Small enterprises need a rating agency to rate big companies that treat them like dirt. And that rating impact the big company’s reputation, credit-rating score and ESG rating. The rating agency should also rate GoI and state governments for revealed, as opposed to claimed, ease of doing business, depending on how fairly government departments and state-owned enterprises transact with small companies.
When it comes to being showered with platitudes and vacuous expressions of gratitude, MSMEs contend with shramiks (workers) for the third place, behind jawans (soldiers) and kisans (farmers). When it comes to being left hung out to dry, MSMEs are in a class of their own.
We are talking about most small enterprises that don’t have a fairy godmother to dub them as startups. If you are a startup, you are a media darling, have money to burn, little accountability, a long rope to roam far before being reeled back in, and the prospect that failure would be treated as a learning experience that would stand you in good stead the next time you start up. (Well, this is overstating things a bit, things have changed since the US Fed raised rates by 5.25 percentage points.)
If you run an old-school MSME, you will struggle to get a bank loan, will always be polite to distant uncles (who knows when you need to tap whom for an emergency loan) and keep the family silver in pawn-ready sparkle.
MSMEs get hardly 15% of their finance from banks and rely on expensive credit from NBFCs and informal sources. Big units pay their vendors 4-6 months after the invoice is raised, and frown upon demands to expedite payments. The frown would turn into a scowl should the vendor have the audacity to sell their receivables to a factor.
The difference between bill discounting and factoring is that the credit relationship changes with the factor. When a bank discounts a bill raised by Midget Inc on Megacorp, the latter continues to owe money to Midget. It is Midget’s job to get the money from Megacorp and pay back the bank the money it got against the bills of supply to Megacorp.
In factoring, a financier, say, Moneybag, takes over Midget’s receivables and collects the payment from Megacorp. Midget gets its money upfront, albeit with a discount, and Megacorp owes money now to Moneybag. Moneybag is far less amenable to further postponement of payment or other bullying than Midget had been. So, Megacorp tells Midget that if it persists with a factoring service, the supply contract will go to Minnow Inc. So, Midget goes back to borrowing dear to give free credit to Megacorp.
Delayed payment for supplies is mere pain. The real torture begins if a small enterprise has to enter into a legal dispute with another company, the government or a bank. This is a very asymmetric fight, and Goliath rarely loses. It is not just the legal expenses that Midget cannot afford. Midget does not have the human resources to carry on its business and wage a protracted legal war.
The solution is a combination of institutional accountability, technology and the threat of reputational damage for errant Megacorps.
Tax officials should periodically testify before a committee of the legislature. People’s representatives should be able to hold tax chieftains to account for misconduct by tax functionaries towards defenceless MSMEs.
MSMEs should sponsor a rating agency to rate big companies on their conduct towards their vendors. All companies with an annual turnover over ₹5 crore raise e-invoices. It is easy to track the interval between raising an invoice and receiving payment with the help of the GSTN and the account aggregators, which can collate, with the permission of the company concerned, all its financial transactions in one place. This MSME fairness score should be publicised along with routine credit scores, whenever the company raises money or vies for talent or a corporate citizen award.
The agency should rate state and central government departments and state-owned enterprises under their wing. When a state government holds an investment summit, its MSME fairness score should be at hand to prick inflated balloons of business-friendly baloney. This calls for a rating agency at arm’s length from individual enterprises, which are in no place to withstand.
Finally, MSMEs need an activist fund to take tiny stakes in large companies. It should collect proxies at AGMs and take Megacorp managers to task for mistreating MSME vendors. The Small Industries Development Bank of India (Sidbi), the World Bank and, say, the Shiv Nadar Foundation could supply the seed capital for the activist fund.
Such pressure tactics should avoid a lot of legal disputes. No dispute is the least costly dispute.
The article was first published in The Economic Times as MSMEs, toughen up on August 15, 2023.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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Posted by Samprikta Banerjee, research intern at IMPRI.