Background: The government has empowered MSME vendors and suppliers through two very powerful regulations, every retailer should know of and comply with.

Modern retailers depend on thousands of small suppliers who help them meet the needs of millions of customers. This makes it important for retailers to maintain good relations with them. One of the ways to do this is to have clear terms of payment with a practice of prompt payment. This is good not just for the growth of the business but is also a legal requirement. Here are two regulations in this regard that can threaten the survival of the business if not complied with.

Insolvency and Bankruptcy Code (IBC), 2016

This reform has made significant changes in the way business failures/ payment defaults are handled. The regulation applies to cases of business failures and investor exits. Done under supervision of the courts, it enables investors to recover capital invested before its value erodes further.

What makes IBC relevant to retail businesses is that it deals with default in payments to vendors. In fact, promoters can lose control of their company due to defaults.

The procedures under IBC are:

1. IBC applies if default of operational debts (provisions for good and services, including employment and statutory dues to government) exceeds INR 1 lakh.

2. The creditor (vendors/employees) must deliver a demand notice (Form 3) to the company at its registered office demanding payment through registered / speed post or through email to key members of management.

3. Within 10 days of receiving the demand notice or invoice copy, debtors should intimate creditors about dispute/pending case, if any regarding the demand.

4. If no notice of dispute is received by creditors, they may file an application supported by evidence before the National Company Law Tribunal for initiating the corporate insolvency process.

5. The Adjudicating Authority has to admit/ reject the application within 14 days of its receipt.

6. The time limit to complete the Insolvency Resolution Process is 180 days, which can only be extended for another 90 days. The time to resolve such matters has reduced to less than a year from 4 years it took earlier.

MSME Development Act, 2006

The Notification dated November 2, 2018 regarding Micro, Small and Medium Enterprises Development Act, 2006 deals with payments to MSMEs.

As per Section 15 of the Act, suppliers are to be paid by the date specified in the agreement. In the absence of an agreement, it is to be made before the appointed date. Appointed date refers to the 16th day from receipt of goods or services. However, the Act allows a maximum period of 45 days from the date of delivery of goods/services.

As per Section 16 of the Act, failure to make the payment within the stipulated date will attract compound interest with monthly rests on the outstanding amount. The rate of such interest will be three times the bank rate, which is to be calculated from the appointed date. In case of dispute regarding the payment of principal/interest, a reference is to be made to the Micro and Small Enterprises Facilitation Council.

Annual Reporting Requirements

Section 22 of the Act requires businesses dealing with MSMEs to disclose the below information in their annual financial statements:

1. The principal amount and the interest due to the MSME supplier till the appointed date. Also, the principal amount and interest due for days beyond the appointed date.

2. Interest paid by the buyer on account of delayed payments.

3. Interest accrued and remained unpaid at the end of each year.

4. Further interests remaining due and payable even in succeeding years, until such date till the interest due is actually paid.

(Interest paid on delayed payments is disallowed under IT Act)

Half-yearly Reporting
Companies have to file half yearly returns to Ministry of Corporate Affairs for payment delays to MSMEs exceeding 45 days along with the reasons for the same. Retailers should minimise risk under IBC and MSME Act since they deal with SMEs on a daily basis.

Tips for Retailers

• Sign a well-defined agreement with every supplier.
  
  
• Ensure that additional clauses for warranty of services, quality of goods, adequate credit period are stipulated in every agreement.
  
  
• Clearly define rights, duties and responsibilities in the agreement.
  
  
• Include an escalation matrix for complaints in every agreement.
  
  
• Educate all concerned executives regarding timely reply to all emails and notices received from suppliers and vendors. Every mail, letter or notice by small vendors are to be addressed on priority. All functions are to be sensitised on a regular basis.
  
  
• Streamline the company’s payment mechanism to give priority to small vendor payments.
  
  
• Monitor payments to MSMEs continuously and address irregularities promptly.

Gautam Jain is Director – Advocacy and Finance at Retailers Association of India, responsible for being the change agent in retail advocacy through policy recommendation, suggesting reform road-maps, facilitating retail trade. He is a Chartered Accountant by qualification with wide industry knowledge and experience.

To network with Gautam Jain, link with him by clicking on the 'Connect' button on his eBiz Card.

Article source: STOrai Magazine

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker, Retailers Association of India or any other organisation.