Yours Say: MSME Expectations from the New Government

After Indian economy having been hit by economic slow down during last quarter of the year, Indian government and RBI had taken some measures to address the crisis. On 13th Feb’09, FISME with The Economic Times organized MSME Summit to discuss these issues which was Chaired by Dr. Montek Singh Ahluwalia, Dy. Chairman Planning Commission. But due to imposition of model code of conduct immediately after the event, new support measures could not be taken.

Now a new Government is taking over. The MSME Summit platform is collecting feedback from the industry with regards to their expectation from the new Government.

We would be grateful if you kindly spare a few minutes and reply to these questions (see Feedback form below OR else click here to fill in the form online) by 27th May 2009. The story will be carried by The Economic Times on 29th May 2009. Towards your gesture of cooperation, FISME would be happy send a print copy of Dossier of MSME Summit.

Defaults by small units will add to bank non-performing assets: FISME

Seema Sindhu / New Delhi

The prospect of large-scale defaults by micro, small and medium enterprises (MSMEs) on repayments to banks is unavoidable and the banking sector’s non-performing assets (NPAs) are set to increase, Secretary General of the Federation of Indian Micro, Small & Medium Enterprises (FISME) Anil Bhardwaj has warned.

Despite several measures taken by the government, MSMEs continue to suffer from the effects of the slowdown, Bhardwaj said in an interaction with Business Standard. The two stimulus packages announced by the government and the Reserve Bank of India had eased liquidity in the banking system considerably, but the measures did not percolate down to MSMEs at ground level, he said.

Bhardwaj said, “Supply chains remain clogged with unsold inventories and unpaid dues. The measures to stimulate demand may take another 6-8 months or more to have any appreciable impact. The policy initiatives and reforms that could have immediate impact were somehow not undertaken.”

Access to finance for MSMEs is a big issue. A working group (headed by K C Chakrabarty, chairman and managing director of Punjab National Bank) appointed by the Reserve Bank of India recently stated in its report that hardly 5 per cent of MSMEs are served by the formal banking sector. Ninety-five per cent of them do not have access to any form of institutional credit.

Access to finance is not so much of an issue for larger sized small or medium enterprises; their concern is speed and cost of finance. “Similarly, a new unit is likely to encounter more problems in accessing finance than an established unit,” Bhardwaj said.

Many progressive MSMEs that expanded or started a new unit during the boom period of the last four-to-five years are finding it difficult to service their debts, as market conditions have suddenly reversed. In the current situation, borrowers are able to meet neither top line nor bottom line targets; re-payment plans have gone awry and defaults have become imminent, Bhardwaj noted.

Courtesy: Business Standard (May 19, 2009)

Wipro to ramp up Chinese operations

Wipro Ltd is ramping up its China operations 10-fold by 2010, according to a top industry official.

Wipro currently has operations in Chengdu and Shanghai, where it employs 305 people. The ramp-up will boost the company's headcount in China to over 3,000, according to Anil Bhardwaj, secretary-general, Federation of Indian Small and Medium Enterprises, who addressed reporters in Bangalore on Monday.

Wipro is understood to be currently in discussions with the Nantong Economic and Technological Development Area to open its third development centre in China in Nantong, a city near Shanghai. The centre is expected to be set up at a new technology park currently coming up in Nantong.

Wipro's spokespersons were unavailable for comment despite repeated attempts. Located amidst the highest concentration of China's leading 250 universities, Nantong offered access to IT/ITES and BPO markets of China and other ASEAN countries, including South Korea and Japan, said Chen Xiao Dong, vice-secretary and vice-director, NETDA.

Apart from Wipro, 10 other Indian companies had a presence in China, he said.

Courtesy: rediff NEWS (May 12, 2009)

Chinese city beckons Indian IT cos

Partnership will enable BPO firms to service markets in Japan, Korea and in the ASEAN region

Special Correspondent

BANGALORE: A five-member delegation from the city of Nantong in China was here on Monday to woo Indian IT and BPO companies to establish partnerships with Chinese companies to jointly reach out to markets in East Asia.

