MSME insolvency

MSME insolvency

Background

Micro, small and medium enterprises (MSMEs) form the backbone of India’s businesses and its famed entrepreneurial spirit. MSMEs employs nearly 11 crore Indians, 6 crore enterprises.

Due to the onset of the pandemic of COVID-19, many issues are being faced by the MSMEs, and people associated with them. There is an urgent need to create innovative solutions around mitigating the problems being faced by them, before the backbone of the Indian economy is shaken.

The government has revised the definition of MSME to include manufacturing or service units with investment and turnover based which will enable more enterprises to come under the ambit of MSMEs and avail the government benefits.
The government package has helped some MSMEs with loans to keep their enterprise going. Unless the recovery is quick, many of them may not be able to service the loans and end up losing not only their net worth but also their collateralized assets.

MSME Overview

There are approximately 46 million Micro, Small and Medium Enterprise sector enterprises across various industries, employing 106 million people Overall, the MSME sector accounts for 45 per cent of Indian industrial output and 40 per cent of exports. While most of the sector is unorganised (approximately 94 percent), informal and un-registered, initiatives to have more enterprises registered are well underway.

The contribution of the MSME sector to India’s GDP currently stands at ~8 per cent for 2011-12 and is growing at a rate higher than the projected GDP growth rate. The contribution of the MSME segment to the GDP in some of the global economies is in the 25-60 per cent range. MSME in India has the potential to increase the share of contribution to GDP from the current 8 per cent to about 15 per cent by the year 2020.

COVID and beyond

Battered by coronavirus lockdowns, businesses around the world are scrambling to save themselves. The world is facing a massive surge in bankruptcies. A 35% cumulative jump in the number of companies that are going to go bust between is being predicted.

The biggest increase among the world’s economic powerhouses will be in the United States, with a 57 per cent jump in insolvencies in 2021 compared to 2019, before the coronavirus struck.

Bankruptcies are expected to soar by 45% in Brazil, 43% in Britain, 41% in Spain, 57% in the USA, and 20% in China is being forecasted. The larger the company filing for bankruptcy, the higher the risk of a domino effect. A premature withdrawal of supportive economic and policy measures could push the rise in insolvencies to 40-45 percent.

Market Problems

Investor Issues
In investing, the highest returns are made when investing in periods of fear and uncertainty when the wider market mispriced securities of Grade A assets.

Investors are looking for high quality assets offering double-digit yields leading to significant gains during COVID unertainities.

They see COVID-19 as another such opportunity to use a temporary dislocation in the markets to reap higher risk adjusted returns in Grade A commercial assets

Due to information asymmetry in the insolvency space there is a lack of transaction. Investors are unable to access the risk they would be undertaking by transacting under the IBC regime.

There is a need for an asset marketplace which can help the investors
  1. Search for Investment Opportunities
  2. Analyse Risk involved in various investments.
  3. Help them through the IBC process of
    1. Filing Expression of Interest
    2. Prepare a Resolution Plan
    3. Negotiate their bid.
Stakeholder Issue

There are various stakeholders participating during an insolvency process. They require a platform where they can get up to date information on the rapidly changing insolvency laws and case laws.

There is an urgent need for a platform that provides for
  1. Insolvency Knowledge Forum
  2. Location based Insolvency Professional search
  3. Service exchange platform
Employee Issues

With a swathe of announced job cuts and business closures, India stands on the precipice of mass unemployment. Thanks to government furlough schemes for workers and massive state subsidies for their companies the full economic impact of the coronavirus pandemic has yet to be felt across India.

With a recent gloomy assessment by the International Monetary Fund, which has abandoned hope of a quick V-shaped recovery from the deepest global recession since the Great Depression of the 1930s.

MSMEs are already implementing a hiring freeze, haircuts, salary reductions and layoffs in order to remain afloat. The exodus of migrant workers have also created labour shortages across industries.

Displaced workers are carrying with them skills that they learnt during their job in the cities. They do not have any formal skill-certificate which may enable them to procure a similar job at another location or help them apply for a bank-loan from a business they may wish to open.

Such workers need to be certified for the skills they already possess. NSDC and the Ministry of Skills has already created a system to align the competencies of the unregulated workforce of the country to the standardized National Skills Qualification Framework (NSQF) under a scheme of “Recognition of Prior Learning”.

There is a need for a solution that enables for self-preparation for RPL certification.

Professional Issues
  1. Legal Knowledge
  2. Interim Finance
  3. Eligibility Verification
  4. Legal Compliance
Solutions - Marketplaces

Asset Marketplace

Our Asset marketplace brings investors and insolvency professionals (who are responsible for selling standalone assets and running businesses under insolvency) together to enable the online exchange of distressed assets. The advantages of our asset marketplace are mainly focused on the increase in efficiency and the reduction of costs.

