MSMEs blame litigation tangle, cost for being a segment killer
New Delhi, Aug 16, 2023
Synopsis
The sluggish and ineffective legal system in India hampers entrepreneurial growth and adversely affects the MSME sector, FISME said.
The country’s MSME representatives have called upon the government to take steps to reduce the cost of litigation for them.
In a seminar organised recently by the Federation of Indian Micro and Small & Medium Enterprises (FISME), several industry observers raised the growing issue of MSMEs facing legal disputes, especially concerning supplies to government departments and public sector undertakings (PSUs).
Time is of the essence for MSMEs when it comes to payments. Small suppliers can be ruined if a large company does not pay them on time for the goods services received, said Prashant K Patel, President of FISME.
The government is encouraging alternative dispute resolution mechanisms, including mediation, conciliation and arbitration, as the main tools for dispute resolution, but the pace of execution is still riddled with loopholes, he said.
Parliament had passed the Mediation Bill in the monsoon session. Earlier, the government had amended the arbitration act to make this a feasible settlement route.
“Although the process of arbitration has become largely time-bound, MSME facilitation councils (MCFs) have failed to adhere to the timelines. Secondly, the intended benefits of alternative mechanisms have been largely nullified by frequent interventions across the process through courts, delaying the conclusion of the process. Thirdly, whether through commercial courts or higher courts, the execution of the award opens up the door to another case which can drag for years,” the FISME president said.
To keep a tab on pending cases, he suggested creating a dashboard capturing data exhaustively on cases active in arbitration panels, civil courts, high courts and the Supreme Court. Such a step would create a sense of urgency to resolve the matter faster.
At the event, FISME also presented its findings on the issue. High cost of litigation moves companies’ focus from core business activities to legal firefighting. It puts a financial strain on them because it locks up precious working capital, squeezing small business owners on the liquidity front. In many cases, this has also acted as a barrier to entry and discouraged potential entrepreneurs, according to a presentation by the federation.
These factors are catalysing the informalisation of MSME, the industry body said. This is evident from the fact that 90% of the MSMEs remain in the informal segment. Also, the segment is characterised by “stagnant manufacturing”, with the best brains shirking the entrepreneurship route.
FISME's research also revealed a paradox: India's overall position in the World Bank's ease of doing business ranking has significantly improved from 142 in 2014 to 62 in 2020 but the enforcement of contracts has shown tardy progress as the ranking of 186 in 2014 improved to just 163 in 2020. Also, the World Justice Project's report indicates that India ranks 88th out of 180 countries in terms of rule of law, 89th out of 180 in criminal justice, and 111th out of 180 in civil justice.
Participants at the FISME programme said contrary to the letter and spirit of the rules, arbitration awards get invariably challenged in the high courts. Even if the party wins, execution of the implementation of the award opens up another case as it goes to a HC again. Also, cases exceeding Rs 1 crore are taken to the National Company Law Tribunal (NCLT), whereas cases below Rs 1 crore have only the execution option, which, according to MSMEs, is dysfunctional.
According to Anil Bhardwaj, Secretary General of FISME, the government must take proactive measures to address mediation, conciliation and arbitration-related concerns as these throttle the growth of MSMEs. The country's economic progress will remain at risk if these issues are not addressed on a priority, he added.
The Insolvency and Bankruptcy Code (IBC) covers only companies and there is no relief for 97% of the players in the MSME sector, said industrialists present at the programme. They pointed out that there is no clarity on clearing dues of companies under insolvency.
FISME officials said a large number of commercial disputes are hindering the growth of MSMEs.
Rajendra Agarwal, Member of Parliament and Chairman of Friends of MSMEs, had said in Parliament that mediation should always be the first step to resolving disputes and for that the process should be efficient. He had expressed hope that the Mediation Act would help resolve the disputes.
During the programme, several entrepreneurs presented specific cases where MSMEs faced near bankruptcy due to delayed payments and prolonged litigations.
JP Singh, Senior Advocate and Secretary of Delhi Mediation Forum, said the efficiency of the mediation process depends on the efficiency of the mediator. The country has a shortage of well-trained mediators, he said.
Small business owners who took part in the seminar were of the view that the government procuring agencies should be advised to have first faith in mediation and arbitration, instead of approaching the courts for resolution of disputes related to contracts below a certain value. This will save the small suppliers from financial crises due to delays in the litigation process.
[The Economic Times]