Chen Xiao Dong, Vice Secretary and Vice Director, Nantong Economic and Technological Development Area (NETDA), said Nantong’s “highly skilled labour force” could enable Indian IT and BPO companies to service markets in Japan, Korea and in the ASEAN (Association of Southeast Asian Nations) region.

Mr. Chen said the lower tax rates on companies operating in NETDA and the financial support provided by the Chinese Government were major incentives to encourage offshoring from Nantong. He said large multinational companies preferred “not to put all their eggs in one basket.” They would rather “diversify their offshoring locations to minimise risks”, he added.

Mr. Chen said major Japanese corporations had already established their bases in Nantong and invested about $5-6 billion in facilities there. Referring to the difficulty that Indian IT and BPO companies faced in addressing the Japanese market because of “cultural constraints”, Mr. Chen said Indian and Chinese companies could jointly service the outsourcing business that lay untapped.

Lower tax rates a major incentive for offshoring in Nantong

He pointed out that revenues from Japan constituted only about six per cent of the Indian IT and BPO companies.

The delegation’s visit to India is being coordinated by Beijing-based India-China Economic and Cultural Council (ICEC) and the Federation of Indian Micro Small and Medium Enterprises (FISME).

Anil Bhardwaj, Secretary-General, FISME, said the sever recession in the advanced economies required Indian companies to adopt a “look east policy” because the East Asian economies were relatively better off in these times. He pointed out that the impending accession of India to the ASEAN Free Trade Agreement gave the partnership with China added relevance.

Courtesy: The Hindu (May 12, 2009)

China’s Nantong lures IT/BPO sector

Bangalore Mirror Bureau

Post the global slowdown, the ASEAN region, consisting of China, Japan, South Korea and India among others, is looking to boost growth. And China wants the Indian IT/ BPO sector to pay attention to markets closer to home.

“It is time India stopped looking Westward and took a look at the multi-billion dollar market in the East,” said Anil Bhardwaj, secretary general, Federation of Indian Micro and Small and Medium Enterprises (FISME). He was speaking at a press meet held by the India-China Economic and Cultural Council (ICEC), based in Beijing, and FISME to invite Indian IT and BPO companies to Nantong’s technology park.

The Nantong Economic and Technological Development Area (NETDA) will provide all necessary infrastructure for the companies to service markets in China and the ASEAN region, Chen Xiao Dong, vice secretary and vice director of NETDA, said. The NETDA technology park is an hour’s travel from Shanghai.

Courtesy: Bangalore Mirror (May 12, 2009)

Reframe insolvency mechanism

Anil Bhardwaj, Secretary General, FISME

‘Temporary stresses’ in business and eventual closure in many cases are inevitable. So a fair and effective mechanism to deal with insolvency and bankruptcy is a prerequisite for enabling risk-taking and enterprise creation.

Though insolvency and bankruptcy are generally used together, the terms are not synonymous. Bankruptcy represents a body of law designed to protect interests of creditors, allowing for confiscation and distribution of debtor’s assets among creditors.

In insolvency, the body of law protects debtors, who would voluntarily declare insolvency, cede all their assets to the court, and be discharged from the ‘debtor’s prison.’ In practical terms, insolvency means that the fair market value of the net assets of the insolvent is less than the liabilities. This necessitates the liquidation of assets through a court-ordered bankruptcy process.

For bankruptcy, there is no comprehensive policy or law in India. The insolvency mechanism for companies is through the Companies Act, and for individuals (and proprietorship/partnership), there are two Acts: The Presidency-Towns Insolvency Act, 1909, and The Provincial Insolvency Act, 1920. As an overwhelming majority of small enterprises in India are proprietorship or partnership (97.3% as per third census of small-scale industries), the two insolvency Acts are applicable to them.

When a business fails, there are three types of creditors whose liabilities need to be settled: Statutory dues (such as central and state taxes, dues of labour, of utilities such as electricity, water, finance by state institutions etc.); dues payable to banks and financial institutions; and dues to sundry creditors (buyers, suppliers and others).

