Budget 2025: Relief for a larger segment of Indian promoters under the insolvency code

India’s insolvency ecosystem has long advocated for a Pre-packaged Insolvency Resolution Process (Prepacks) for all corporates. In her budget speech, the Finance Minister has, perhaps inadvertently, taken a partial step forward on the subject.

More than 99% of the Indian companies have a turnover which is less than ₹500 crores. In this context, the recent reclassification of Micro, Small, and Medium Enterprises (MSMEs), through enhanced turnover and investment limits, now brings a large number of corporates under the ambit of prepacks. Under the current insolvency framework, MSMEs have the option to pursue prepacks.

At first glance, an investment limit of ₹125 crores may seem modest. However, it is important to note that this figure includes only the value of plant, machinery, and equipment, while excluding land, buildings, furniture, fixtures, pollution control equipment, and research and development assets. Given that the land and buildings constitute a significant portion of asset base in the manufacturing industries the total investment outlay is bound to be far greater than the aforesaid ₹125 crores.

This amendment not only enables MSMEs to achieve greater economies of scale, adopt advanced technologies, and improve access to capital, as articulated by the Finance Minister, but also indirectly provides much-needed succour to their promoters in the event of insolvency.

MSMEs undergoing Corporate Insolvency Resolution Process (CIRP) benefit from two key exemptions under Section 29A, which defines eligibility criteria for resolution applicants. These exemptions allow an individual or entity to submit a resolution plan even if: (1) The account has been classified as a Non-Performing Asset (NPA). (2) A creditor of corporate under insolvency has invoked a guarantee executed by the applicant.

Despite its potential, prepacks have struggled to gain traction. However, this could change if, as the Finance Minister remarked in a different context, the principle of "trust first, scrutinize later" is incorporated in the process. Currently, one of the reasons for low interest in Prepacks is the requirement for corporate debtors to declare probable avoidance transactions, which must then be independently verified by the resolution professional.

The enhanced turnover and investment limit of MSMEs introduces greater flexibility and support for MSME stakeholders, ensuring a more inclusive and practical approach to insolvency resolution.

(The author is an INSOL Fellow & Restructuring Adviser)