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A recent survey of 1,500 micro enterprises by the Global Alliance for Mass Entrepreneurship found that 54% of the firms were not getting promptly paid for their goods and services. Delays sometimes last months.  (Photo: Mint)
A recent survey of 1,500 micro enterprises by the Global Alliance for Mass Entrepreneurship found that 54% of the firms were not getting promptly paid for their goods and services. Delays sometimes last months. (Photo: Mint)

Small firms catch the deadly IOU virus

  • Few companies have been able to recover payments in the post-covid world. This, in turn, has a cascading effect
  • Inside government circles, there is talk of a new technology platform to list firms’ payments outstanding information. But there is little the government can do vis-a-vis private contracts

NEW DELHI : Dhruvam Thaker, founder of car rental company The Smart Taxi, aggressively pursued two customers that delayed payments. The customers were multinationals based in Ahmedabad who had used his cabs before and during the lockdown, in March and April. They ran up combined invoices of 2 lakh. Nonetheless, there was no word on clearing the dues even after four months.

The companies wouldn’t take calls, neither did they respond to mails asking for updates. In August, Thaker sent a team to their offices without appointment. “Our team went three times. They sat in their offices the entire day, from 9 am to 6 pm. Yet, no one came to meet (them)," he said.

The supply chain and finance heads weren’t helpful. Things rolled only after Thaker texted the CEOs. The payments were finally made by September but Thaker had already decided to terminate the contracts. “For us, delay in payments was not the only issue. Not attending queries after availing service is definitely not acceptable behaviour," he explained.

Thaker is both bold and lucky. Not every entrepreneur can stand up to larger buyers; few small companies have been able to recover stranded payments in a post-covid world. In many ways, they are living their worst nightmare. Bigger customers are holding onto their cash reserves and delays in payments go much beyond the gentleman’s agreement of clearing dues in 45 days.

This, in turn, has a cascading effect. Impacted small firms are struggling with cash flows, are unable to pay salaries or meet their commitments to vendors down the supply-chain. Some companies have an order book, like in the automotive sector. Nevertheless, manufacturers don’t have the cash to buy raw materials as suppliers are now reluctant to offer any credit; they demand immediate payments.

The list of entities delaying payments include private corporates, ranging from large textile firms and retailers to truck makers and telecom companies. Then, there are public sector units, central and state government departments as well as municipal bodies. About 13,565 cases are currently under consideration at the Micro and Small Enterprises Facilitation Council (MSEFC), sometimes referred to as the ‘MSME Court’ since it settles disputes over delayed payments.

There are 5,148 crore worth of cases at various stages of hearing, data from the ministry’s Delayed Payment Monitoring Portal showed. Nearly 23,297 applications are yet to be viewed by MSEFC Council; the amount involved in these applications aggregate 7,171 crore. The portal hasn’t updated the cases by date of the application—it is thereby difficult to understand how many were filed during the covid months. Nevertheless, that number could be substantial. Applications pending, or applications received in the last 15 days, added up to 1,558 and involved 500 crore.

Make no mistake—not every dispute is referred to the MSEFC. The quantum of payments stuck would be multiple notches higher. Pradeep Bhargava, the president of Mahratta Chamber of Commerce, Industries and Agriculture in Pune said about 2 lakh crore is the estimated overdue from government enterprises to their vendors, including disputed amounts.

The Global Alliance for Mass Entrepreneurship (GAME), a coalition that works on mass entrepreneurship in India, along with Lead, a non-profit research organisation, is studying the status of micro-enterprises in India during the covid-19 crisis. The first phase of its research, completed in June, polled about 1500 such entities. To the question—‘are you getting paid by your customers?’—54% replied in the negative. About 15% said they didn’t have any customers due to the lockdown; 12% got paid partially; 11% with delays and only 8% didn’t run into a problem.

“For small businesses, the mismatch between receivables and revenues is a huge problem," Ashwin Chandrasekhar, vice president at GAME said. While this was a bugbear in normal years too, the pandemic has exacerbated the situation. “Corporates have greater bargaining power with MSMEs, so they tend to use that to their advantage. We have heard stories about how small companies are made to wait because the large corporate wouldn’t process the invoice for three months," he added.

So, how can this cash flow problem be resolved? There are no easy answers. GAME wants to make a strong moral and ethical case at the moment. “We can look at something like a prompt payment pledge that large corporate CEOs sign up to. This would be good for business; it would be good for their reputation," Chandrasekhar said.

Confederation of Indian Industry (CII) has requested its members to adhere to payment timelines, too. “We said that the small and the medium companies should be immediately paid. We have a very strong follow-up mechanism. Every national council meeting we have had so far, this has been a topic of discussion," Chandrajit Banerjee, director general of CII, said. He added that the government has started releasing money while corporates are responding responsibly as well. “One understands that delayed payments can lead to bigger implications not only on the economy but also on individual companies and the supply-chain. There might be SMEs which might just disappear," he warned.

Government’s push

Inductus, a consulting, outsourcing and project management company in Noida, recently implemented a telecom project for a customer in North East India. Inductus engaged local partners since it is a difficult terrain. Payments to these partners are now delayed because the customer has delayed clearing the dues.