The insolvency Acts provide for respective legal recourse for recovering statutory dues from individuals, firms or companies, prescribing fines, attachment of assets and also, in most cases, imprisonment. The final recovery procedures, whether on behalf of central or state governments, are effected by state governments through their administrative machinery.

In the Indian mechanism, there are specific problem areas for small enterprises. The first problem is that two set of institutions—the statutory authorities and banks/ financial institutions—-seek to recover dues under different set of laws simultaneously.

Most provisions for recovery of statutory dues are through a mechanism under land revenue Acts in the states. Typically, the process entails arrest and detention of the person and attachment and sale of debtor’s assets.

Banks and financial institutions have several options for restructuring a stressed account and recovering their dues: the State Level Inter-Institutional Committee (SLIC) route for a revival or restructuring when more than one financial institution is involved or a ‘one-time settlement’ (OTS) or a restructuring of the failed/sick as per RBI guidelines or finally recovery of dues through the DRT Act and the Sarfaesi Act. However, there is no institutional mechanism to guide the process.

The report of the ‘Working Group on Rehabilitation of Sick SMEs’ (RBI, 2007) highlights the shortcomings of the current dispensation succinctly.

It states: “the normal action plan of any banker when a small unit is in stress is to stop operations in the account, serve a recall notice and initiate action under Sarfaesi Act. Efforts for rehabilitation, if any, are ad hoc and not properly structured after viability study or analysis of the root causes of sickness etc. The bank staff puts in efforts to avoid classification of the account as NPA. All focus of the banks is centred on the asset classification and not health classification.”

While the entrepreneur may be trying to restructure the unit, the statutory authorities could move for attachment of assets and his imprisonment. Though theoretically, the legal remedy to escape attachment of assets and accompanying imprisonment for an entrepreneur would be to take shelter under the two insolvency Acts.

The insolvency mechanism through the two Acts is all but dysfunctional. The conditions attached are almost impossible to meet and terms are antiquated, hugely subjective. Most importantly, in the current dispensation, under the two Acts, there is no protection from ‘criminal cases’ —as the defaults under statutory dues are construed, and the eventual attachment of assets and imprisonment. There is no BIFR-type mechanism for small enterprises to seek a stay. Not only all personal belongings of a debtor are attached and auctioned but also of all their guarantors.

The key issues are: (i) The case of small enterprise is fundamentally different from that of corporates, both in terms of personal liabilities of promoters and related legal provisions. The liabilities of small enterprises in the event of default are unlimited and there is no BIFR-like mechanism for recourse.

(ii) There is no mechanism for addressing eventualities borne out of ‘temporary stresses’ in the life of an enterprise. While the ineffectual mechanism of SLIIC does exit—its jurisdiction is limited to institutional credit only—there is absolutely no system for restructuring multi-agency statutory liabilities.

(iii) The insolvency mechanism under the two Acts is largely dysfunctional both because of uninterested judicial dispensation for insolvency cases as well of extremely harsh post-insolvency treatment meted out to a debtor.

There is no wholesome mechanism for bankruptcy in India. Therefore, there is no functional system for recovering debt when creditors include government agencies (Centre and state), public institutions (central and state), banks/FIs and private parties.

(v) There being no single administrative mechanism for insolvency and bankruptcy, there is no one to decide whether or when the firm is to be liquidated or be sent for restructuring. Therefore, even a ‘temporary stress’ or shock is enough to bring a small unit to ‘sickness’ and to ‘closure.’

With the current conditions of economic slowdown financially injuring a large number of individuals and small entrepreneurs and leading to closure of units, the following steps are to be taken urgently:

The two insolvency Acts should be substantially amended or replaced with a new, single and comprehensive law, and a comprehensive bankruptcy law mechanism covering non-corporate entities be enacted;

Suitable revisits be made to other central and state statutes affecting recovery procedures and clauses of imprisonment and an authority/registrar/central registry system to be constituted where all the orders declaring a person as insolvent may be filed. 

