COVID-19, Highlights of Government of India’s financial package Part – I: Highlights of May 13, 2020

I. MSME legislative changes

1. Change effected by Government/proposed change to be effected

There is a proposal to change the definition of the term MSME.

2. Date of applicability and period till when applicable.

The notification will be issued soon and currently no date has been prescribed. This will make change to the definition of the aspect of MSME under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”).

3. Brief synopsis of the change including prior position, change in position and effect of the change

As per the revised proposal, the following would be the revised criterion for various enterprises:

(a) Micro enterprise – currently classified on the basis of investment of upto INR 25 lac for manufacturing INR 10 lac for service enterprise. Now the same has been revised to investment does not exceed INR 1 crore and turnover not exceeding INR 25 crore;

(b) Small enterprise - currently classified on the basis of investment of upto INR 5 crore for manufacturing INR 2 crore for service enterprise. Now the same has been revised to investment does not exceed INR 10 crore and turnover not exceeding INR 25 crore; and

(c) Medium enterprise – currently classified on the basis of investment of upto INR 10 crore for manufacturing INR 5 crore for service enterprise. Now the same has been revised to investment does not exceed INR 20 crore and turnover not exceeding INR 100 crore.

The new definition will also eliminate the differences between the existing guideline for a service MSME and a manufacturing MSME.

4. Clarification required

The Government will have to clarify as to what all inputs would constitute investments, i.e. whether the same aspects of investment in machinery, capital etc. will constitute the investment criterion for an MSME.

5. AJC viewpoint

In our considered view, the government has intelligently made the classification to include service MSME in the definition. With demand for manufacturing not set to rise exponentially, it is advisable that core changes to services. Hence, the primary aim appears to appease various service MSMEs which fail to register themselves as MSMEs.

II. Labour reforms

1. Change effected by Government/proposed change to be effected

Extension of payment under the Employees’ Provident Funds and Miscellaneous Provident Act, 1952 (“EPF Act”) and reduction of contribution under the EPF Act.

2. Date of applicability and period till when applicable.

There will be an extension of the notification already issued by the Government on March 26, 2020 regarding contribution under the EPF Act.

3. Brief synopsis of the change including prior position, change in position and effect of the change

Primarily under the EPF Act 12% of employer and 12% of employee contributions into EPF accounts is required. The government had already been contributing 24% contribution for all entities with up to 100 workers and enrolled under the Pradhan Mantri Gareeb Kalyan Yojana (“PMGKY”). The Government was already paying the contribution till May, 2020 and now the same has been extended to eligible establishments for a period of 3 months from June to August 2020.

For those establishments not eligible under the previous PMGKY, the EPF contribution for both employer and employee shall be reduced from the existing 12% to 10% for the next 3 months. For Central Public Sector Enterprises and State Public Sector Undertakings, the employer shall continue to contribute 12% into the EPF account.

The same are all applicable on employees contribution earning up to INR 15,000.

4. Clarification required

Currently, no clarifications are required.

5. AJC viewpoint

The Government min aim appears to be to increase the take home salary and liquidity for employers. However, certain tax exemptions may also be given to such exemption so that employers or employees may not have to pay more tax in case they fall in the tax bracket. Since, the same are only temporary provisions, tax exemptions should be extended.

III. Liquidity schemes for NBFC, Housing Finance Corporations, and Micro Finance Institutions

1. Change effected by Government/proposed change to be effected

Thirty thousand crore rupees (Rs. 30,000 cr.) liquidity for Non-Banking Financial Companies (NBFCs).

Forty five thousand crore rupees (Rs. 45,000 cr.) partial credit guarantee scheme 2.0 for NBFC’s, housing finance companies (HFCs) and microfinance institutions (MFIs).

2. Date of applicability and period till when applicable.

To be announced by the Government.

3. Brief synopsis of the change including prior position, change in position and effect of the change

Under the INR 30,000 crore special liquidity scheme, investments will be in both primary and secondary market transactions in investment-grade debt papers of these institutions. These securities will be fully guaranteed by the Government.

The existing partial credit guarantee scheme to cover borrowings through primary issuance of bonds and commercial papers by nonbank lenders i.e. NBFCs, MFIs and HFCs is also being remodelled where the government will guarantee up to 20% of losses under the scheme targeted at firms with low credit ratings.

4. Clarification required

Currently, no clarifications are required.

5. AJC viewpoint

These investment grade papers will help the intended industries tide over difficult times. However, one would expect a more proactive role from the Government in executing these transactions and schemes at the earliest where in case of the ILFS fiasco essential amount of only up to 10% was disbursed.

The Government as a policy measure may in the near future also look to shore up its due diligence on non investment grade papers where defaults are less and may include shoring them also in their guarantees. This would encourage participation even from smaller NBFCs, MFIs and HFCs.

IV. Loans to DISCOMS

1. Change effected by Government/proposed change to be effected

Emergency liquidity fund of INR 90,000 crores injected through Power Finance Corporation and Rural Electrification Corporation to all the DISCOMs against all the receivables of the DISCOMs.

2. Date of applicability and period till when applicable.

The same will be extended by way of loan to DISCOMS and the date of extending this facility is yet to be decided.

3. Brief synopsis of the change including prior position, change in position and effect of the change