Why is there no Samadhaan for delayed payment to MSMEs?

Representative Image (Source: ShutterStock)

Just as the pandemic was about to wreak havoc, businessman Raman Mehta who runs Diamonds Ceilings, a ceiling tiles manufacturing unit in Manesar, filed a complaint with the Micro and Small Enterprise Facilitation Council (MSFC) in Panchkula, Haryana, seeking its intervention to recover pending payments from clients. It’s been 20 months since then, and he is nowhere close to recovering the dues.

Mehta is not alone. Thousands of small businesses across the country are suffering, hurt by delays in payment for goods they have delivered. Only a fraction of these businesses have approached facilitation councils hoping for an early settlement of their payment.

According to the MSME Samadhaan portal, a portal to monitor delayed payments to MSME units, an estimated 97,359 cases involving a sum of Rs 25,553 crore have been filed by small businesses over delayed payments since its inception in October 2017. Of these, 18,072 cases were filed against government ministries and departments to recover Rs 11,202 crore.

"This was my first experience with filing a complaint. I would give the state council a benefit of doubt in terms of the time they are taking because I filed the complaint during the Covid-19 period in March last year," Mehta told Moneycontrol.

The first hearing of the case happened this year, nearly a year after he filed the complaint. So far there have been three hearings, including one with the arbitrator. Significantly, the defaulter did not show up at any of the hearings.

"It is frustrating because the defaulter will never show up for hearings. There is a lacuna in the system which should be fixed at the earliest. There should be some form of penalty for not attending the hearings," he said.

The Micro and Small Enterprise Facilitation Councils (MSEFC) have been set up in the states for settlement of disputes arising out of delayed payments to micro and small enterprises by government departments, ministries, central and state public sector enterprises, proprietors among others. The states were required to set up these councils under the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006.

MSMEs that face more than 45 days’ delay in payment can approach MSEFCs in their state to fast-track the settlement of dues. Complaints can also be filed with the MSEFCs through the Samadhaan portal. Once the case is referred to a state MSEFC, a decision is required to be made within 90 days.

However, a settlement within 90 days rarely happens.

R Ramamurthy, a member of the All India Council of Associations of MSMEs, a body that represents 170 MSME associations across the country, said, "Although the Micro, Small and Medium Enterprise Development Act, 2006, provides that buyers should make payments to MSMEs within 45 days, this is not honoured by most entities." Delays in payments to MSMEs blocks their working capital, affects the overall business cycle and poses liquidity challenges, he explained.

The Act stipulates that payment for the supply made by an MSME should be mandatorily cleared by the buyer within the outer limit of 45 days from the date of acceptance or deemed acceptance of the supply unless agreed otherwise by the parties. Payment delays attract compound interest with monthly rests on the defaulter at three times the bank rate notified by the Reserve Bank of India.

However, there are several loopholes in the system that ultimately favour the defaulters to get away without making the payments, the associations’ representatives said. 

"There are just so many flaws in that Act. I do not understand why it has not been amended yet. The buyer will just never attend the hearings and keep pushing the case for years because there is simply no penalty for doing that." Even when the arbitration goes in the favour of an MSME to collect the dues, the business is forced to approach a local civil court to collect its dues.

"It then becomes a civil case. It may then take up to 10 years to recover the dues because the civil court is also very slow," he added.

Often buyers hold back payments claiming that the quality supplies were poor, several industry associations said.

Many MSMEs do not even file a case because the bargaining power is so poor, they just fear that they will get caught in the system and lose a buyer," said DP Goel, co-chairman of the MSME Committee at the PHD Chamber of Commerce.

Currently, an estimated 27,186 cases are under consideration in the state facilitation councils.

Mukesh Mohan Gupta, chairman of the Chamber of Indian Micro Small and Medium Enterprises said, "If a buyer has decided that they will not make the payment, then they will simply not pay. The present law is very weak to ensure justice."

"Whenever an aggrieved MSME approaches the state council, it takes at least two months for the first hearing on it, then a notice is issued to both the parties where again a time of two months is given to both to settle it. Then it is referred to the arbitrator where again a time of three months is given to them for hearing but the buyers simply do not care to come for the hearing."