MSMEs through Fund of Funds
The finance minister mentioned that a fund of funds will be setup with a corpus of INR 10,000 crores. This fund of funds will be managed by a mother fund and a few daughter funds. The fund structure will help leverage INR 50,000 crores of funds at the daughter funds level. This is intended to provide additional equity funding to MSMEs with growth potential and viability. This equity infusion will help MSMEs expand in size and reach a level where they can look at listing opportunities.
From the announcement it is unclear of what is the government role in the fund structure. It also mentions that the structure will help leverage INR 50,000 crore while the corpus is INR 10,000 crore. Would this mean that the remainder amounts would be sought from investors? The general intent of a fund of funds is to help investors diversify their risks by investing in the mother fund and having it spread between different separate daughter funds having different focus. However, given that in this scenario the fund of fund is in relation to the MSMEs, it will be interesting to know about the detailing of the structure of the fund. Irrespective of the structure, the measure is aimed to provide respite to certain MSMEs which is a positive.
From the above three measures mentioned, there is no clarity on whether an MSME who has got the benefit of a collateral free loan will also be eligible for an equity infusion from the fund of funds. There is no direction provided on how the measures are to be dissipated to have a maximum outreach.
IV. New Definition of MSMEs
Section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006(“MSMED Act”) classifies enterprises as micro, small and medium enterprises based on the size of their investments. The existing and revised definition of MSME’s is as under:
|Enterprise||Existing Definition||Revised Definition|
|Micro Enterprise||Manufacturing: Investment of less than INR 25 lakh||Investment of less than INR 1 crore and turnover of less than INR 5 crore|
|Service: Investment of less than INR 10 lakh|
|Small Enterprise||Manufacturing: Investment of less than INR 5 crore||Investment of less than INR 10 crore and turnover of less than INR 50 crore|
|Service: Investment of less than INR 2 crore|
|Medium Enterprise||Manufacturing: Investment of less than INR 10 crore||Investment of less than INR 20 crore and turnover of less than INR 100 crore|
|Service: Investment of less than INR 5 crores|
The government of India has introduced several measures to benefit MSMEs in the country. The revised definition will allow for a larger number of entities to be considered as an MSME, and therefore benefit from the existing advantages provided to MSMEs, along with the added benefits being introduced. It is however, essential to ponder whether a company with a 99 crore turnover should actually be considered to be a medium enterprise and be eligible for all the concessions and reliefs.
It is also important to note that as per the MSMED Act, entities will still have to file their memorandum with the relevant authority to record themselves as MSMEs. It is unclear whether such recording would be a pre-requisite to avail of the benefits being provided.
V. Global tenders to be disallowed upto INR 200 crore
The General Financial Rules, 2017 allows the ministries and departments of the Indian government, to seek foreign tenders if they feel that the goods of the required quality, specifications etc., may not be available in the country and it is necessary to also look for suitable competitive offers from abroad.
The Indian government has now disallowed global tenders in government procurement tenders up to INR 200 crore. This measure has been introduced in furtherance of and in support of the ‘Make in India’ policy.
This measure comes as a relief to Indian entities, especially MSMEs that struggled on account of competition from foreign entities. Further, this provides an increase in the revenue earning opportunities for Indian enterprises. There were instances wherein because of high qualification of certain global players, the MSMEs kept getting overshadowed or even disqualified. This will ensure domestic participation in the category of tenders less than INR 200 crores.
VI. Other Measures for MSMEs:
(a) E-market linkage – The Indian government is proposing to promote e-market linkage initiatives for MSMEs, and has indicated that financial technology will be used to enhance transaction based lending using the data generated by the e-marketplace.
With the lockdown and social distancing measures being followed in India throwing a damper on trade fairs and exhibitions, e-market linkage initiatives for MSMEs promise an alternative platform for MSMEs to sell their goods. This is a strong indication provided by the Finance Minister that even after lock down and for quite some time thereafter, social gatherings and congregation of people would not be allowed. This would be a hint which should be taken by inter-alia the businesses running theatres, clubs etc and those in the event industry (whether fairs, exhibitions, concerts or marriages)
(b) Receivables from the Government and CPSEs –All amounts payable by the Indian government and central public sector undertakings to MSMEs, shall be released within 45 days.
Although the amounts receivable by an MSME from the government and central public sector undertakings may not be substantial, this measure may provide some form of liquidity for the MSME, which will be in a position to cover certain immediate expenses. While most of the others are non-fund based reliefs, this is the first commitment made by the government which entails that the money would be directly be paid by the government undertakings to them. However, it is to be noted that this is anyway money already due to MSMEs are not anything additional.
VII. Employee Provident Fund Support for Businesses
(a) Under the Pradhan Mantri Garib Kalyan Package (“PMGKP”), the employers and employees contribution, for eligible establishments, into their employee provident fund accounts, for the salary months of March, April and May for the year 2020, have been made by the government. Now this support has been extended for the months of June, July and August as well.
