Institute of Management
Studies & Research
Recent 17A provision to curb
the problem of delayed payment
Prof. Sameer Kulkarni
Introduction:
Credit crunch either genuine or deliberated crafted enacts
negatively in the smooth functioning of any organization. Indian
Small Scale organizations are cursed to face such problems; and
they are left at the mercy of their buyers' willingness to pay in time,
which leads for the availability of credit for MSME (Towards faster
and more inclusive growth, “An approach to the 11th Five year
plan, 2007-2012”, December-2006, pp-39).
Though the MSMED act which covers comprehensive measures
to ensure timely payment to SMEs is brought in to effect on 2nd
Oct 2006; which states that large companies sourcing products or
services from the small scale organization; should settle the
payments within a period of 45 days. The law says that the SME
can file a complaint with the centers in their respective states in
case of non receipt of payments for the supplies made. Such
complaint will be addressed within 90 days, from the filing date. In
spite of such a nice instrument not much systemized
implementation is taken care of the same. As in case of only, Tamil
Nadu, in the year 2008, Aug there were legal cases worth Rs.
35.50 Crores, and MSEFC (Micro and Small Enterprise
facilitation Council) could able to settle for Rs.9 Crores in the
same day i.e.Aug,25,2008 ( The Hindu, 26th Aug,2008). The
interesting thing which was revealed from this case is that this
amount is averaged to Rs.1 Crore with respect to the number of
units' (this committee handled 39 cases in total) filing such
complaint; shows the kind of sheer negligence followed by the so-
called big brothers.
Importance:
Recent global recession and knock off effect at the domestic
market, due to the recent drought situation and the rising food
prices,(which has reduced domestic demand for items like,
textiles to an extent of 30%); has once again provided a certain
reason to the big buyers to squeeze the payments of their small
suppliers. This has forced the PMO to form a special task force
consisting of 11 high level members, under the control of the PM
principle secretary, Mr.T K A Nair to address this issue specifically.
Besides these measures, there are other regulatory bodies
enforcing many measures; to ensure prompt payments to the
Small enterprises, of all the three categories, viz. Micro, Small
and the Medium enterprise by their buyers. In the aura of
globalization and markets without barriers this intervention of
government bodies may be seen as a crazy move, but is was
necessary.
The small businesses get under tremendous situational pressure
to reduce the stock levels, to take care of smooth functioning and
to maintain the pace of their activities and keeping the supply
chain intact. This example will reflect the significance of those
problems emerging due to mismanagement of the credit cycle;
the 50,000 textile traders operating form 140- odd textile markets
in the Ahmadabad and Surat in Gujarat in this pre-Diwali season
(Times of India, 6th October, 2009). Reeling under the huge
losses due to the dwindling markets in northern and southern
India, the rise in default cases has become a major cause of
concern for the weavers as well as the traders.
Recent Developments:
Reserve Bank of India (RBI: 2006-07 Report) has advised all
banks to closely monitor the operations in the sub-limits,
particularly with reference to their corporate borrowers' due to SSI
units. The corporate borrowers should ensure that the pending
dues to SSI suppliers get paid before the 'appointed day' /agreed
date.
Apart from this, The Central Board of Direct Taxes, has
incorporated a clause through its notification No. 36/2009 dated
13th April, 2009, in the Form No.3 CD in Appendix II of the
Income-Tax Rules, 1962, to provide for facilitating the promotion
and development and enhancing the competitiveness of micro,
small and medium enterprises and for matters connected
therewith or incidental thereto.
This new clause has enhanced the scope of the tax auditor, for the
large organizations; to keep a track on such non payments, which
were due to the small suppliers, and mention about such due
payments in the audit report in the Form No.3CB. Under this act
there is a provision of a penalty of compound interest, with
monthly rests; to be paid at 3 times of the bank rate notified by the
RBI, for the due payments to the supplier, starting immediately
from the date agreed upon. Along with, any due of the Income tax
on such amount is to be charged to the buyer, and any such
payments made by the buyers, shall not be allowed as a
deduction for the purposes of the computation of Income under
the Income-tax Act, 1961.
Under section 22 of the MSME Act, the large buyers has to furnish
details pertaining to the principal amount and interest due thereon
remaining unpaid to any supplier as at the end of each accounting
year separately.
In order to be eligible to take benefit of this facility of filing a sue in
the courts of law one has to become the 'supplier under the Act'
needs to file a memorandum of Micro, Small as the case may be
with the authorities, referred to in section 7(1)(a); as may be
designated by State Government. The memo can be obtained
from the following web address,
www.industries.delhigovt.nic.in/download/EM_FORM.pdf
If the buyer fails to make due payments, the supplier or the SME
can approach to the Micro and Small Enterprise Facilitation
Council for recovery of the amount.
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Institute of Management
Studies & Research
Recent 17A provision to curb
the problem of delayed payment
Prof. Sameer Kulkarni
The procedure to recover the delayed payment is as Conclusion
following:
The enactment of MSMED Act is a welcome step to consolidate
1. An application shall be made by the supplier/SME's containing all the legal provisions relating to the Micro, Small and Medium
the full particulars of the claim along with interest to the Enterprises spread across various Acts. The further bifurcation of
Chairperson of the Council. SSI undertakings and ancillary industries into MSM Enterprises
and recognition of the status of Enterprise by combination
2.The application should be supported by an Affidavit, with method is worth to identify the development of all sectors of the
necessary court fee stamp affixed thereon. industries.
3.The Chairperson may ask for further information's. This However, certain revisions could be carried out in the Act from the
additional information is to be supplied within a period of 15 days Buyers' perspective. The MSMED Act is silent on the compliance
and if not supplied the Chairperson may terminate the obligations of the Suppliers. Various penal provisions like
proceedings. declaration of qualification in the Annual Report are no doubt
superior to mere collection of fines at some Government office.
4.The supplier/SME shall also simultaneously send a copy of the
application to the buyer.
5.The Chairperson shall than direct the buyer to furnish his
detailed response to the claim within 15 days.
6.The Chairperson on the response of the buyers shall place the
claim of the supplier/SME before the Council.
7.The Council shall conduct Conciliation preceding either itself or
through any institute providing Alternate Dispute Resolution
services. The provisions of the Arbitration and Conciliation Act,
1996 shall apply in such a case.
8.The Council shall require the supplier/SME and the buyer to
appear before it by issuing notices to both parties.
9.On the appearance of both parties, the Council shall first try to
resolve the dispute amicably.
10.If the Conciliation is not successful, the Council shall refer the
dispute to an Arbitrator for final settlement.
11.The supplier/SME or buyer may, either in person or through his
lawyer present his case before the Council or the institute during
the arbitration proceedings.
12.The Council or any institution designated by the Council shall
make an arbitral award within ninety days from the date of making
such reference.
13.The award shall be stamped in accordance with the relevant
law in force. Copies of the award shall be made available within
seven days of filing of an application.
14.Appeal against the supplier/SME can only be admitted only
when the buyer has deposited 75% of the awarded money.
In spite of all such legal measures what is needed is the concern
towards the existence of the small scale industry by the large
players, as only cordial co-existence will ensure the smooth
functioning of the industry.
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