In a move aimed at supporting MSMEs, the Insolvency and Bankruptcy Board of India (IBBI) has proposed a fresh amendment to the corporate insolvency regulations. 

The proposed change would require corporate debtor (CD) to disclose at the start of the resolution process as to whether or not they are registered as a Micro, Small, or Medium Enterprise (MSME) under the Micro, Small, and Medium Enterprises Development Act, 2006.

This disclosure is expected to reduce information asymmetry in the resolution process for MSMEs. 

For this purpose, IBBI has brought out a discussion paper on MSME Registration and Disclosure Framework under CIRP. Comments on the discussion paper may be submitted electronically by September 12, IBBI has said.

Providing this clarity on the status of a corporate debtor at the time of issue of Insurance Memorandum (IM) is expected to encourage greater participation from potential resolution applications who may have otherwise been uncertain about their eligibility. This may lead to improved outcomes in terms of value maximisation, IBBI discussion paper said. 

The IBBI discussion paper also suggests that if the documents available to the Resolution Professional (RP) indicate that the Corporate Debtor (CD) qualifies as an MSME, the RP may obtain the Udyam Registration Certificate on a case-by-case basis before making the necessary disclosures in the Information Memorandum (IM).

Certain resolution applicants specifically look for MSMEs due to their unique nature and advantages, such as simplified compliance requirements and government incentives.

MSMEs play a vital role in the Indian economy, contributing significantly to employment generation and gross domestic product (GDP). Given their importance, the Insolvency and Bankruptcy Code (IBC) already provides certain special dispensation for MSMEs undergoing insolvency resolution.

Resolution applicants for MSMEs have been specifically exempted from the disqualification criteria under Section 29 A (b) and (c). Moreover, under the IBC pre-packaged insolvency resolution process (PPIRP) can be initiated only for a MSME.

Hari Hara Mishra, CEO, Association of ARCs in India said that clarity on status of a corporate debtor as MSME in the beginning of CIRP process,  at the time of issue of IM,  is likely to evince more interest and bring in more  resolution applicants. This may save small units from heading into liquidation in absence of resolution plans, he noted. 

“MSMEs drive economic growth generating employment, and any move aimed at better chances of their  revival is welcome”, Mishra said. 

Jyoti Prakash Gadia, Managing Director at Resurgent India, said that IBBI’s proposed change in the CIRP regulation for specially incorporating the disclosure about status and classification and eligibility of a CD being MSME or otherwise is a welcome step.

This will bring about the necessary clarity for the information and consideration of all the stakeholders in the CIRP process, he said.

In fact this is a small and obvious necessary change in disclosures in the IM which should have been brought out long ago as soon as special exemptions and a separate ‘prepackaged scheme for resolution of MSME sector cases’ was envisaged under the code, Gadia added.

Published on August 25, 2024