Contributing 29 per cent to India’s GDP and 40 per cent of India’s exports, 6.3 crore micro, small and medium enterprises (MSMEs) provide employment to 21 per cent of India’s workforce translating into 80 million jobs.

However, MSMEs continue to face 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 per cent of the annual delayed payments amounting to a whopping ₹8.73 lakh crore were owed to micro and small suppliers. Interestingly, 72.4 per cent 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 per cent of the eligible enterprises, representing only 1.3 per cent of the delayed payments pool, using the MSME Samadhaan portal for formally recording delays. Lack of any tangible outcomes and high rejections have rendered it as a mere filing tool. The final recourse of going to court is plagued with issues such as being resource heavy, existence of power asymmetry and an already overburdened justice delivery 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 and Small Enterprise Facilitation Councils — MSEFCs. Unlocking ODR by leveraging data and technology is integral to addressing a part of the concern relating to delayed payments for suppliers in the MSME ecosystem.

The law requires the buyer to pay to the micro and small enterprises compound interest at monthly rests at 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.

ADR-like mechanism

Commonly ODR is 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 and machine learning 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.

The time is ripe for ODR to solve the issue of delayed payments that is crippling MSMEs. This can be achieved by a two-pronged approach. First, a dedicated supplier-side technology platform accessible 24x7 in multiple languages encompassing (i) a layered approach to establish communication and convey consequences to buyers to ensure increased awareness; (ii) automating processes and standardisation to ensure a streamlined process; and (iii) integrated reporting to concerned authorities to ensure increased recoveries, prompt payments, 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-friendl y and convenient.

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 for delayed payments but how soon can it be implemented.

Shah is the co-founder of Presolv360, an online dispute resolution company, and Sultania is part of the Strategy Team of the company

Related Topics