We offer a location based asset search facility for potential investors looking to invest in distressed assets. Investors can search for businesses under IBC based on the TYPE of ASSET, LOCATION of the ASSET, and other parameters.

The objective of the law for value maximization met and upto 25% increase in the value of the asset has been observed by the insolvency professionals. The other objective of lowering the insolvency transaction costs is also met and the standardisation and automation of the agreement, inquiring, and ordering processes has helped reduce transaction cost by 50%.

Our marketplace solution has enabled professionals to showcase their assets and reach out to potential investors to elicit expression-of-interest from them. There are other filters like industry, price range, and location which are critical to the investors in deciding their investment decisions.

Our marketplace solution has enabled the investors to locate and evaluate investment opportunities. We have an integrated investor forum to enable the insolvency professionals (sellers) and resolution applicants (buyers) to exchange information in a confidential manner.

Our marketplace solution has helped insolvency professionals reachout to the investors via automated web-based application that handles business-to-business lead generation and cold emailing.

We have an integrated eAuction solution that has been developed in accordance with the IBC regulation and is regularly updated to keep in sync with the legal requirement, which helps complete the transaction.

Service Marketplace

Our Service marketplace brings stakeholder and IBC practitioners together on a single platform to enable online exchange of professional services. The advantages of the service marketplace are mainly focused on the increase of efficiency and the reduction of costs.

A reduction of upto 50% of service fees have been observed by professionals who have used our platform. The standardisation and automation of the agreement, inquiring, ordering and paying processes that our B2B service marketplace helps reduce transaction costs.
Our service marketplace offers
  1. Location-based search: that enables professionals to find other professionals primarily based on their location. There are other filters like domain expertise and eligibility which are critical in locating a relevant professional. Location is critical especially during COVID days where the proximity of professionals is mandated by law.
    1. Increase efficiency: Our system helps evaluate other professionals, exchange quotations, scope out the work involved and creates a level playing field for all professionals. It helps bring the professionals together, contributing to the discovery and meeting of new professionals, and exchange of services. The extensive reach offered by our service marketplaces minimises the costs of finding and promoting new professionals.
    2. Discovery Platform: Marketplaces include the ability for professionals to present their entire service catalogues to insolvency stakeholders. Other professionals can dynamically respond to requests for bids and quotes.
Skills Marketplace

Our skill marketplace offers such laid off / displaced workers to obtain a Recognition of Prior Learning (RPL) certificate for themselves. RPL refers to an assessment process used to evaluate a person's existing skill sets, knowledge and experience gained either by formal, non-formal or informal learning. It aims to align the competencies of the un-regulated workforce of the country to the standardized National Skills Qualification Framework (NSQF).

Our skill marketplace establishes the concept of “learning and training anywhere, anytime”. We have employed the fastest and cheapest technologies to support new ways of skilling in the face of the current pandemic. The solution must be adapted to shift from a top-down approach to a bottom-up culture of learning. The workers/learners must be in the driving seat of their own learning and development. Workers will have simpler access to the National Skill Qualification Framework (NSQF). Our solution allows for workers a democratic way to begin identification of their NSQF related job-roles, and to instantly begin their skill process with minimal outside help and technological friction.

Features

Easily accessible: Easily and cheaply accessible The learners must be allowed the time to undergo the training without having to make a trade-off in terms of their performance; The learners must be able to afford it on their existing resources, and with their employer's assistance where needed; and it must be in a format that can work within whatever constraints they face.
  • Found our solution personally personally useful and relevant.
  • It must meet their needs and help them further their goals.
  • it met the challenges faced by the learners in order to plug their skills gaps
Learning pathways: Lowering the technological friction which a user confronts on a conventional website or android/iOS application. Lowering the cost of self-skilling. Bringing the job-roles (NSQF) and its related curriculum directly in the hands of the learners in a language of their choice. Leveraging “Open Education Resources” (OERs)/MOOCs to bring world class skill-training content to the learners for FREE.

Earning pathways: There must be a clear path to earning via job or entrepreneurshipThe learners must have a clear be allowed the time to undergo the training without having to make a trade-off in terms of their performance; The learners must be able to afford it on their existing resources, and with their employer's assistance where needed; and it must be in a format that can work within whatever constraints they face.

Process

Mobilization
Mobilization involves activities related to mobilization of potential candidates who are skilled but uncertified. There are millions of workers being displaced due to liquidation and resolution of insolvency companies. The insolvency professionals and resolution applicants can undertake in their resolution plans responsibility of providing RPL skill certificate as a part of severance package. Thus millions of workers can be easily mobilized ithout any major effort.

