Online dispute resolution for MSMEs soon, govt to start training officials

New Delhi: The government is set to digitize dispute resolution for small businesses, according to two people aware of the development, aiming to improve their ease of doing business and resolve rows over delayed payments.

An online dispute resolution (ODR) platform for smaller enterprises, to be launched soon by the Union MSME (micro, small and medium enterprises) ministry, is in its final stages of development. Once completed, the government will deploy it for a pilot, the people said.

“The ministry is about to undertake the massive job of training officials at MSEFCs to use the ODR portal before it goes live,” said one of the people mentioned above, requesting anonymity.

MSEFC stands for ‘micro and small enterprises facilitation councils’, which will use the new ODR platform. Traditionally, MSEFCs have been used by small businesses to resolve disputes, especially those related to delayed payments. 

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There are MSEFCs in every state, but in limited locations — often in state capitals – making it difficult for small businesses in the hinterlands to lodge a complaint or take legal action against defaulters.

Even businesses that have approached MSEFCs complain about arbitral awards being constantly challenged, and the dispute resolution process itself taking too long.

Pending disputes

Mint reported in July 2024 that the government was considering empowering MSEFCs to fast-track the resolution of delayed payment disputes, as MSMEs faced multiple issues including a lack of expertise among MSEFCs in dealing with out-of-court dispute resolution processes such as arbitration and mediation.

That, in part, is also because MSEFCs are overburdened, with over 42,000 cases pending in these councils across India, as per the government’s MSME Samadhaan portal. 

Of the cases that have been disposed of, the facilitation councils have managed to secure only a fraction of the money claimed by small businesses. 

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Of the ₹28,398 crore payable to MSMEs from 92,794 cases filed, MSEFCs have managed to resolve only 50,507 disputes worth about ₹8,740 crore, as per Samadhaan portal data, as of 12 March.

MSME disputes assume importance as small businesses are one of the most important aggregators of the economy. Over 58 million MSMEs contribute to about a third of the country’s gross value added every year. 

Between April 2023 and May 2024, MSMEs accounted for over 45% of Indian exports. MSMEs employed over 260 million people as of 12 March, as per the government’s Udyam portal, making up a third of the country’s total workforce.

The challenges

Currently, the Samadhaan portal acts as a place where MSMEs can only file and monitor progress of complaints digitally. But the portal does not allow digital or virtual dispute resolution.

ODR platforms can be the quick-fix for these issues, according to domain experts, as they can allow MSMEs to participate in arbitrations or medications virtually.

The demand for ODR services arose during the pandemic, and now several private Indian firms provide such services.

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Mumbai-based Presolv360, for instance, caters to delayed payment disputes raised by MSMEs, among other clients. The lack of expertise in MSEFCs and the fact that they are overburdened creates roadblocks in the dispute resolution process for MSMEs, said Krunal Modi, founding member and manager, Presolv360. 

The law has given MSEFCs the power to conduct arbitrations and conciliations for smaller businesses, but the awards passed by these councils are routinely set aside by the court, due to a lack of adherence to proper legal procedure, he said. “This is caused majorly due to lack of experience among officials of the MSEFCs in conducting conciliation and arbitration proceedings,” said Modi, highlighting the need for training of officials.

Notably, this is not the first time the Union government has chosen to use an ODR platform for quick and easy resolution of domain-specific disputes. Market regulator Sebi also launched its own ODR platform in July 2023.

What really makes an MSME ODR platform different is the sheer volume of disputes that it will be able to facilitate. With nearly 61 million MSMEs in the country supplying their products and services to large businesses in every sector of the economy, disputes related to delayed payments are ubiquitous in the MSME ecosystem.

Virtual dispute resolution — or arbitration and mediation using electronic means — has also been part of the government’s recent reforms in the Arbitration and Conciliation Act, 1996. The draft amendment altered the definition of arbitration itself to include dispute resolution by electronic means.

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Last month, the ministries of MSME, corporate affairs, and law and justice also started discussions about simplifying the life of smaller businesses, by making registrations, closures, as well as mergers and acquisitions easier, Mint reported on 20 January.

Queries mailed to the union ministry of micro, small & medium enterprises remained unanswered till press time.