A time-bound restructuring mechanism for the small-scale sector may be devised, learning from the shortcomings of BIFR and providing effective protection against attachment of assets and imprisonment during the restructuring exercise.

Finally, there is a need to institute specialised bankruptcy and insolvency courts (fast-track) and a cadre of specialists providing a ‘single window’ to address all related issues: restructuring, liquidation, bankruptcy and insolvency.

— The article appeared in The Financial Express on April 17, 2009. For more details see the policy paper: ‘Towards establishing modern insolvency and bankruptcy codes for small enterprises’, which can be downloaded from http://www.fisme.org.in 

VOTE FOR SMALL BIZ

In these elections, political parties have shown concern for small business owners and startup entrepreneurs. Partha Ghosh checks out the ballot points

In the run up to the elections, India’s Joe the Plumber hasn’t found his moment of glory yet. His concerns-about his small business-and how the next government will address them, have been diffused by the gratuitous political rhetoric of our leaders. He hasn’t been as lucky as Samuel Joseph Wurzelbacher, a former plumber, who was shown on national television questioning Senator Barack Obama about his small business tax policy during the 2008 US election campaign. During one of his debates, Republican Senator John McCain called Wurzelbacher as ‘Joe the Plumber’ and since then Joe… became a metaphor for the American middle class and small business owners.

The plight of small businessmen and startups may not be a burning issue in the Indian elections, but with the global meltdown impacting business like never before, politicians here cannot afford to ignore their problems entirely. To begin with, India’s top three political parties (in terms of the number of MPs they sent to the last Lok Sabha) have indicated their plans for small companies and startups in their respective election manifestos.

The CPI(M) has promised specific relief packages for affected sectors like textiles and garments, gems and jewellery, leather, handicrafts, coir, cashew, marine products, software and IT, aimed mainly at SMEs. The BJP’s manifesto says it will promote SMEs and the retail sector, which can generate a large number of jobs and make a meaningful contribution to the nation’s economy. It also proposes to review the criteria for classifying businesses as SMEs. The Congress, on the other hand, has promised in its manifesto that there will be a special focus on small entrepreneurs and SMEs-”The Indian National Congress pledges a ‘new deal’ for SMEs and for first-generation entrepreneurs.”

That evidently doesn’t cut ice with trade bodies that represent small business. The sense among the SME fraternity is that these pre-poll ‘promises’ hardly address the real issues at hand. “It seems both the major political parties are blissfully ignorant of challenges that Indian entrepreneurs are confronted with. Leadership at the helm of parties either lacks the vision or the will needed to make India an entrepreneurial society,” says Anil Bhardwaj, secretary general of the Federation of Indian Small and Medium Enterprises (FISME), which represents close to 5 lakh SMEs.

Congress spokesperson, Abhishek Manu Singhvi counters that his party’s promise regarding SMEs is clear enough. “It is essential to appreciate the nature, character and purpose of a manifesto. A manifesto does not lay down a detailed plan of action for implementation. On the one hand it lists the concrete achievements of the past; on the other it gives broad but genuine declarations and promises for the future.” Fellow Congress leader and industrialist Naveen Jindal is more forthcoming, though. “The Congress manifesto not only talks about collateral-free credit, it also mentions a multiplicity of laws and forms for freeing SMEs from the clutches of inspectors. The focus is thus on simplifying procedures for SMEs in general, not just in credit matters,” he says. Jindal points out that the party’s manifesto also mentions cluster development, which provides for synergies in access to finance, technology and marketing, and implementation of recommendations by the National Commission on Enterprises in the Unorganised Sector and the National Manufacturing Competitiveness Council.

On what his party will do to facilitate credit for SMEs, Jindal says, “There is a more permanent credit problem and indeed, SMEs and farmers often lack access to institutional credit. The inclusive agenda mentioned in the Congress manifesto incorporates financial inclusion as well. More than the cost of credit, which is high in informal borrowing, the key is availability of credit and the new Congress government will ensure that this financial inclusion progressively happens.”