(b) Further, for all entities covered by the Employee Provident Fund Organisation and not getting covered under PMGKP, for the next three months, contribution into the employee provident fund accounts by both the employers and employees, will be reduced from 12% to 10%. The said reduction will not be applicable to the employers of the central public sector undertakings and state public sector undertakings wherein the government will continue to pay 12%.
In this time of struggle, where certain establishments are suffering from depletion in their revenue, a reduction in the contribution by the employer will ensure additional funds are available with the employer to make payments of expenses such as salaries of employees. Both measures introduced will assist in providing additional liquidity to several employees. However, what is unclear is whether the 2% reprieve being given to employer contribution will actually get passed onto the employee. In case it does not get passed on to the employee, then effectively the employee will be having a 2% pay cut reflecting for these three months. If it is a cut reflecting in the employees basic salary then it will result in deduction of the dearness allowance of the employee as well.
VIII. Special Liquidity Scheme for NBFCs/HFCs/MFIs
In order to assist NBFCs, HFCs and MFIs to raise funds in the debt markets, the government has launched a special liquidity scheme of INR 30,000 crores. Under this scheme the investments will be made in investment grade debt papers of NBFCs/HFCs/MFIs, which securities will be fully guaranteed by the government of India.
It is important to highlight that it has been a constant attempt of the government to strengthen liquidity in the financial markets, especially at the NBFC/HFC/MFI strata. The availability of funds at the investment grade ensures that funds are available for a wide range of credit ratings and would make it accessible to a larger section of the target market, especially ones that would require such investment more due to their lower credit rating.
The present stimulus may assist and provide the required boost to debt mutual funds which are usually well invested into NBFC’s debt instruments.
It is important to highlight that this provision would increase the debt profile of micro financial institutions, who would be more likely to be benefitted for grants obtained from the government instead of debt finance.
IX. Partial Credit Guarantee Scheme 2.0 for NBFCs
The finance minister has announced that the scope of the Partial Credit Guarantee Scheme for PSBs which was first approved by the Government on December 11, 2019, is being widened to include borrowings such as primary issuance of bonds and commercial papers of NBFCs/HFCs/MFIs with a low credit rating (including commercial papers with a rating of AA or below, and unrated commercial papers). Further, it has announced that 20% of the first loss will be born by the Government of India approved the Partial Credit Guarantee Scheme for PSBs for purchase of high rated pooled assets from financially sound NBFCs/HFCs.
Under the original scheme public sector banks could purchase high rated pooled assets from financially sound NBFCs/HFCs with the overall guarantee limited to first loss of up to 10% of fair value of assets purchased by banks under the scheme of Rs. 10,000 crores, whichever is lower. Pursuant to the relief package announced by the Finance Minister on May 13, 2020, this scheme has been extended to NBFCs/HFCs/MFIs with low credit rating and is also to cover borrowings such as primary issuance of bonds and CPs of such entities. The guarantee limit has also been raised to first 20% of the loss. Further, the assets eligible for investment have been broadened to include all assets rated as AA or below including unrated papers. Further, the extension to include primary issuance of bonds and CPs will provide a boost in the liquidity and also help improving the balance sheets of these entities. Further, the increase in the credit guarantee by the Government will increase the confidence of banks to provide finance to these entities. This scheme is expected to induce a liquidity of around Rs. 45,000 crores which will aid these NBFCs/HFCs/MFIs to smoothly lend to MSMEs and individuals who are the most affected due to the Covid-19 pandemic.
X. Liquidity Injection for DISCOMs
In the wake of the Covid-19 pandemic, revenue generation of power distribution companies (“DISCOMs”) have taken a serious hit. The finance minister in her speech recognised and identified that the payables of DISCOM to the respective power generation companies (“Gencos”) are at about INR 94,000 crores. In order to combat these liquidity disbalance, Power Finance Corporation (“PFC”) and Rural Electrification Corporation (“REC”) shall infuse a total of INR 90,000 crores into DISCOMs in form of loans provided against the receivables of the DISCOMs. These loans will be guaranteed by the respective state governments, and shall be exclusively for the purpose of discharging the liability of the DISCOMs to the Gencos. Further, central public sector Gencos are required to give a rebate to DISCOMs which shall be passed on to the final consumers (industries)
(i) It has been observed that the power sector has seen a tremendous amount of development and there are several companies that have undertaken power generation. However, the problem faced has been that the DISCOMs have not been able to pay for the power bought. There have been several unsuccessful attempts to revive and help the DISCOMS.
(ii) It is pertinent to note that this infusion of liquidity is being carried out in forms of loans secured against the receivables of the DISCOMs and exclusively for the purpose of discharging the liability to the Gencos. In such a situation we would be seeing a reshuffle of liability more than a true relief as the DISCOMs would still be liable for the same amounts now to PFC and REC instead of the Gencos.
