Industry Insights

INVESTMENT AND TURNOVER CALCULATION CRITERIA FOR MSMEs NOTIFIED

Ministry of Micro, Small, and Medium Enterprises on 26th June 2020 has officially notified the criteria for calculation of Investment and Turnover for MSMEs. The notification outlines the new classification of MSME that was introduced on 1st June 2020, which is as per the table below along with a detailed plan of registration and other requirements.

MSME investment

Msme Investment

Registration as an MSME:

  1. New registrations:
    1. The notification clarifies that in order to establish an MSME, Udyam Registration has to be filed online on the Udyam Registration Portal, based on self-declaration with no documentary requirements. No fee shall be applicable for registration.
    2. Aadhar number shall be required for registration:
      1. of the proprietor in case of Proprietorship
      2. of the managing partner in case of Partnership Firm
      3. of the karta in case of an HUF
    3.  For any other registered organisation like Company, LLP, Co-operative Society or Trust – GSTIN and PAN shall also be required along with the Aadhar Number
    4. Upon registration, the enterprise will be allotted an ‘Udyam Registration Number’.
    5. An e-certificate – ‘Udyam Registration Certificate’ shall be allotted to the enterprise on completion of the registration process.
    6. No enterprise shall file more than 1 (one) Udyam Registration, whether having one or more than one business activity i.e. complete disclosure of all the business activities to be specified in a single Udyam Registration.
  2.  Registration of existing enterprises:
    1. All existing enterprises registered under EM–Part-II or UAM shall register again on the Udyam Registration portal on or after the 1st July 2020.
    2. All enterprises registered till 30th June 2020, shall be re-classified in accordance with this notification.
    3.  The existing enterprises registered prior to 30th June 2020, shall continue to be valid only for a period up to the 31st March 2021.
    4. An enterprise registered with any other organisation under the Ministry of Micro, Small and Medium Enterprises shall register itself under Udyam Registration.

 

Composite criteria of investment and turnover for classification:

  1. The notification has clarified that a composite criterion of investment and turnover shall apply for classification of an enterprise as micro, small or medium i.e. if an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category. No enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover.
  2. All units with GSTIN listed against the same PAN shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.

Calculation of INVESTMENT IN PLANT AND MACHINERY OR EQUIPMENT:

  1. The calculation of investment in plant and machinery or equipment will be linked to the ITR of the previous years filed under the Income Tax Act, 1961.
  2. In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.
  3. The expression “plant and machinery or equipment” of the enterprise, shall have the same meaning as assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings).
  4. The purchase (invoice) value of a plant and machinery or equipment, whether purchased first-hand or second-hand, shall be taken into account excluding GST, on self-disclosure basis, if the enterprise is a new one without any ITR.
  5. The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Act shall be excluded from the calculation of the amount of investment in plant and machinery.

Calculation of TURNOVER:

  1. Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise.
  2. Information as regards turnover and exports turnover for an enterprise shall be linked to the Income Tax Act or the Central Goods and Services Act and the GSTIN.
  3. Turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March 2021 and thereafter, PAN and GSTIN shall be mandatory.

Points to Note:

  1. Enterprises having Udyam Registration Number shall have to update its information online on Udyam Registration portal along with its ITR and GST Returns and other required details.
  2. Failure to update such information poses a threat of suspension of the enterprise status.
  3. Based on the submission of documents, the enterprise classification shall be updated.
  4. Any graduation or reverse graduation shall be communicated to the enterprise.
  5. Facilitation and Grievance Redressal measures have been outlined in the notification, refer link.

Link to the Circular

NEW SCHEME INTRODUCED FOR HELPING DISTRESSED MSMEs

Ministry of Micro, Small and Medium Enterprises (“MoSME”) on 24th June 2020 has launched another funding scheme to help the distressed MSME sector. The Scheme is named as ‘Distressed Assets Fund – Subordinate Debt for Stressed MSMEs’. The Scheme will be operationalized through a Trust called Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

Purpose: The purpose of the Scheme is to provide guarantee coverage to provide sub-debt support in respect of the restructuring of MSMEs. It shall provide personal loans through banks to the promoters of stressed MSMEs for infusion as equity/quasi-equity in the business eligible for restructuring.

Duration: The Scheme would be applicable for a maximum period of 10 years from the guarantee avail ment date or 31 March 2021, whichever is earlier; or till an amount of Rs. 20,000 crores of guarantee is approved.