Issues relating to farmers are top on the agenda for most political parties mainly because of their electoral significance. But the problems that SMEs are battling today have far-reaching economic implications as well, admits Sudheendra Kulkarni, election strategist for the BJP and advisor to the party’s Prime Ministerial candidate LK Advani. The BJP, which is seen to represent the trader community more than other parties, has promised to ensure that the credit requirements of SMEs are adequately fulfilled. “We recognise that economic reforms in the past have only helped the big entrepreneurs. The small business sector is still in the shackles of the Inspector Raj, the capital markets are a no-go for them and barely 4% of small business owners have access to institutional funds.”

If the BJP came to power, Kulkarni says it would create a more liberal and market-friendly environment, including better infrastructure-roads, ports, airports, etc-that will reduce the cost of setting up and running a small business: “In a major course correction, we’ll revive the domestic sector as our dependence on the international market will have to be curtailed at least in the foreseeable future. A vibrant domestic market will also help growth of the agriculture, rural and unorganised sectors.”

While talk of better terms for SMEs is music to the ears of political leaders at the CPI(M), it clearly doesn’t subscribe to the rest of the economic agenda espoused by the other two parties. Having helped the UPA come to power by providing outside support and then parting ways on the Indo-US nuclear deal, the CPI(M) is critical of the Congress and the BJP for having left the country’s economy to market forces during their tenure. Says Nilotpal Basu, member of the central secretariat of the CPI(M), “Left to themselves, SMEs cannot survive. Our party believes there is a need for specific government intervention to boost growth of the sector. The neo-liberal paradigm of the past few years needs to be reversed and there should be a renewed focus on public sector growth and micro and small sectors.”

The CPI(M)’s proposal of setting up a third alternative-which hopes to form a non-Congress, non-BJP government at the Centre-has given rise to apprehensions in industry that such an arrangement could negatively impact economic sentiment, scare foreign investors and send the Rupee into a tailspin. Basu however insists that his party isn’t against growth. “Our approach will be different. Even the Congress and BJP will have to do a rethink. Governments will be forced to assume a bigger role. Relying too much on market forces will not help.” Like the BJP, the CPI (M) too is advocating the need to gear production towards the domestic market. And this, says Basu, will propel growth of micro and small businesses. Banks will be made more competitive, though reforms will not mean more privatisation or FDI, especially in retail.

Expectations, nonetheless, are still high from the new government. The Federation of Indian Chambers of Commerce and Industry (FICCI) is hopeful that SMEs will get their due from whichever party comes to power. “The fact that all manifestos have mentions of SMEs is proof that they recognise the importance of this sector,” says Dr Amit Mitra, secretary general, FICCI. The new government, according to him, should ensure SME lending at rates lower than even the prime lending rate: “In the US, for small businesses, they have a very soft (sub-PLR) loan.” FISME’s Bhardwaj says irrespective of which government comes to power, he expects that a PSU procurement target of 20% from SMEs will be made mandatory. Presently, the figure stands at less than 1%. He also hopes that the Competition Commission will be strengthened.

This election season is quite unlike others. Thick in the middle of an unprecedented economic downturn, political leaders can ignore the hardhit foot soldiers of India Inc at their own peril. For India’s Joe the Plumber, there could be a silver lining to the dark recessionary clouds, after all.

CONGRESS

Will give special focus to small entrepreneurs and SMEs Pledges a ‘new deal’ for SMEs and for first-generation entrepreneurs by assuring them greater access to collateral-free credit Will untangle multiplicity of laws and forms, and also Inspector Raj

BJP

Promote SMEs and the retail sector to create jobs Will review criteria for classifying SMEs Enhance the use of IT in SMEs and retail trade Credit for small and tiny retail vendors at 4% interest Introduce a pension scheme for small traders

CPI(M)

Specific relief packages for sectors affected by recession like textiles and garments, gems and jewellery, aimed mainly at SMEs Encouragement to SMEs in labour intensive sectors Adequate incentives, infrastructure support and sufficient credit from banks Prohibition of FDI in retail trade with inputs from Ravi Teja Sharma

Courtesy: The Economic Times (April 17, 2009)