As promised in the 12 May address of the Prime Minister, the Government of India (“GOI”) has announced the first phase of economic relief package under the ‘Atma Nirbhar Bharat Abhiyan’. A quick snap-shot of the main reliefs is as follows:

MSME Sector

The relief package seeks to address the liquidity issues for the MSME sector, by focusing on:

1. Increasing the existing thresholds for classification as an MSME to include more enterprises, thereby remove disincentives for MSMEs to become bigger for the fear of losing benefits;
2. Providing equity and subordinated debt support to stressed MSMEs and promoters of MSMEs;
3. Unlocking the available liquidity with banks and financial institutions by encouraging them to lend to MSMEs by providing 100% credit guarantee.

Change in Definition

The revised classification of the MSMEs is based on both investment and annual turnover, as opposed to the earlier basis of classification focussing on investment alone. The distinction between manufacturing and service based MSMEs has also been done away with. The revised classification is as follows:

• Micro Enterprise- investment of less than Rs 1 crore and turnover of less than Rs 5 crore,
• Small Enterprise – Investment of less than Rs 10 crore and turnover of less than Rs 50 crore
• Medium Enterprise- Investment of less than Rs 20 crore and turnover of less than Rs 100 crore

Increase in threshold will help MSMEs retain their status even when their investments and turnovers increase.

Subordinated debt for stressed MSMEs

The GOI has promised to facilitate provision of subordinated debt of upto Rs. 20,000 to functioning MSMEs which have non-performing assets or which are stressed. The fine print of the scheme is not yet out, but it is likely to be implemented as a credit guarantee scheme enabling the banks to lend against the credit guarantee by the GOI or a GOI backed fund.

An additional Rs. 4000 crores will be made available under the existing  Credit Guarantee Fund Scheme to Micro and Small Enterprises administered through Credit Guarantee Fund Trust for Micro and Small Enterprises (“CGTMSE”). This is aimed at enabling banks to provide lend to promoters who may in turn infuse the amount as equity into their businesses.

Fund for Equity Infusion   

The Government proposes to set up a fund of funds with Rs. 10,000 crores corpus. This fund of funds is expected to leverage about Rs. 50,000 crores at daughter fund levels, for infusion of equity in viable MSMEs with growth potential.

Collateral free debt

To unlock the liquidity with the banks and NBFCs, the Government has proposed to provide them with 100% credit guarantee of upto Rs. 3 lakh crores. Under this scheme, financial institutions can provide an emergency credit line to MSMEs for upto  20% of their entire outstanding as on 29.02.2020. The key features are as follows:

• Eligibility: The borrowers with up to Rs. 25 crores outstanding and 100 crore turnovers.
• Term : 4 years with a moratorium of 12 months on principal amount repayment.
• Period for availing the scheme: It can be availed until 31.10.2020.
• Key Features: The Government shall provide 100% credit guarantee cover to Banks and NBFC on the principle and interest. No guarantee fees shall be charged, and no fresh collateral is required.

The MSMEs with existing borrowers are likely to be benefitted by this move. However, GOI may have to be conscious of the repercussions of such loans going bad, particularly if the borrowers or the lending institutions are not incentivised to ensure recovery of such debts.

Other measures 

• MSME dues from the Government and Central Public Sector Enterprises shall be cleared in 45 days. It is pertinent to note that under the Micro, Small and Medium Enterprises Development Act, 2006, MSMEs are already entitled to be paid within 45 days from the date of acceptance or deemed acceptance of the goods or services. For any delay in payments, the MSMEs are entitled to compound interest at monthly rests at the rate of three times the bank rate notified by the RBI. We anticipate that the Government/ CPSEs would not extend this benefit to those cases where disputes are pending.
• Fintech is proposed to be used to enhance transaction based lending.
• E-market linkages are proposed to be promoted to replace the existing trade fair and exhibitions.

