The New Companies Act Haunts MSMEs

Indian MSMEs have shown their uncomfort from the deposit rules under the New Companies Act . According to Federation of Indian Small and Medium Enterprises (FISME), “On one hand it is generally complained that MSMEs do not adopt corporate structure by becoming companies, on the other hand Government keeps creating such strong disincentives that even the existing MSME companies would shred the company structure.”

The new rules, to be effective from April 1, 2015, makes acceptance of unsecured loans and deposits by a private company illegal.
Loans from friends and relatives have long been the most important source of funds for small entrepreneurs which formed their seed capital/ margin money to borrow from banks.

All existing private limited companies will have to return these deposits by March 31, 2015 failing which stringent penalties could be imposed.

Further, FISME has said that less than 10 per cent of MSMEs have access to credit from institutional sources. Most of MSMEs make do with funds raised through their own savings or from friends and relatives. Such stringent provisions will make most MSMEs starved of funds. FISME has demanded that MSMEs must be allowed to accept unsecured loans from friends and relatives. It has also suggested a special easier dispensation for MSMEs so that enterprises are encouraged to adopt the Company format.

According the new provisions, “If a company fails to repay the deposit or part thereof, the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees and every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both.”

Earlier, the definition of deposits excluded amounts received by any company from its directors or from its members, and directors’ relatives.

As per fourth MSME census, 97 per cent of MSMEs are proprietorship or partnership firms and less than 3 per cent of them are ‘Companies’.