By Bhaven Shah and Garv Sultania

Contributing 29% to India’s GDP and 40% of India’s exports, 6.3 crore micro, small and medium enterprises (“MSMEs”) provide employment to 21% of India’s workforce, translating into 80 million jobs. MSME CHAMPIONS, Samadhaan portal, Trade Receivables Electronic Discounting System (TReDS) and Government e-Marketplace (GeM) are a few initiatives introduced by the Government that have contributed to the holistic growth of this sector. However, MSMEs continue to encounter serious issues and disputes relating to delayed payments that choke cash flows and push many towards the brink of insolvency.

A recent report by the Global Alliance for Mass Entrepreneurship (“GAME”), Dun & Bradstreet, and Omidyar Network India reveals that 80% of the annual delayed payments (amounting to a whopping INR 8.73 lakh crore) were owed to micro and small suppliers. Interestingly, 72.4% of such instances can be avoided, provided there is an effective and efficient way to tackle the menace of delayed payments.

The current mechanisms involve informal follow-ups, with less than 1% of the eligible enterprises, representing only 1.3% of the delayed payments pool, using the MSME Samadhaan portal for formally recording delays. The lack of any tangible outcomes and high rejections have rendered it a mere filing tool.

The final recourse of going to court is plagued with issues such as being resource-heavy, the existence of power asymmetry, and an already overburdened justice delivery system. Some other concerns include:

  • Supplier’s fear of retaliation from buyers.
  • Lack of awareness.
  • Lack of a streamlined and accessible system.
  • The complex and lengthy recourse process itself, which has cumulatively led to low success, thereby limiting trust in the system.

To tackle this issue, one of the solutions proposed in the GAME Report is to enable the entry of Online Dispute Resolution (“ODR”) service providers to ensure faster (and thereby effective) resolution of payment-related disputes. The use of ODR will play a tremendous role in easing the burden faced by the Micro & Small Enterprise Facilitation Councils (“MSEFCs”). Unlocking ODR by leveraging data and technology is integral to addressing a part of the concern related to delayed payments for suppliers in the MSME ecosystem.

The law requires the buyer to pay the MSME compound interest at monthly rates three times the rate notified by the RBI if the payment to the supplier is delayed beyond 45 days. Buyers are also required to make disclosures and have reporting obligations around delayed payments, failure of which attracts serious penalties and consequences for both the buyer and officers-in-charge of the buyer. Such disputes can be registered online on the Samadhaan portal or can be directly filed with the jurisdictional MSEFC. After evaluating the application, the MSEFC may either convert it into a case or reject the application. The concerned MSEFC may itself conduct conciliation followed by arbitration, or refer it to an Alternative Dispute Resolution (“ADR”) institution.    

ODR is commonly referred to as the modern counterpart of ADR mechanisms like negotiation, mediation, arbitration, etc. Powerful communication technologies, case management tools, and advanced technologies like Artificial Intelligence (“AI”) and Machine Learning (“ML”) allow ODR to curate a case-specific solution which is quick, effective and efficient.

The law not only permits ODR, but it has also gained wide recognition in India from the judiciary, the government, and business enterprises. For instance, the National Payments Corporation of India (“NPCI”) has mandated platforms in the UPI ecosystem to adopt ODR for complaints and grievances connected to failed transactions. INGRAM, SEBI SCORES, RBI CMS, MahaRERA, and RTI Online are other examples of ODR systems that are widely used.

Several enterprises including banks, e-commerce companies, fintechs, and start-ups have also included ODR in their dispute resolution frameworks.

The time is ripe for ODR to solve the issue of delayed payments constricting and crippling MSMEs.

This can be achieved by a two-pronged approach:

  • First, a dedicated supplier-side technology platform accessible 24×7 in multiple languages, encompassing:
    1. A layered approach to establish communication and convey consequences to buyers to ensure increased awareness
    2. Automating processes and standardization to ensure a streamlined process
    3. Integrated reporting to concerned authorities to ensure increased recoveries, prompt payments, increased action against delays, and reduced rejections by MSEFCs
  • Second, exploring the enabling provisions of the law which permit referral of disputes by MSEFCs to ADR institutions.

Where the incumbent setup involves significant resources, ODR provides a superior experience, while being pocket-friendly, quick, and convenient. A fully integrated platform will enable parties to track the end-to-end progress of the entire journey and provide actionable data to explore possibilities of dispute avoidance.

Ultimately, given the Government’s emphasis on supporting MSMEs as the growth driver of India’s economy, the question is not whether ODR should be explored to solve delayed payments, but rather how soon it can be implemented.

Bhaven Shah is a Co-founder of Presolv360.

Garv Sultania is a lawyer keenly interested in the intersection of technology and law. He is a part of the Strategy team at Presolv360.

Adapted from How to tackle delayed payments to MSMEs, originally published in Business Standard.


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