2024-08-25 04:23:39
To support MSMEs, the Insolvency and Bankruptcy Board of India (IBBI) has proposed new amendments to the corporate insolvency rules.
The proposed changes will require a corporate debtor (CD) to disclose whether it is registered as a micro, small or medium enterprise (MSME) under the Micro, Small and Medium Enterprises Development Act, 2006, at the start of the resolution process.
It is expected that this disclosure will reduce information asymmetry in the resolution process of MSMEs.
To this end, IBBI has released a discussion paper on registration and disclosure framework for MSMEs under CIRP. Comments on the discussion paper can be submitted electronically by September 12, IBBI said.
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Clarifying the identity of the corporate debtor when issuing an insurance memorandum (IM) is expected to encourage participation of more potential resolution applicants who might otherwise be unsure of their eligibility. This is likely to lead to better outcomes in terms of value maximisation, the IBBI discussion paper said.
The IBBI discussion paper also suggests that if the resolution professional (RP) has documents in his possession indicating that the corporate debtor (CD) qualifies as an MSME, the RP may obtain an Udyam registration certificate on a case-by-case basis before making the necessary disclosure in the information memorandum (IM).
Some resolution applicants specifically seek out MSMEs because of their unique properties and advantages, such as simplified compliance requirements and government incentives.
MSMEs play a vital role in the Indian economy and contribute significantly to employment generation and gross domestic product (GDP). In view of their importance, the Insolvency and Bankruptcy Code (IBC) has provided certain special exemptions for MSMEs undergoing insolvency resolution.
MSME resolution plan applicants have been specifically exempted from the disqualification criteria under Section 29A (b) and (c). Further, under the IBC, only Pre-packaged Insolvency Resolution Process (PPIRP) can be initiated for MSMEs.
Hari Hara Mishra, CEO of ARC Association of India, said that clarifying the status of corporate debtors as MSMEs at the beginning of the CIRP process (i.e. when the IM is issued) may generate more interest and attract more resolution plan applicants. This may save small units from going into liquidation without a resolution plan, he pointed out.
“MSMEs drive economic growth and create jobs and any move that helps facilitate their recovery is welcome,” Mishra said.
Resurgent India Managing Director Jyoti Prakash Gadia said that IBBI’s proposal to amend the CIRP regulations to specifically include disclosures regarding the status, classification and eligibility of CDs as MSMEs or other types is a welcome move.
This, he said, would bring necessary clarity to the information and considerations of all stakeholders in the CIRP process.
In fact, it is a small but obvious necessary change in the disclosure of the Internal Administration Act, which should have been proposed long ago when the Code envisaged a special exemption and a separate “pre-formulated scheme for resolution of cases of the MSME sector”, Gadiya added.
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