The impact of the Trump tariffs has been felt most strongly by the Micro Small and Medium Enterprises (MSME) sector in India. These MSMEs, largely reliant on US buyers and operating on thin margins, are now facing competition from countries like Vietnam and Bangladesh where tariffs are significantly lower. With purchase orders paused or cancelled, the MSME industry has sought various interventions from the government, such as extension of credit, faster refunds under GST and Remission of Duties and Taxes on Exported Products (RoDTEP) scheme. These demands are aimed at managing the cash flows of MSMEs that have either lost orders or have to absorb higher costs.
Issue of delayed payments
Another key contributor to the cash flow issues faced by MSMEs is the problem of late customer payments. This problem had been posing a significant threat to their cashflows even earlier. As per data available on the MSME Samadhan portal, which was established for registration of delayed payment disputes, over Rs. 20,000 crores were stuck in cases filed by MSEs in various facilitation councils as of 2024. Industry estimates suggest that annually about Rs. 10.7 lakh crore is locked up in delayed payments from buyers to MSME suppliers.
A recent initiative of the Ministry of MSME may be a timely solution to this long-standing concern. On 27th June, the International MSME Day, the President Smt. Draupadi Murmu, launched an Online Dispute Resolution (ODR) portal for delayed payment disputes of MSEs. Micro and small enterprises must immediately utilize this facility to ease their cash flow woes.
Over the years, the government has enacted various provisions to aid MSMEs in recovering their money. It introduced a 45-day timeline for payments, failing which a high rate of interest would be attracted. Micro and Small Enterprise Facilitation Councils (MSEFCs) were established at the state and district levels to decide disputes within 90 days. Companies are required to disclose any amount owed to MSMEs in their annual statements. In 2017, the MSME Samadhan portal was launched through which supplier MSEs could file online applications against buyers of goods and services before the MSEFCs of their state. Later, a sub-portal to track dues from Central Ministries, departments and other Public Sector Enterprises to MSEs was also set up. Tax deductions offered for purchase of goods or services from MSMEs were disallowed in case payments weren’t made within a 45-day period.
Even with all these provisions, MSMEs have been founding it difficult to recover their money. Essentially, there is an inherent inequality between micro and small vendors and their large buyers. As a result, in case of delays in payments, MSMEs are unable to take effective legal action against the more financially strong and legally shrewd businesses. Payment reminders, legal notices and even initiation of legal proceedings often do not work. In many cases, enterprises are even unaware of the legal recourse available to them and of various forums of dispute resolution such as MSEFCs.
ODR as a solution for MSEs
It is here that Online Dispute Resolution offers a solution. ODR, to a great extent, removes the imbalance of power that exists between the MSEs and the larger companies.
As per the scheme for ODR released by the Ministry of Micro Small and Medium Enterprises, the revamped ODR portal will be an end-to-end process of dispute resolution, taking place exclusively on a digital platform. The first stage, a pre-MSEFC one, shall be voluntary in nature and based on consent of both parties and shall last a maximum of 15 days from the date of initiation by the MSE. Within this stage, AI enabled probable outcome or an unmanned negotiation to seek an agreement will be attempted.
The second stage, which involves the MSEFC, shall be a formal dispute resolution process involving Conciliation or Mediation and Arbitration. The online nature of proceedings and the promotion of document-only resolution, involving neutral ADR institutions, independent mediators and arbitrators, will facilitate fair and just outcomes for both parties. The entire lifecycle of a dispute, from e-filing to hearings, orders to settlement agreements and awards, will take place on the ODR portal, increasing accessibility, removing need for travel and physical documentation, and most importantly, ensuring transparency.
Time limits and minimum standards have been prescribed for each step of the process, to ensure that a stronger party cannot frustrate the proceedings. The process will also be accessible to parties in vernacular languages.
The process also allows MSEFCs, which were struggling to keep up with the rising number of applications, to focus attention on identifying and empanelling ADR and ODR institutions and overseeing the administration of disputes rather than resolving each one individually.
ODR has been successful in resolving various challenges in different sectors. It is used widely in the lending ecosystem and has been deployed to provide a unique solution to investors to resolve grievances in the securities market. Integration of ODR makes the resolution process accessible and efficient. In the MSME ecosystem too, the integration of ODR could remove the imbalance of power, increase accessibility to a faster and more efficient dispute resolution process, and this solve one of the many problems that MSMEs face currently.
(Bhaven Shah the co-founder of Presolv360, an ODR institution. Rajendran Karakulam is the Founder-Director of Karakulam Consulting, a public policy firm.)
Views are personal and do not represent the stand of this publication.
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