Can India’s post-covid-19 stimulus benefit Chinese companies?

Adjusting business plans can ensure entrepreneurs navigate risks and profit from a new relief programme

on 12 May 2020, Indian Prime Minister Narendra Modi declared a special economic package of ₹20 trillion (US$265.7 billion), aiming to revive the micro, small and medium enterprises (MSMEs) sector, which are the backbone of the Indian economy, yet worst-affected by the ongoing covid-19 pandemic. The salient measures announced in the economic package include the following:

New definition of MSMEs: In order to benefit more companies, the definition of MSMEs has been revised by raising the investment limit, introducing an additional criterion of turnover, and removing the distinction between the manufacturing and service sectors, as follows:

Collateral-free loans. To provide additional funding for MSMEs to meet operational liabilities, raw materials and restarting business, the economic package has provisioned for ₹3 trillion worth of collateral-free automatic loans.

Businesses with up to ₹250 million outstanding and ₹1 billion turnover are eligible to borrow under this scheme until 31 October 2020 from banks and non-banking financial companies (NBFCs) up to specified limits, without providing any fresh collateral or paying any guarantee fee. Such loans can have a maximum tenor of four years with a moratorium of 12 months on principal repayment, and interest will be capped. The government of India will provide 100% credit guarantee cover to the lending banks and NBFCs on principal and interest in respect of all such loans.

Subordinate debt. To provide equity support for MSMEs that have been classified as non-performing assets, or that are stressed, the government will facilitate provision of ₹200 billion as subordinate debt. The promoters are required to infuse such debt as equity in their respective MSMEs. The government will provide support of ₹40 billion to the credit guarantee trust for micro and small enterprises (CGTMSE) to enable it to furnish partial guarantee support to banks extending such credit to promoters of MSMEs.

Equity infusion through fund of funds. To help MSMEs expand, a fund of funds (FoF) with corpus of ₹100 billion will be established. The FoF will be operated through a mother fund and a few daughter funds (which would typically be alternative investment funds registered on the Securities and Exchange Board of India). Expected leverage of 1:4 at the level of daughter funds will lead to mobilization of equity of ₹500 billion. MSMEs will also be encouraged to get listed on the main board of the stock exchanges.

Global tenders disallowed. The government has disallowed global tenders for government procurement of goods and services worth less than ₹2 billion. This is in addition to the existing mandate that every central government ministry, department and public sector undertaking of the government must procure at least 25% of its total annual purchases from MSMEs. Chinese companies might require more partnerships with Indian companies to participate in certain government procurement tenders that were earlier open to direct participation by foreign companies.

Santosh Pai is a partner at Link Legal India Law Services. He can be contacted on +91 9004 2652 35 or by email at santosh.pai@linklegal.in

Vijay Sureka is a partner at Link Legal India Law Services. He can be contacted on +91 9892 2550 43 or by email at vijay.sureka@linklegal.in

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