Key Highlights of the Scheme:

  • The Scheme seeks to extend support to the promoter(s) of the operational MSMEs which are stressed and have become NPA as on 30th April 2020.
  • Promoter(s) of the MSMEs will be given credit equal to 15% of their stake (equity plus debt) or Rs. 75 lakh whichever is lower.
  • Any guarantee approved under this Scheme shall be over and above the existing loan or guarantee sanctioned.
  • Promoter(s) in turn will infuse this amount in the MSME unit as equity and thereby enhance the liquidity and maintain the debt-equity ratio.
  • Lending institutions to undertake due diligence to assess the viability, need, and requirement of the sub-debt facility and shall also ensure that the sub-debt/credit given to the promoters are infused into the MSME unit.
  • The sub-debt shall have a repayment schedule as defined by the lender, subject to a maximum of 10 years from the guarantee availment date or 31 March 2021, whichever is earlier.
  • There will be a moratorium of 7 years on payment of principal whereas maximum tenor for repayment will be 10 years; where the principal has to be repaid within a maximum of 3 years after completion of the moratorium and the interest shall be serviced monthly.
  • The sub-debt will have a second charge on the assets.
  • A non-refundable guarantee fee of 1.50% per annum on the outstanding guarantee amount shall be borne by the borrowers.
  • 90% guarantee coverage for this sub-debt will be given under the Scheme and 10% would come from the concerned promoters.

Points to Note:

  1. Exceptions – Fraud and Wilful Defaulter accounts will not be considered under this Scheme.
  2. MSME can be a Proprietorship, Partnership, Private or any other Registered company, etc.
  3. Responsibilities of the lending institutions, returns, and inspections have all been covered by the Ministry, refer link for details.

 Link to the Circular

Understanding Neo Banking In India

We keep hearing about Neo Banks these days. Here is a small write on what they do and their current landscape.

Neo Bank is a new type of digital bank that exists without any branches. They are primarily fintech firms providing digital and mobile-first financial solutions services to modern tech-savvy customers. These include payments and money transfers as well as lending through online platforms and apps. Neo banks are reinventing the practices and processes associated with traditional banking.

This new-age banking emerged about 5 years ago, namely in the UK through FinTech players such as Monzo and Atom Bank.

Neobanks don’t have a bank license of their own but count on bank partners to provide bank licensed services. For example – Niyo solution tied up with Yes Bank.

Difference between Digital Bank vs Neo Banks

Digital banking usually refers to a bigger player in the banking industry providing financial services in a traditional way. Neo banks are 100% digital and do not relate to any traditional banking names, big or small.

Advantages of Neobank:-

  1. Easy account creation
  2. Seamless international payments
  3. Customer friendly interface
  4. Value added services like bookkeeping, financial management etc

Challenges faced by the Neobank:-

  1. Targeting customer segments
  2. Arriving at best market-fit product for the customer segment
  3. Partnership with traditional bank
  4. Technology challenges – core banking systems used by most banks do not meet some of the expectations for modern digital services

Regulatory norms for Neobank: –

In India, RBI is still not granting Banking licenses to virtual banks. Currently, Neo Banks are outsourcing their banking responsibilities to those with licencesiecreating strategic partnerships with traditional banks.

Focus Business Segment for Neo Banks in India: –

Neo Banks main focus are especially young generation who are digitally savvy consumers and who don’t want to deal with traditional banks due to lack of flexibility. This generation wants to compare online loans, submit their application with a few clicks, and receive approval in a matter of minutes. And this is exactly what neo-banks offer them: speed, friendly customer support, and relevant services. Neo-banks are all about convenience and respect for the customer’s time. Some of the players are available in both B2B and B2C segments.  In terms of customer base Niyo – one of the leading Neo bank has ~ 1 Million customers and B2B leading player Open has ~ 0.4 Million customers. Below are the details of some B2B and B2C players.

B2B companies Product feature offering

Retail companies Product Feature Offering

Funding Details of Indian Neo Banks: –

During the period of Q1’20, India fintech companies has raised $421 M. New-born Neo Bank – Jupiter which is founded by Citrus pay co-founder raised $ 2 M on Apr-20. Below are the more details of Neo Banks funding: –

Neo Banks and their Banking Partners

Neo-Banking Future Prospects: –

Credit to GDP Ratio in India is 50% where as it is north of 100% for developed countries. Credit reach definitely needs to improve in India. More bank licenses is surely one way but a thought on giving a systematic push towards digital channels of fulfilling the credit need of the country may go a long way. Moreover, the recent Covid situation has underscored the imperative of quickly scaling banking and credit services to consumers and small businesses.

