India’s insolvency regulator, the Insolvency and Bankruptcy Board of India (IBBI), has proposed that MSMEs undergoing insolvency resolution should disclose whether they are formally registered as a micro, small or medium enterprise with the government.
In accordance with the MSME Development Act, 2006, enterprises are required to register on the MSME Ministry’s Udyam Registration portal for access to formal credit along with various government schemes.
Disclosing registration status as an MSME, said IBBI in a discussion paper on August 23, will likely reduce information asymmetry in the resolution process for such enterprises and encourage greater participation from units who may have otherwise been uncertain about their eligibility.
“It is proposed to amend Regulation 36 of the CIRP Regulations for making disclosures about the status of the corporate debtor, being registered or not, as a micro, small or medium enterprise in accordance with the provisions of the Micro, Small and Medium Enterprises Development Act, 2006,” the paper noted.
Importantly, under the current regulatory framework, Regulation 36 of the IBBI Regulations, 2016, the information memorandum doesn’t need to disclose the status of MSME — the corporate debtor – whether Udyam registered or not.
The information memorandum serves as a comprehensive document carrying key information about the corporate debtor.
The MSME status of the corporate debtor, said IBBI, has important implications in the insolvency resolution process, particularly in terms of the eligibility criteria for resolution applicants under Section 240A.
Since the status of the MSME is currently not explicitly required to be disclosed, IBBI said there have been instances where the classification of a corporate debtor as an MSME has been contested during the insolvency resolution process.
“This uncertainty can lead to complications and potential delays in the resolution process,” the regulator said.
Section 240A of the IBC excludes MSMEs from section 29A(c) and section 29A(h) which means that promoters of MSMEs can be the resolution applicants for MSMEs undergoing the insolvency process.
IBBI also proposed that if the available documents indicate the MSME to be registered, the resolution professional may get the MSME’s Udyam certificate generated before disclosing the status of the MSME in the information memorandum.
The insolvency regulator has sought public comments on the proposal by September 12, 2024, through its website.
The government had implemented its Pre-Packaged Insolvency Resolution Process (PPIRP) back in 2021 for MSMEs where the default amount ranges between Rs 10 lakh and Rs 1 crore. The pre-pack process has to be initiated by an eligible MSME who has made the default and has not undergone or is not undergoing the insolvency process under Part II IBC.
According to the data shared by the former MoS in the MSME Ministry Bhanu Pratap Singh Verma in a written reply in the Lok Sabha in July 2023, the PPIRP saw only six admitted cases, of which four were ongoing while one case was resolved and one was withdrawn.
