State Of The Economy 2020

MSMEs In India | State Of The Economy

Caught in a vortex of delayed payments, tax obligations and credit squeeze, small businesses are calling it quits

It was in 1996 that Kanhaiya Lal Agarwal, a chartered accountant by profession, became an entrepreneur. He took over an ailing aluminium products unit and renamed it Palco Metals. While he has been through quite a few business cycles in the ensuing years, the one this time is throwing up new challenges.

The Ahmedabad-based SME just took a hit on its receivables, after the LN Mittal-owned ArcelorMittal bought the Ruias-promoted Essar Steel for Rs.420 billion. Agarwal, who supplied aluminium coils to Essar Steel, now finds himself among the 150 small and medium enterprises (SMEs) who have not been paid their dues by the steel major after it went under the hammer through the Insolvency and Bankruptcy Code (IBC) 2016.

Around 1,750 SMEs have run up receivables of around Rs.9.8 billion. Following the settlement, 1,600 SME suppliers whose dues were less than Rs.10 million got their payment in full, but those such as Agarwal, who had arrears of Rs.25 million, just got 20%. “Banks have got 90% of their dues, while it’s the other way round for us,” says Agarwal, who is also heading a forum of aggrieved SME suppliers to Essar Steel. “Though we are planning to move court with a special writ petition, we are not too hopeful,” he says.

Since the past three years, SMEs across the country have faced one headwind after the other. To begin with, the construct of the IBC favours financial creditors such as banks and investors, not operational creditors that include SME suppliers. Therefore, small companies are waiting for a pile of dues to be cleared. Second, tax refunds under the Goods and Services Tax (GST) are getting delayed by painful paperwork, and lastly, credit has become hard to get as bankers turn wary. 

Agarwal points to the peculiar injustice of the IBC proceedings. Suppliers like him keep companies like Essar Steel running by extending operational credit, but they have little to no representation on the Committee of Creditors (CoC) once the insolvency resolution process begins. They get a voice on the panel only if their dues exceed 10% of the total debt

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