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One major exemption to SMEs will be from Section 29A of the Code, which says that major shareholders of companies in default cannot participate in the resolution scheme unless the default is rectified (Sai Sen/Mint)
One major exemption to SMEs will be from Section 29A of the Code, which says that major shareholders of companies in default cannot participate in the resolution scheme unless the default is rectified (Sai Sen/Mint)

Special scheme to rescue bankrupt small businesses soon

  • The ministry of corporate affairs is finalising a special insolvency resolution under the Insolvency and Bankruptcy Code to provide relief to MSMEs and the same would be notified soon

NEW DELHI: The Centre will soon roll out a special scheme for salvaging bankrupt micro, small and medium enterprises (MSMEs), the government said in a statement on Sunday after finance and corporate affairs minister Nirmala Sitharaman reviewed the measures taken so far to support the pandemic-hit economy.

The ministry of corporate affairs is finalising a special insolvency resolution under the Insolvency and Bankruptcy Code “to provide relief to MSMEs and the same would be notified soon," said the official statement.

The scheme, to be notified under Section 240A of the Code, will specify a modified version of the bankruptcy scheme for small business. The section empowers the government to customise the requirements of bankruptcy resolution for small businesses.

One major exemption to SMEs will be from Section 29A of the Code, which says that major shareholders of companies in default cannot participate in the resolution scheme unless the default is rectified. In the case of small businesses, there may not be much interest from other investors to take charge of the company and excluding the promoter from resolution may not be a good idea.

In June, the government had suspended operation of the Code for at least six months so that businesses will not be dragged into tribunals by lenders for defaults made after 25 March, when India entered into a stringent national lockdown. As part of regulatory relief to businesses struggling with the impact of the pandemic, the government has extended due dates under various laws including the Income Tax Act and the Companies Act.

In May, the union finance minister announced a slew of measures to support the poor, farmers and small businesses hit by the coronavirus-induced nationwide lockdown that suspended economic activities for over two months. The finance minister also announced reform measures across several sectors, including defence, mining, among other and called upon industries to use this crisis to become self reliant.

Banks have disbursed 61,988 crore as of 9 July out of 1.2 trillion sanctioned loans under the emergency credit line guarantee scheme (ECLGS), the finance ministry said. This translates into 52% of the credit having already been disbursed.

Out of this, 22 private sector banks and non-bank lenders sanctioned 51,954 crore, out of which 23,615 crore has been disbursed. In case of the 12 state-owned banks, 38,373 crore or 56% of the sanctioned credit has been disbursed, official data showed. Under ECLGS, additional working capital finance of 20% of the outstanding credit as on 29 February 2020, in the form of a term loan is being provided. This collateral-free loan is expected to enable small businesses to pay salaries, rent and restocking expenses.

The ministry also said out of the new front loaded special refinance facility of 30,000 crore sanctioned by National Bank For Agriculture and Rural Development (NABARD) to cooperative banks, regional rural banks (RRBs), 24,876 crore has been disbused as of 6 July. The special facility will help 3 crore small and marginal farmers meet their post-harvest and kharif sowing needs.

As far as the 30,000 crore special liquidity scheme for non-banking financial companies (NBFCs) and housing finance companies (HFCs) is concerned, investment bank and project advisor SBICAP received 24 applications requesting financing worth 9,875 crore as on 7 July. The first application in this regard has received its approval and the remaining are also being considered, the ministry said.

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