XI. Relief to Contractors
Contractors working for central agencies, such as the Railways, Ministry of Road Transport & Highways, Central Public Works Department, etc, will receive an extension of up to 6 months for construction/works, goods and services contracts – for the completion of work and associated intermediate milestones and concession periods in public private partnership contracts. Further, for contracts that are partially completed, government agencies would be providing a partial release of bank guarantees to the extent of the completion.
(i) The infrastructure sector had received a huge impetus over the last few years. Accordingly, there was a lot of activity undertaken in the infrastructure sector – whether roadways, railways, metro etc. All of these projects and all work were suspended during lockdown. This will provide clarity to the contractors regarding the timelines. With a heavy reduction in operational workforce however, with several workers migrating back to their hometowns, it remains to be seen if the time provided would be sufficient to reach adequate completion and avoid defaults under the relevant contracts. Effectively, 6 months may just be a very short extension in the scheme of the issues being faced.
(ii) The partial release of bank guarantee would make valuable credit limit accessible to the respective contractors who would be able to meet their other credit requirements. This is technically a smart move to free up idle non-fund based limits. However, it remains to be seen as to how this would be operationalised. Several of the bank guarantees issued don’t envisage partial release of guarantee limits. There may be fresh documentation required to be entered into to bring this to effect.
XII. Extension of Registration and Completion Date of Real Estate Projects under RERA
As a result of the Covid-19 pandemic and its associated lockdown, several real estate projects have slowed down or been put entirely at a standstill. To counteract this adverse impact the finance minister has announced that the Covid-19 pandemic would be treated as a ‘force majeure event’ under RERA – and the timelines for registration and completion date of such projects shall be increased suo-moto by the State/Union Territories and their respective regulatory authorities, by a period of 6 months. This may be further extended by an additional period of 3 months if needed. Concurrently, various timelines under RERA would also be extended.
(i) The addition of Covid-19 as a force majeure event entails that the real estate projects can continue to operate without any event of default, and no proceedings can be initiated against the respective construction houses pursuant to the Covid-19 pandemic. It would be interesting to see the manner in which such a declaration of force majeure is provided and whether such a declaration would allow developers to invoke force majeure in other contracts that they have entered into like their construction contracts, land owner contracts etc.
(ii) It is also pertinent to note that home buyers would be suffering from this modification, in the sense that firstly the homeowners will not receive their respective flats within the initial stipulated time-period. Moreover, it remains to be seen whether the developers would utilise the ‘force majeure’ declaration to wriggle out of additional commitments provided to home-buyers.
XIII. Measures in Taxation
(a) With an intent to increase the liquidity available to taxpayers, the rates of tax deduction at source for non-salaried specified payments made to residents and the rates for tax collection at source for the specified receipts shall be reduced by 25% of the existing rates. These revised rates shall be available for payment for contract, professional fees, interest, rent, dividend, commission, brokerage, etc, and shall be hall be applicable for the remaining part of the financial year 2020-2021.
(b) All pending refunds to charitable trusts and non-corporate businesses and professions including proprietorship, partnership, limited liability partnerships and co-operatives shall be issued immediately.
(c) Due date of all income-tax return for financial year 2019-2020 will be extended from July 31, 2020 and October 31, 2020 to November 30, 2020 and tax audit from September 30, 2020 to October 31,2020.
(d) Date of assessments getting barred on September 30, 2020 extended to December 31,2020 and those getting barred on March 31, 2021 will be extended to September 30, 2021.
(e) Period of Vivad se Vishwas Scheme for making payment without additional amount will be extended to December 31, 2020.
The first part of the measures seemed well structured to provide relief to the MSME sector and certain measures for the NBFCs as well. It is important to note that most of the measures were non-fund-based measures, more in the nature of guarantees, wherein there is no direct outflow at this stage for the government. This is unlike measures taken by certain other jurisdictions like United States of America, wherein they physically transferred all the money to the unemployed and to certain businesses. The key to the approach adopted by Government of India is that they still have to be dependent on another institution to deliver the benefit. For example, the financial institutions would still need to provide the collateral free loans to the MSMEs. Therefore, there is an additional layer and mechanism to be followed in order to ensure effective implementation of the package. It would be interesting to see what the rest of the package has in store for the country.
Md Piyal Shaikh and Shreya Menon, Associates at Equilex have also contributed for this analysis.
The conclusions reached and views expressed in this document are matters of opinion. Our opinion is based on our understanding of the law and regulations prevailing as of the date of this document and our past experience with the authorities. However, there can be no assurance that the regulators/adjudicating authorities may not take a position contrary to our views. Our opinion in this document is basis Indian law only and does not provide any insight on any other laws. Legislation, its judicial interpretation and the policies of the regulatory authorities are also subject to change from time to time, and these may have a bearing on the advice that we have given. Accordingly, any change or amendment in the law or relevant regulations would necessitate a review of our comments and recommendations contained in this document. Unless specifically requested, we have no responsibility to carry out any review of our comments for changes in laws or regulations occurring after the date of issue of this document.
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