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MSME Relief Package

Updated on: Oct 23rd, 2023


8 min read

The Prime Minister of India, Shri. Narendra Modi announced a special economic package on 12 May 2020 for the Micro, Small and Medium Enterprises (MSMEs) to help them overcome the COVID-19 crisis. The PM announced a package of 20 lakh crores which is equivalent to 10% of India’s GDP. This package was announced to provide a boost towards achieving ‘Atmanirbhar Bharat’. 

It focuses on land, labour, liquidity and laws. It is provided to cater to various sections including cottage industry, MSMEs, labourers, middle class, industries, among others. The details of the special economic package were announced by the Finance Minister, Smt. Nirmala Sitharaman on 13 May 2020. The details of the package provided specifically for MSMEs are discussed below.

Revised Criteria for Classification of MSMEs

The government changed the criteria to decide micro, small and medium enterprises. The new definition is applicable from 1 July 2020. The new definition of MSME redefines the upper limits, thus, covering more enterprises under its ambit. The old definition had different limits for the manufacturing and services sectors. The new definition provides the same limits for both the manufacturing and services sectors. Thus, more enterprises can avail of the loans and schemes provided for MSMEs now. 
The new definition is as stated below-

Criteria for Manufacturing and Services SectorMicroSmallMedium
Investment in Plant and Machinery or EquipmentNot more than 1 CroreNot more than 10 CroreNot more than 50 Crore
Annual TurnoverNot more than 5 CroreNot more than 50 CroreNot more than 250 Crore

Credit Guarantee Scheme for Subordinate Debt

The name of the Scheme is ‘Distressed Assets Fund – Subordinate Debt for Stressed MSMEs’ and the credit product for which guarantee is provided under this Scheme is known as ‘Credit Guarantee Scheme for Subordinate Debt (CGSSD)’. This scheme provides for Rs.20,000 crore sub-ordinate debt for two lakh MSMEs that are NPA or are stressed. Banks will provide the subordinate-debt to promoter/s of such MSMEs equal to 15% of the promoter/s existing stake in the unit subject to a maximum of Rs.75 lakhs. 

CGSSD provides sub-debt support for the restructuring of MSMEs. The scheme provides for 90% guarantee coverage and the remaining 10% from the concerned promoter/s. The objective of CGSSD is to provide personal loans to the promoters of the stressed MSMEs through banks for infusion as equity/quasi-equity in the business eligible for restructuring. 

Nature of Assistance –

  • The promoter/s of the MSME unit will be given credit equal to 15 % of his stake, which includes equity plus debt or Rs.75 lakh, whichever is lower.
  • The Interest Rate of Credit under the scheme shall be capped.
  • The maximum tenure for repayment is 10 years.
  • There is a moratorium of a maximum of 7 years on the payment of principal.

Eligibility –

  • Applicable for those MSMEs whose accounts are standard as on 31.03.2018 and are in regular operations, either as standard accounts or as NPA accounts during the financial year 2018-19 and financial year 2019-20.
  • A personal loan will be provided to the promoters of the MSME units.
  • The Scheme is valid for MSME units that are stressed, viz. SMA-2.
  • NPA account as on 30.04.2020 who are eligible for restructuring as per RBI guidelines on the books of the Lending institutions.

Three Lakh Crore Loans to MSMEs

The COVID-19 pandemic hit the MSME sector very severely. It caused losses to the MSMEs. To provide additional funding to the MSMEs for meeting their operational liabilities built up, buying raw materials and restarting businesses, the government announced three lakh crore loans relief. MSMEs will not have to provide any guarantee or collateral of their own to avail benefit under this relief package/scheme. The Department of Financial Services implements this Scheme. 

One of the features of this scheme is that the government provides 100% credit guarantee cover on principal to the banks and NBFCs. Under this scheme, there is no guarantee fee, and no fresh collateral is required. This scheme can be availed till 31st October 2020. It is expected that approx 45 lakh units can take benefit under this scheme and resume business activity while safeguarding the employment of people. 