Reliefs under Employee Provident Fund

1. GOI had earlier announced to bear the burden of employer’s contribution to employee provident fund, for  employers with upto 100 employees, with 90% of the employees drawing salaries of less than Rs. 15,000 for a period of March- May 2020. This has now been extended by another three months, for salaries of June- August, 2020.
2. Mandatory statutory contribution to employee provident fund by the employers and employees has been reduced from 12% to 10% for private enterprises.

Government Contracts/ Contractors

The Government has announced following reliefs to government contractors:

1. Six-month extension for all construction/ works, goods and services contracts  with all the Central agencies (like Railways, Ministry of Road Transport & Highways, Central Public Works Department etc.). Extension to cover obligations like completion of milestone/work and extension of concession period in Public-Private Partnership contracts.
2. Extension of time shall be without cost. The language of this relief (as available) is unclear and may lead to some confusion and potential dispute. The circular/ notification would have to be awaited to see if this means that no penalty would be imposed on the contractor or does it mean that contractors are disallowed from claiming cost overrun under the contracts for the period of the force majeure.
3. To ease cash flow issues, government agencies will partially release the bank guarantees to the extent the contracts are partially completed.

Real Estate Sector

Advisory to real estate regulatory authorities (“RERA”) around the country to consider Covid-19 as a force majeure event and grant extension of registration to all registered projects for upto six months from 25 March 2019. As per the Indian Express, this move is expected to benefit 40,000 projects. State RERAs are also empowered to extend this by a further period of 3 months. Revised project registration certificates shall be issued by state RERAs with revised timelines. Timelines for other compliances too shall be extended accordingly. We have considered the regulatory framework on such extensions here.

Power Sector

To ease the distress on the state power distribution companies, and the generation companies, following steps have been announced:

1. Power discoms to be extended credit by Power Finance Corporation/ Rural Electrification Corporation against receivables of the discoms, and guarantees of state governments. This credit is to be used exclusively for discharge of liabilities of discoms to generation companies.
2. Central Public sector generation companies shall offer rebates to state discoms which shall be passed on the end consumers by the discoms.

The Minister of Power has separately announced that central power sector generation companies such as NTPC and Damodar valley Corporation, and central power transmission company, the Power Grid Corporation of India, shall be waiving fixed charges and inter-state transmission charges against the power that has not been drawn for the period of 24.03.2020 to 17.05.2020.  This may help discoms reduce their liabilities significantly.

Reliefs to NBFCs/HFCs/ HNIs

To ease the liquidity issues for NBFCs, housing finance companies (“HFC”) and micro-finance institutions (“MFI”), the Government has announced the following measures:

1. A special liquidity scheme of Rs. 30,000 crores, under which investment will be made in investment grade debt paper of NBFCs, HFCs and MFIs, which will be fully guaranteed by the Government of India. This will provide them with much needed liquidity for onward lending.
2. NBFCs/ HFCs/ MFIs with low credit rating to be allowed to access capital through issuance of bonds and commercial papers under the existing Partial Credit Guarantee Scheme 2.0. First loss of 20% shall be guaranteed by the GOI under the scheme. AA grade and below including unrated papers are eligible for support under this scheme.

Tax Measures 

The Government has announced the following tax measures:

1. The rates of tax deduction at source (“TDS”) and tax collection at source (“TCS”) across categories, except on salary income, shall be reduced by 25% over the existing rate, until March 31, 2021.
2. All pending tax refunds of non-corporate businesses and professions shall be released immediately.
3. The due date for filing of income tax return has been extended to November 30, 2020, and for tax audit to October 31, 2020.
4. Deadline for assessments getting barred which are expiring on September 30, 2020 and March 31, 2021, respectively, are extended to December 31, 2020, and September 30, 2021 respectively.
5. Deadline for making payments under Vivad se Vishwas scheme to be extended to December 31, 2020.

Conclusion

The measures announced by the Finance Minister are aimed at releasing liquidity into the system, particularly for the MSMEs. While doing so, the Government has tried to nudge the banks to unlock their coffers by increasing lending, instead of releasing its own funds in any significant way. This may be due to limited fiscal space available to the Government, or perhaps it may like to save some fuel for the long winter ahead.