According to a report published by Allied Market Research, the global neo bank market is growing at a CAGR of 50.6% during the period 2017-2020. Thus, e can confidently say that they are here to stay and grow the pie of the borrowing customers.

Solutions to the Challenges faced by MSMEs: COVID times and way forward

With a very large number of MSMEs struggling with cash flows, due to delayed payments, reduced customer demand and a general slow-down in the economy, it is important to focus on getting demand back as soon as possible. The best way would be to incentivise accelerated spending over the next 6 months.

  1. Revenue – the cash flow challenges

Over the past few weeks, MSMEs across the world have been facing unprecedented challenges. For MSMEs in consumer businesses such as hotels, restaurants, salons, gyms, movie theatres, distribution firms, and other non-essential retail, revenues are down to near zero.

Firms operating in the B2B space have also seen revenues dip substantially. We have heard of multiple instances of large customers canceling long term contracts and enterprise customers delaying payments. Cash collections have slowed down or completely stopped.

Most of the MSME founders are in a state of shock and there is a total lack of clarity on when customers will return. The rare few who don’t face this problem should consider themselves lucky.

  1. Expenses – how do you pay?

On the other hand, the firms have to continue to pay for certain necessary expenses, such as employee salaries, utility payments, rentals, etc. With the lack of cash collections, many of these payments are being delayed or reduced. Firms are resorting to reduced salaries and asking landlords to delay rental payments. Supplier payments are being delayed.

Firms are looking to mitigate cash flow pressures, through the RBI provided a temporary moratorium on existing borrowings and the set-off benefits on GST and TDS payments provided by the government, though these come at a cost.

  1. Can one turn to the bank for help?

The firms can look to the banks for loans to help with cash flows, but given the uncertainty over the business, banks are also reluctant to lend till there is more clarity. Remember, the bank can lend only if they are confident of collecting the principal and interest. If there is a material risk for the loan to be repaid, it is not in the best interest of the bank to provide the loan – else the bank runs a high risk of default on the loan.

Given the triple pressures of Low or No Cash Collections (Revenues), necessary payments to be made and limited borrowing opportunities, the MSMEs are using whatever little cash cushion to manage, but if the weak demand continues for slightly longer, then the situation looks dire for a large number of MSMEs. The Risk of bankruptcies is very high.

  1. What are MSMEs doing

In this situation, MSMEs are first focussing on evaluating if customers will get back and planning accordingly. Wherever possible, they are reducing costs and new initiatives are being shelved. In conversations, many promoters have mentioned that they have set aside some additional capital to take care of the expenses over the next few months and if the business does not get back to profitable mode, they may have to start taking hard calls.

  1. The challenges for the government

There is much clamor for the government to provide a large stimulus, but this is a complicated path. Already the fiscal deficit has been under strain and the COVID related lockdown has further exacerbated this problem, with tax collections already down and guaranteed to go down even more. Any increase in tax rates will delay an already fragile economic recovery. And just providing increased liquidity, can only help the MSMEs to some extent, as the money will go down the drain if customers don’t return soon.

  1. What support do MSMEs need from the government

For the entire economy, this is a complicated challenge. At the root of the problem is delayed customer demand. Enterprise businesses are going into a cash conservation mode and delaying spending, as they prepare for the uncertain times ahead. Individuals are also conserving their cash as they are uncertain about their future.

In this scenario, it is imperative to get demand back as early as possible. In order to do this, firms and individuals who have sufficient cash reserves and cash flows should be incentivised to start their spending early. This will ensure the MSMEs (and also larger businesses) get back to normalcy sooner. There are precedents on how the government has addressed this in the past:

  • For businesses, allow for say 100% depreciation as an expense on Capex done before September 2020
  • Provide discounted GST rates on consumption done before Sept 2020 for both businesses and individuals. In the past, we have seen reduced excise and service tax for limited periods

This will get the economy back on its feet sooner, save jobs, reduce bankruptcies,  reduce bad loans for banks, and get the MSME engine moving. The government will also benefit, as demand recovers and the tax lost out on the depreciation benefit will just be delayed. Jobs saved will lead to higher income tax collections and the increased consumption will lead to improved GST collections.

As they say, teach a man to fish….