Insolvency ordinance: SME promoters may get leeway

Promoters of small and medium enterprises (SME) may be allowed to bid for their insolvent companies. 

This is likely to be achieved by exempting them from the Ordinance on the Insolvency and Bankruptcy Code (IBC). 

The government in a recent Ordinance barred promoters with non-performing assets of more than one year, wilful defaulters and anyone associated with them from submitting resolution plans during insolvency proceedings.

According to the definition provided by the micro, small and medium enterprises ministry, a small manufacturing enterprise is one whose investment in plant and machinery is between Rs 25 lakh and Rs 5 crore.  

An official in the ministry of corporate affairs said the government would not go only by the investment by a company in its determination of an SME. 

“We plan to take into account the profit after tax and the turnover to categorise a company as an SME in order to exempt it from the recent Ordinance on insolvency,” the official said. 

He said in certain industries, such as the oil industry, all firms would be characterised as large enterprises even if they had the characteristics of an SME. Oil firms such as Jubilant Energy Kharsang and Jubilant Offshore are facing insolvency proceedings.

The government move is driven by the realisation that SMEs are usually promoter-driven and attract resolution mainly from the promoters themselves. Even where other financial investors are involved, the promoters are typically roped in.

Recently, Minister of State for Corporate Affairs PP Chaudhary said the insolvency of such companies could be treated differently. “We have to consider the case of SMEs objectively since they form the backbone of the country and create huge employment,” he added.

A number of SMEs have faced liquidation after they were unable to arrive at third-party resolution. Experts said of the 300-odd SMEs undergoing insolvency resolution, at least 200 would face liquidation with restrictions on promoters presenting resolution plans.

The government has also set up a committee to look into various amendments in the Insolvency and Bankruptcy Code. These include tax incentives like exemption from MAT.

  

The government is yet to notify bankruptcy rules for individuals and corporate guarantors. The Insolvency and Bankruptcy Board of India is working on these rules. 

LOOKING AHEAD

• Govt to take into consideration profit after tax and turnover of firm to determine exemption from ordinance

• Govt’s ordinance prohibits companies with NPA over one year; wilful defaulters from submitting resolution plan

• Move could lead to liquidation of small & medium enterprises