Counselling and pre-screening
Although counselling and pre screening is recommended for explaining the benefits and process of RPL, most workers are intelligent enough to realize how skill certification will assist them in transforming their life. The skill-sheet is user-friendly enough to enable the worker to ascertain the job role which matches the prior knowledge and existing skill sets. Documents required from the candidates can be collected by the insolvency professional or by the resolution monitoring committee.

Orientation & Assessment
The mandatory 12 hour orientation can be provided via pre recorded videos and video conferences. The pre-recorded videos may include 6 hours of domain specific training, 4 hours of training on soft skills and entrepreneurship, and 2 hours on familiarization with the assessment processes and methods. Assessment of candidates is conducted by the assessment bodies accredited by the Sector Skill Councils (SSCs).

Solutions - Databases

Investor Database: Extensive investor database and marketing campaign. IPs and IPEs are leveraging our database of global investors who are keen on investing in India through IBC.

Eligibility Verification Database:
A resolution applicant has to be eligible under section 29A of IBC in order to 1. participate for bidding under resolution process 2. participate in the auction process under Liquidation 3. participate in the sale of stand alone assets.
  1. Undischarged Insolvent Database: Applicant is ineligible if he is an undischarged insolvent
  2. Wilful Defaulter Database: He has been declared as wilful defaulter per the guidelines of the RBI issued under the Banking Regulation Act
  3. NPA Account Holder Database: He has an account classified as NPA per the guidelines of the RBI issued under the Banking Regulation Act
  4. Criminal History Database: He has been convicted for any offence punishable with imprisonment- for 2 years or more under 12th schedule Act or for 7 years or more under any other law.
  5. Disqualified Director Database: He has been disqualified as a director under the CA-2013; Provided that this clause shall not apply in relation to a connected person referred in clause (iii) of explanation
  6. SEBI Prohibition Database: He has been prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;
  7. Fraudulent Transactor Database: He has been a promoter etc. of a corporate debtor in which a PUEF transaction has taken place and in respect of which an order has been made by the AA under IBC
  8. Unpaid Guarantor Database: He has executed a Unpaid Guarantors been admitted under this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part;
  9. International Disability Database: He is subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India
Solutions - AI & Software

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About Resolution Bazaar

Resolution Bazaar is an online platform built with the central idea of resolving distressed assets in India that pose an inherent threat to the country’s economy. The platform provides a single-window avenue for Discovery, Investment and Resolution of such assets. In addition, the platform also recognizes coveted professionals in the field, laying the foundation for a strong legal community, dedicated to insolvency resolution.
Mission: To decrease the burgeoning NPA debt crisis and empower MSMEs to reinstate, replenish and resolve corporate structures, leading to healthier economical stature for India.

Vision: To help in the process of value maximization and quicker resolution for Assets stuck in Insolvency/Liquidation, targeting MSMEs representing 45% of India’s net industrial output.

Market Size

Our potential clients include
  1. Financial Creditors:
  2. Operational Creditors: Both public and private banks have lent money to various corporates. About 12345 Crores stand NPA in the books of these banks. Other major creditors are Homebuyers and Trade creditors.
  3. MSMEs Debtors: There are over 6 lakhs corporates registered with MCA that fall under the category of MSME. Over half of them are expected to file for insolvency from January 2021 onwards.
  4. Personal Guarantors: Every corporate debtor has an average of 3 directors/promoters that have offered a personal guarantee to their company. With over 3 lakhs MSMEs in insolvency, there ought to be anywhere between 6-9 lakhs applications for personal insolvency from January 2021 onwards.
  5. Investors:
  6. Professionals: There are 3000 registered insolvency professionals, and 3000 registered valuers registered with IBBI
  7. CA/CS: There are over xxxxx CAs and xxxx CS registered with ICAI and ICSI institutes.
  8. Employees:
Challenges & Traction

Resolution Bazaar has been gaining momentum over the past 4 months ever since the advent of COVID-19. The revenue out of various offerings has been going up and the customer base has dramatically increased. Customer satisfaction has remained at very-good to excellent levels. The profits have remained at 50% and above. By January 2021, we see Resolution Bazaar to be the sole goto portal for all insolvency needs both by the professionals and stakeholders. We are very active on linkedin and intend to increase our reach via Twitter over the next few months. We are market leaders in the insolvency resolution space and have multiple products to cover most aspects. The only competition we have is a semi-private body called information utility.

Over the past two years we have been able to build well established products and brand awareness. Our marketing effort includes sending regular emails to all banks, insolvency professionals, registered valuers, MSMEs and corporates. We intend to ramp up our marketing on linkedin and twitter. We continue to carefully research and reach-out to potential customers in order to maintain traction and continue our path to success.
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