Restructuring and Anti- Takeover Restructuring Measures to Protect MSME Sector: One Step Forward?

Shatakshi Tripathi, Symbiosis Law School, Pune

As India’s GDP contracts by 23.9% in the first fiscal of this financial year, it does not come as a surprise that businesses continue to suffer the collateral damage of the COVID pandemic. With crumbling market conditions, active measures have been adopted by the Governments, across the globe, to pacify the increasing distress in the economy. The Indian Government also adopted various measures to mitigate the impact of the COVID crisis, especially on the Micro, Small and Medium Enterprise (“MSME”). Amongst other fiscal measures, the struggling MSME sector gained its first sigh of relief through the Confederation of Indian Industry’s (“CII”) idea to set-up a COVID Rehabilitation and Relief Fund to provide direct monetary assistance to the MSMEs. Along with this, the CII also recommended various measures, inter alia, an extension of bank loans, a special fund, steps regarding the filing of GST and improving the welfare of workers etc. that were necessary to tide in MSME’s through the pandemic. In this article, the author analyzes the measures adopted to protect the MSME sector, with a special focus on the debt restructuring measures and safeguards against opportunistic takeovers.

I. Debt restructuring

The Reserve Bank of India (“RBI”), in a significant measure, extended the timeline granted for the restructuring of advances to MSME through a notification dated 6 August 2020. In 2019, the RBI introduced ‘One-time Restructuring of Loans’ (hereinafter “Restructuring Scheme”) specifically for the MSMEs, to tide over the economic instability. The Restructuring Scheme was applicable only for the last financial year i.e. 2019-2020. However, to give a breather to the struggling MSMEs, the RBI has extended the prescribed time period for restructuring until the end of the current financial year. It was first extended by a notification dated 11 February 2020 and consequently, on 6 August 2020 considering that MSMEs are worse-hit by the outbreak of a pandemic.

By the way of the said notification, existing loans advanced to MSMEs can be restructured by the banks and Non-Banking Financial Company, without any downgrade in the asset classification. However, it is imperative to note that the benefits of this scheme can only be availed by standard accounts of MSME’s with the lenders.

Pertinently, the extension provided is a unique restructuring measure adopted granting retrospective relief to the MSME’s facing monetary crisis. This advantage is reflected through the notification as it clearly states that all the assets that have slipped into the category of Non Performing category between 2 March 2020 and the date of implementation of the restructuring plan, can be upgraded as ‘standard asset’.

Furthermore, it is safe to presume that this was done in furtherance of the relief granted to borrowers, wherein a six-month moratorium period was given to put a restraint on the lenders for labeling assets as non-performing assets till 31 August 2020. To continue this benefit in a reasonable manner, the Hon’ble Supreme Court also passed an interim order on 3 September 2020 to extend the moratorium period till further orders are passed.

The RBI’s extension for the one-time restructuring of the MSME is predominantly in consonance to the Resolution Framework for COVID 19–related Stress, (“Resolution Framework”) announced by the RBI on the same date. The Resolution Framework is, however, a generic recourse provided to the borrowers, with the intent to facilitate the revival of real sector activities and to mitigate the impact on the ultimate borrowers, guided through the Prudential Framework for Resolution of Stressed Assets Directions, 2019. However, this restructuring mechanism is only available to borrowers having stressed assets on account of COVID which has to be categorically established. The resolution plan, thus, formed under the Resolution framework is implemented without any change in ownership.

Notably, the key difference between the two available recourses is that the Prudential Resolution Framework does not cover the MSME borrowers whose aggregate exposure to lending institutions collectively is a maximum of INR 25 crores or less as on 1 March 2020. As a corollary to this, the recourse under Prudential Resolution Framework is not available to MSMEs with exposure of less than INR 25 crores and will only be able to avail the benefit of a one-time restructuring scheme.

Recently, on 31 August 2020, the Securities and Exchange Board of India (“SEBI”) issued a notification instructing all the Credit Rating Agencies to not consider the restructuring due to COVID as a ‘default’. This will undisputedly help the MSMEs in maintaining their pre-COVID era credit ratings and borrow funds from the financial institutions in an effective manner. If this measure was not adopted, it would have negatively impacted the financial assistance being offered to distress MSMEs on a later date. However, the detailed guidelines pertaining to this are yet to be released by the SEBI.

