Reviving the Prepack Scheme: A Path Forward for MSMEs

Launched in the throes of the COVID-19 pandemic, the prepackaged insolvency resolution process (prepack scheme) was designed as a lifeline for micro, small, and medium enterprises (MSMEs) teetering on the brink of bankruptcy. However, three years on, the scheme has yet to gain the momentum initially anticipated. Despite its promise of a fast-track resolution process, the uptake remains sluggish, and recovery rates trail behind those achieved through the conventional corporate insolvency resolution process (CIRP).

The prepack scheme's tepid reception can be attributed to several factors. A significant hurdle has been the lack of awareness and understanding among MSMEs and their creditors about the scheme's benefits and mechanisms. Unlike the more publicized CIRP, the prepack process has remained somewhat obscure, limiting its reach and impact.

Experts argue that the prepack process, intended to be a more informal and flexible alternative, has been hampered by stringent requirements that paradoxically make it more cumbersome. The need for creditor and shareholder approval before initiating the process has added layers of complexity, deterring potential applicants. In its current form, the process requires extensive coordination and agreement among stakeholders, which can be challenging to achieve.

The statistics reflect these challenges starkly. According to recent data, only ten applications have been filed under the prepack scheme, with half of these resulting in successful resolutions. While this might seem promising, the recovery rate for creditors has averaged around 25%, falling short of the approximately 32% recovery under the CIRP.

Industry experts believe that a more streamlined approach could rejuvenate the prepack scheme. Simplifying the initiation process, perhaps by removing some of the preconditions such as the declaration of deferred transactions, could make it more accessible. Additionally, once a prepack process is initiated, it should ideally operate independently of National Company Law Tribunal (NCLT) hearings to expedite resolutions.

Moreover, there's a pressing need for a concerted awareness campaign. Many MSMEs and financial creditors remain uninformed about the structure and benefits of the prepackaged insolvency process. Increasing publicity and education around the scheme could encourage more enterprises to consider it as a viable option for debt resolution.

Another aspect to consider is the incentive structure for lenders. Currently, there's little motivation for lenders to pursue the prepack route, as their focus often remains on immediate recovery rather than long-term resolution. Adjusting this focus could help align the interests of all parties involved.

As the market watches and waits, the onus is on regulatory bodies and industry leaders to address these implementation issues. With the right adjustments, the prepack scheme has the potential to become a robust tool for MSMEs, providing them with a faster, more efficient path to resolution and recovery. The future of the prepack scheme hinges on making it simpler, more flexible, and better understood—transforming it from a well-intentioned concept into a practical solution that genuinely benefits India's MSMEs.