IBBI proposes mandatory disclosure of MSME status in insolvency proceedings to boost transparency

Recognising the differences between micro, small and medium enterprises and larger corporates, the Insolvency and Bankruptcy Board of India (IBBI) has proposed that any firm undergoing insolvency proceedings should disclose its status.

It is proposed to amend Regulation 36 of the CIRP Regulations for making disclosures about the status of the corporate debtor, being registered or not, as a micro, small or medium enterprise in accordance with the provisions of the Micro, Small and Medium Enterprises Development Act, 2006, the IBBI has said in a recent discussion paper.

It has also proposed that in case available documents with the Resolution Professional, indicates that the corporate debtor falls within the category of MSME, he or she may get the Udyam Registration Certificate generated on a case-to-case basis before making the disclosure in the Information Memorandum.

At present, this information on whether the debtor is an MSME is not provided in the Information Memorandum and often this is later contested, which leads to uncertainty and delays in the resolution process, the IBBI noted.

“The proposed amendment is expected to reduce information asymmetry in the resolution process for MSMEs,” the IBBI said.

Further, it may also encourage greater participation from potential resolution applicants who may have otherwise been uncertain about their eligibility. “Certain resolution applicants specifically look for MSMEs due to their unique nature and advantages, such as simplified compliance requirements and government incentives. This may lead to enhanced participation and thereby lead to improved outcomes in terms of value maximisation,” it said.

The Insolvency and Bankruptcy Code, 2016, provides certain special dispensations for MSMEs undergoing insolvency resolution. It exempts resolution applicants for MSMEs from the disqualification criteria in certain cases and the pre-packaged insolvency resolution process (PPIRP) can be initiated only for an MSME.

Experts welcomed the move and said it would bring necessary clarity for the information and consideration of all the stakeholders in the CIRP process.

“This is a small and obvious necessary change in disclosures in the Information Memorandum which should have been brought out long ago as soon as special exemptions and a separate 'prepackaged scheme for resolution of MSME sector cases' was envisaged under the Insolvency and Bankruptcy Code,” said Jyoti Prakash Gadia, Managing Director, Resurgent India.

This will take care of the procedural aspects of necessary disclosure for the benefit of all the stakeholders and is consistent with the test of the regulations under the IBC and easy to implement as well,” he added.

The IBBI has sought public comments on the proposed amendment by September 12.