II. Drawbacks of the debt-restructuring measures adopted

Firstly, one of the major concerns that arise is that it has been specifically provided for the restructuring framework for MSME’s is a one-time restructuring policy, and thereby can be strictly availed only once. This has been explicitly stated in the extension circular rolled out in February 2020 which remains applicable even under the extension provided as a relief for COVID. However, on the flip side, it is safe to presume that a lot of companies in the MSME sector would have availed the benefit of the Restructuring Scheme.

Moreover, the relief under Prudential Resolution Framework does not cover MSMEs below the exposure range of 25 crores, therefore, they cannot avail of the benefit under it. Therefore, whether the MSMEs that have undergone debt restructuring in the last financial year will be able to reap the benefits of restructuring during COVID still forms a grey area. Thus, this raises questions about the Restructuring Scheme that are yet to be addressed by the RBI. 

Secondly, these measures only provide relief to the accounts that fell within “structured accounts” before COVID adversely impacted the economic activities. This ignores the small businesses which were suffering in pre-COVID era because of the already fluctuating economy. These impacted MSMEsneed excessive hand-holding to tide through the current economic turmoil. However, the current governmental measure fails to take this perspective into account. Thus, as their plight has been ignored by the RBI, the only supposed aid that can be of assistance to them is the CII fund leaving them is a distressful state.

Measures against restructuring through opportunistic takeover

Another major step adopted by the Indian government, in the light of the welfare of the MSMEs, was the amendment in Foreign Direct Investment (FDI) norms. The Government, through the Press note dated 17 April 2020, tweaked the FDI norms for foreign investors sharing land boundaries with India. As per the notification, the investments by the beneficial owner who is a citizen of a neighbouring country can only be made through the governmental route i.e. with prior government approval. Specifically, this stringent norm aims at preventing opportunistic takeovers and/or acquisitions of the Indian companies during the pandemic, especially the small and medium enterprises. This move was essentially adopted after the MSME industry raised their concerns before the government that they fear a potential hostile takeover by Chinese investors. Thus, simply put, it is labeled as a protectionist measure adopted for shield industries including MSMEs from hostile takeovers.

However unfortunately, the amended FDI norms have been widely criticized for being in violation of India’s commitment towards free trade under Agreement on Trade-Related Investment Measures and General Agreement on Trade in Services. It is important to note that such measures to shield hostile Chinese takeover has adopted been by Spain, Italy, Australia and others, for protecting their economy; however, it is argued that this measure can also backfire because of its loose approach.

Drawback of the approach

Firstly, the shield against the predatory foreign investment is to protect MSMEs and understandably so. However, the start-ups, especially, in the technology sectors are expected to suffer negative ramifications because start-ups like Paytm, Oyo and Ola etc. are a testimony to the fact that many Indian tech-giants bloomed infusion of Chinese investment.

Second, as the term ‘beneficial owner’ is not defined in the press note, the ambiguity around the concept of beneficial owners will hinder investment from other companies not located within the land neighboring nations. This includes keen investors companies located in other nations with a small involvement of investment from China or other neighboring nations. 

Lastly, there have been no domestic measures to protect MSMEs from the hostile takeover by the Indian giants. It is undisputed that India has a stringent Takeover Code in place; however, during such unprecedented times, no specific measures have been adopted to protect the bleeding MSMEs from native giants.

Conclusion

MSME sector forms an integral part of the Indian economy, especially since schemes like ‘Make in India’ and ‘Atma Nirbhar Bharat’ started gaining momentum, their importance has been realized in the country. This is also because MSMEs assist in providing large employment opportunities and also help in the industrialization of rural &backward areas, thereby, reducing regional imbalances. Even though the Government has time and again adopted measures to protect the MSME sector, with the dreading economy, but due to the pandemic, the onus to protect them from sinking has further increased.

As discussed above, certain measures have been successfully adopted to facilitate the growth of MSMEs but the drawbacks and loopholes create a negative parallel that is yet to be resolved. Especially, the businesses that were already suffering and needed dire assistance have been ignored in the policies adopted so far, thus, it is safe to conclude that to protect the sector a lot of effort is still needed on part of the government.

To achieve the same measures such as improving liquidity support to address cash flow issues, with the aim of ensuring business continuity and working towards adopting measures to expand trade opportunities for MSMEs can be a great step forward. Further, it is also beneficial to introduce measures that aim at developing the resilience of MSMEs and building their capacity to overcome future shocks to demand and supply chains. As the supply chain has been majorly impacted due to COVID such measures, if adopted, it can be a sigh of relief for the Indian MSMEs.

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