Strengthen the MSE facilitation council sooner than later
Most micro and small enterprises suffer from delayed payments for their supplies and services. Several contractual engagements with both the government and public sector undertakings also are not honoured.
In line with the long-standing demand of small-scale sector to alleviate the problem of delayed payments the Delayed Payments Act came into being in 1993. The hope that the small scale industries would be relieved of the stress in working capital was short-lived due to ineffective implementation. The Act has been amended in September 1998 providing for payment of penal interest at 150% of the prime lending rate of SBI, defining default period as 120 days. It also provided for an alternative mechanism of arbitration and conciliation and also redefined the term supplier to include any institution, agency or undertaking notified as such by the Union Government. Industrial Facilitation Councils empowered to act as arbitrators/conciliators were to be notified by the State/UT governments. The amendments were effected to strengthen the Act, to make it more useful without disturbing the buyer - seller cordial relations and to provide a relief to the small suppliers from undergoing the cumbersome recourse of legal redressal through civil suits.
Subsequently, in 2006 when the MSME Development Act was brought in, the Delayed Payments Act was subsumed in Sections 15to18 of the MSMED Act whereby the MSE Facilitation Councils replaced the Industrial Facilitation Councils. The well intentioned provisions, however, are still not delivering the intended reliefs for the following reasons:
- The Council is expected to deliver the judgment within 90days of lodging the claim. Not infrequently this time lag expands at the Council itself due to administrative reasons as the Chairman is obliged to perform other statutory functions as Director of Industries within the ordained timelines of the state government.
- Ninety days’ delay if unresolved in terms of actual realisation of the supply bill turns the account into NPA. Ninety days was fixed when the NPA norm was 120 days’ overdue position. Therefore, this 90 days’ timeline has to be reduced to 60 days and that too mandatorily.
- The Council that meets once in a month should meet at fortnightly intervals to provide reasonable scope for hearing both sides providing for either party unable to present itself when called upon to do so by the Council for any justifiable reason. No more than two adjournments shall be allowed in such cases by the Chairman. It is desirable that this is provided in the statute itself instead of rules.
- After the Council adjudicates on the claim, if the respondent does not honour the order, the firm has to file an Execution Petition within the respective jurisdiction after waiting for three months from the date of the order and this is governed by the CPC. Therefore, the intended settlement does not take place.
Jurisdiction: Section 18(4)
- Several MSEs enter into sale contracts and PPPs that specify the jurisdiction of the dispute within the respective State. Unless the MSMED Act has a provision to overrule such jurisdiction, the claim order will go for a legal tangle involving huge legal expense and further delay in realising the claim from the respondent.
- Most such disputes are formidable when the respondent is either a government department or public sector undertaking.
- It is incumbent on the payee to remit 75% of the claim amount in case the Council’s order is contested in the High Court. But such remittance being made into the Court and not into the account of the firm, the sword of NPA still hangs on the neck of the enterprise. It is a matter for consideration whether the related High Court in such dispute could straight away inform the Bank where the firm holds its accounts that the Deposit is held by the Court in its name so that the proceedings of the Bank due to declaring the Account as NPA and further proceedings under Sarfaesi Act can be halted and the unit allowed to carry on its normal production activity with renewal of their credit limits.
- Clause 4 of Section 18 has overriding clause that is not honoured by several State Governments and the High Courts as well. Therefore, strengthening this provision is extremely important when alone the disputed claim gets remittance of 75% into the Court upfront.
Hence it is important that the issue of the jurisdiction should have an overriding provision over any and all other such clauses in any agreement between the disputant parties. All said and done, the small enterprises being captive suppliers do not have the muscle to alter the PPP clauses even when some of them contravene law.
- Chairman of the Council being a quasi judiciary function shall be no less than Director of the Industries. This is imperative for the other reason that the Director acting as Chairman has full knowledge of (a) the functioning of the inter-relationship between the buyer and seller as a contractual arrangement; (b) the functioning of the industry itself from the date of registration to its demonstrated ability of reaching production capacity and standards of supply of goods and services by it; and (c) of the transactional milieu of the industries with the Banks and FIs, as Chairman of SLIIC Sub-committee.
- This position shall get the acceptance from all the State Governments: several state governments, notwithstanding the existence of such Councils in their own State, refuse to honour the verdict of the Council.
The Chairman and the Members of the Council shall be given a five-day training in the essential laws that govern the contracts, sale of goods Act, taxation laws and the jurisdictional issues, Arbitration and Conciliation Act 1996 and its further amendments through Case Laws in the State Judicial Academy or the National Law University/School. This will enable them to come to quicker decisions on the disputes between the buyers and sellers and lessen the burden of arguments on either side which is necessary to judge the case within two or three hearings.
Whenever the Courts receive petitions relating to the debts due to the MSMEs from the government departments or PSUs, it is a matter of introspection as to the reasons for Judiciary at different tiers not asking them to specify what according to them meets with the contractual arrangement and pass the orders in just one or two hearings. This single step could settle many grievances relating to MSEs before they are declared as NPAs by the Banks and FIs.
*The author is an economist and Adviser, MSE Facilitation Council, Government of Telangana. The views are personal.
More blogs by the authors can be read at http://www.moneylife.in/author/dr-b-yerram-raju.html