Nature of Assistance –

  • The scheme provides additional working capital finance of 20% of the outsourcing credit as on 29.02.2020, in the form of term loan.
  • Concessional rate of interest.
  • Loans to have a 4-year tenure.
  • 12 months moratorium on principal repayment.
  • Interest to be capped.

Eligibility –

  • All businesses / MSMEs are eligible.
  • Available for units with up to Rs.25 crore outstanding and turnover of up to Rs.100 crore whose accounts are standard.
  • MSMEs can apply through Banks, DFS and National Credit Guarantee Trustee Company Ltd (NCGTC).

Equity Infusion For MSMEs Through Fund of Funds

MSMEs are facing a severe shortage of equity. The Fund of Funds provides equity funding for MSMEs, which have growth potential and viability. This scheme is expected to facilitate equity financing of Rs.50,000 crore in the MSME Sector. Venture Capitals (VCs) and Private Equity (PE) firms offer early-stage funding, but very few provide growth-stage funding. This scheme will be able to intermediate different types of funds into underserved MSMEs and address the growing needs of viable and high growth MSMEs with the help of government intervention. 

The main objective of this scheme is to encourage MSMEs to grow and get listed on stock exchanges. As per this scheme, the government will set up a Fund of Funds with a corpus of Rs.10,000 crore which provides equity funding support for MSMEs. The Fund of Funds will be operated through a Mother and a few Daughter funds. It is expected that the Fund of Funds will be able to mobilise equity of about Rs.50,000 crore with leverage of 1:4 at the level of daughter funds. 

Under this scheme, there will be a Mother Fund, where the Government of India would be the Anchor Investor. The Mother Fund can invest in daughter funds that will deploy the investments in targeted MSMEs. Thus, creating a partnership with MSMEs in their growth journey and enabling them to grow bigger and get listed on the stock exchanges. 

Nature of Assistance –

  • Growth Funding to MSMEs through equity financing: The Government of India will support VCs/PE firms for investing in commercially viable MSMEs to meet their growth requirements. The proposed fund of funds will encourage private sector investments in the MSME sector and leverage Rs.50,000 crore. The actual investment can be even higher.
  • Private funding leverage: Funds of Funds aims to achieve private funding leverage through the use of professional fund managers who have access to funding and strategic performance oversight. This will help attract a wide range of investors, including financial institutions, banks, corporate investors, other government funds, High-Net-Worth (HNW) individuals to invest in MSMEs.

Eligibility – All MSMEs are eligible. They can apply through Investor Funds onboarded and registered with the proposed Fund of Funds.

No Global Tenders For Procurement Up To Rs.200 Crore

The Government announced that General Financial Rules (GFR) would be amended to disallow global tenders in the procurement of Goods and Services of the value of less than Rs.200 crore. Indian MSMEs and other companies often have to face unfair competition from foreign companies. Therefore, to help the MSMEs, global tenders will be disallowed in government procurement of up to 200 crore. 

The Government also stated that necessary amendments in the General Financial Rules would be done. Under exceptional circumstances, global tenders can be floated for procurement of up to Rs.200 crore after the approval of the Finance Ministry’s expenditure department. Earlier, no global tenders were floated for procurement of up to Rs.50 lakh. 

On 15 May 2020, the Finance Ministry amended Rule 161 of the GFR relating to global tenders for government procurement. This will help the MSMEs as the global tenders up to Rs.200 crore will be given to MSMEs companies. With global tenders up to Rs.200 crore going to MSMEs, more opportunities are created for domestic MSMEs and less competition from foreign companies. 

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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Quick Summary

The Indian PM announced a special economic package of 20 lakh crore to aid MSMEs affected by COVID-19. The package includes revised criteria for classification, a credit guarantee scheme, loans to MSMEs, and equity infusion through a fund of funds. Additionally, global tenders up to Rs.200 crore will be reserved for Indian companies. These measures aim to boost the MSME sector and promote self-reliance in India.

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