India’s government will soon roll out a scheme to help salvage bankrupt micro, small and medium enterprises (MSMEs). This will reportedly be notified under Section 240A of the Insolvency and Bankruptcy Code, which empowers the Centre to customize the process of bankruptcy resolution for small businesses.
This seems to be aimed at making it less painful for all parties whose interests need to be looked after when small set-ups go bust. Resolving these is often harder than large cases and our bankruptcy courts were clogged even before the covid crisis struck. Finding rescuers for MSMEs also has not been easy. However, a move to let promoters bid for their own businesses, should a default turn their reins over to lenders, could prove controversial. What’s clear though is that many MSMEs will find it hard to survive this crisis. They employ hundreds of millions and make up a big chunk of India’s output. Allowing too many to close messily would go against efforts to lift the economy. A rescue of some sort is needed. Direct measures tend to work best, but indirect efforts have their role as well. The new plan’s efficacy would depend on its design.