“We are finding it very difficult to keep out commitments. We are losing credibility, built over the last 12-13 years," Alouk Kumar, CEO at Inductus said. In 2019-20, the company had a turnover of 47 crore. Its outstanding today is about 18 crore—or about six months of operational cash stuck. The company implements projects both for private companies and the government. Kumar said that since not many employees are going to government offices, movement of files is impacted.

How much has the government released?

Nitin Gadkari, the minister of Micro, Small & Medium Enterprises provided an update on the dues payable to MSMEs by the union government and central public sector undertakings (CPSE). Between May and August 2020, the dues totalled 12,555 crore; about 9,545 crore has thus far been released to clear the pending dues, the minister informed Parliament on 17 September.

“The government has taken many steps to get the dues payable to the MSMEs cleared by the public sector units of the central government. The Ministry has taken up the subject vigorously with the central ministries, CPSEs, state governments and the corporate world," Gadkari said.

Apart from requesting private sector corporates to pay up, what can the government do? A top chartered accountant said on condition of anonymity that there is some brainstorming in government circles about a technology platform similar to the National e-Governance Services Limited (NeSL). The company, registered under the Insolvency and Bankruptcy Board of India, serves as a repository of legal evidence since every bank is required to onboard loan information.

“In all company accounts, any amount outstanding has to be reported. Delays attract an interest. This information today is in disarray and no authority looks at it," the CA said. “A platform similar to NeSL can capture all the information on payments outstanding. The authorities can then move against companies delaying payments," he added.

Nonetheless, a lawyer known to be close to the ruling dispensation at the centre said it would be incorrect to expect the government to intervene in private contracts. “The government cannot do certain things. You cannot manage the cash flow of an economy as large as India through either law or intermediation," he said on condition of anonymity. “Government intervention to solve a problem is of Nehruvian vintage."

Legal routes

To be sure, small companies have the legal recourse to settle payment disputes. Companies can invoke the arbitration clause if their contracts permit. However, most business arrangements do not provide for an arbitration clause, Sonam Chandwani, managing partner at KS Legal & Associates, a law firm, said. Companies may choose to file a civil suit or criminal complaint for non payment of dues. Complaints filed under Section 138 of the Negotiable Instruments Act (cheque bounce cases) induce additional pressure since the management of defaulting parties risk imprisonment, she mentioned.

In the pre-pandemic era, MSMEs could have approached the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code 2016. But two amendments have been made. The minimum debt required to approach NCLT is now 1 crore. Two, defaults between March 25 and September 25, 2020—the covid months—can’t be taken to NCLT.

“Most MSMEs usually have debts of less than one crore. In any case, we advise MSMEs not to approach NCLT because as an MSME, you are likely to be categorised as an operational creditor," Ravitej Chilumuri, partner at Khaitan & Co., another law firm, said. A debtor is likely to have financial creditors and, therefore, the amount of money operational creditors end up getting under the corporate insolvency resolution process is usually low. “Apart from being a pressure tactic, approaching NCLT serves little purpose," he added.

Both Chilumuri and Padmaja Kaul, a partner at IndusLaw, suggested that a more effective route would be to initiate proceedings under the MSMED Act and approach the Micro and Small Enterprises Facilitation Council where a case has to be resolved in 90 days.

“Most of the settlements happen during the facilitation council process. Defaulting parties have to pay compounded interest which is three times the bank rate. A lot of people thereby end up settling," Kaul said.

Triple whammy

Meanwhile, small companies that don’t want to go the legal route face a triple whammy.

ZingUpLife, a wellness engagement and advisory company in Bengaluru, was working on the workplace wellness of truck drivers when the pandemic hit. As the company’s corporate customers shut offices and shelved wellness programmes, it pivoted into supplying N-95 masks and PPE kits. The firm cut deals with manufacturers and procured the kits for customers which included state governments.

Soon, there was trouble. All manufacturers wanted 100% advance. ZingUpLife could use its cash reserves up to a point. The firm has 1.5 crore outstanding for more than 90 days.

“There is a severe working capital crisis. I have got a large order of 2 crore from a state government to supply PPE kits. However, I can’t cater to the business because I have to pay the manufacturer in advance," Anirvanjyoti Chaudhuri, co-founder at ZingUpLife, said.

So, customers are demanding supplies and, therefore, the businesses have to buy raw materials. They have little money to buy. Meanwhile, like Chaudhuri indicates, the trade dynamics have changed with manufacturers and suppliers asking for prepayment. To top this, banks have started demanding payments of moratorium dues.

“When I go to the market, suppliers ask for payments of old dues. After I clear the dues, they are still unwilling to give me any further credit," Rajiv Chawla, chairman of JaiRaj Group, a manufacturer of auto-components, plastics, injection and blow moulded products said. The same suppliers offered credit of 60-90 days pre-covid. They are unwilling to offer any credit now because they themselves face a liquidity crunch.

“In an economy like India, 86% of the MSMEs are dependent on the trader as the financier. But even the transporter today wants an advance or immediate payment to move goods. This is a huge crisis," Chawla added.

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