The FISME said as operational creditors, the MSMEs were not able to recover dues and the protection to that under the the MSMEs Development (MSMED) Act had been undermined.
"The current recovery process under the IBC is one-sided. The MSMEs are classified as operational creditors. They get nothing if their buyer undergoes CIRP. This is against the letter and spirit of the MSMED Act, which guarantees recovery of the dues along with interest," it said.
According to the FISME assessment, 25,000 MSMEs are affected and 75,000 more are likely to be affected. If a solution is found to repay their dues, the burden on the financial creditors would be minimal and decline to 1.18-1.33 per cent, it said, citing the June 30, 2019 IBBI data.
"After discussions with stakeholders, we propose that the payments due to MSMEs from corporate debtors before and during the CIRP process be included in the 'insolvency resolution process costs' as provided for under section 5(13) of the IBC read with regulation 31 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016," it said.
As per the FISME, recoveries of the financial creditors will remain unaffected as the dues of MSMEs would be treated as part of the insolvency process cost, while at the same time it would ensure substantial recoveries of dues for micro and small enterprises.
On the insolvency process of MSMEs under the IBC, it said partnership or proprietorship firms were excluded from its ambit and around 97 per cent MSMEs fell in that category, thereby not allowing their bankruptcy and insolvency proceedings in the NCLT.
"The IBC 2016 is a comprehensive legislation and provides for a framework for resolution of insolvency and bankruptcy for all types of entities. But the 'rules' have been framed for body corporates/companies only."
"Thus, partnership/proprietorship firms and individuals are excluded. As 97 per cent of MSMEs are partnership/proprietorship firms and even when they are registered as companies, because of involvement of their personal guarantees, the IBC Rules don't provide them any relief," the FISME said.
It has urged formation of a committee for framing rules for insolvency proceedings of partnership and proprietorship firms.
( With inputs from IANS )