How do we keep paying wages, say many IT/ITES CEO’s
This morning, I started talking to my friends in the IT/ITES industry. These are CEOs and CFOs. The mood was sombre. I could understand the palpable sense of uncertainty and grief. I can say for sure, be patient, the prosperity will come though. The IT/ITeS industry contributes about 8% to GDP of the country. It contributes $191 billion to the GDP, with 44 lakh employees. The industry in general and more specifically the smaller and medium enterprises, have competed in paying close to what the large players pay and thus have contributed to the well-being of people employed.
In this context, enterprises, big and small, may well find it difficult and, in some cases, impossible to comply with the government’s advisory/directive; that workers’ wages must continue to be paid through the unfolding economic crisis, by invoking sec 10(2) of Disaster Management Act 2005. There is a doubt in the industry, whether such orders are in consonance with the Disaster Management Act, Epidemic Act or Industrial Disputes Act on whether wages need to be paid during absenteeism. Sec 10(2) of Disaster Management Act 2005 talks of implementing the national plan. No reference is made of it overriding other statutes, I am not a lawyer though. Further, laws like the Minimum wages Act &, Shops and Establishment Act have enshrined the power to remove employee grievances in hands of the appropriate authorities, which can be used. The current situation is a Force De Majeure situation; very abnormal. How will you serve good tea if either there is no tea in the kettle, or the tea is of thin and poor quality? Such is the comparison.“We need much more government help, is the industry's consistent message”. NASSCOM would do well to take up these issues, as they normally do...
The moot question now is in terms of cash flow management. How do IT/ITeS enterprises continue to pay while their payments, which may be delayed, or future looks uncertain. Most clients are in Europe, which is badly affected. Indian clients may defer payment too for the same reason. Some of the clients may go for across the board cuts from employee salaries in their geographies, vendor cuts etc. Many industry players clearly say that the new prospects pipeline for 2020, is certainly washed out. Customers will make decisions only if they have the pain. In most IT/ITeS situations, revenue comes out of a dire problem. Past trends indicate delayed decisions by clients in such an atmosphere.
Most of IT/ITeS are contemplating or debating the decision or thinking to do the following:
- Defer Salaries of senior white collared officers/personnel, executives March 2020 by a month
- Cut/Defer top level salaries immediately by a large chunk or in a graded measure
- Stop Increments for 2020 and some of them are talking of decrements or reduction
- Retrenchment as the last resort.
It is a question of survival now, both for companies and employees of small and medium IT/ITes and after a while, conservation for large firms as well.
What is the solution?
Since problems that each organisation faces would be unique to the organisation, it is difficult to have a macro level solution at an industry level, however there is a bare minimum common to do. For starters employee cost, rentals, electricity and training are the largest costs for IT/ITeS companies.
Here is what we can do.
- Allow all enterprises to part pay wages and pay the balance on a
Minimum Wages Act, Shops and Establishment Act, Industrial Disputes Act and other labour laws may be amended if required, to allow all enterprises to part pay wages and pay the balance on a deferred basis. EMI deferment has already been allowed on application by the banks. Thus, there is no pressure on employees on account of EMI at least for the next two months. This could be extended for four months or even a year. This gives cash flow since EMI will not be paid after the ad-hoc moratorium but will be added to tenor or period. EMI forms about 30% to 50% of IT employee wages. The MHA order of March 29th, 2020, rental for one month can also be deferred. This order in full or part could be extended. To the extent 50% of the EMI/rent deferred, the employer may defer payment to senior employees, by mutual consent perhaps, for a period. As an incentive, an attractive interest rate between bank FD rates of various tenors and overdraft rates charged by the bank, can be paid to senior or deferring employees, who are willing to go beyond to help the situation. This can partly finance the wages to a sensitive class of employees. To that extent, minimum wages act, shops & establishment act, company law provisions for deposit taking also need to be relaxed for salary deferment and deposit taking. This can be done by way of orders, circulars and clarification very quickly. Further IT departments also need to clarify that this will be allowed as expenses. All this needs to be done quick.
- Permit deferred tax payments
Can the CBDT department allow deferral of about 20% of the tax payable of the current year, as a secured loan for two years for companies under Rs.500 crores of turnover, at an interest rate of 12.p.a? This is close to what MSME pays banks for working capital facilities. Same with GST authorities? Not long ago for MSME enterprises, you could take a loan against sales tax dues. This will not affect the current account deficit as the tax will be accrued and accounted for. It will stand as receivable. All tax liabilities are secured and can be recovered by way of refunds etc.
This will also be a good indirect stimulus for the companies, who would be able to utilise the cash for operating expenses and working capital requirements.
- Step up bank credit
IT/ITeS companies, are generally fairly underleveraged and have immovable and receivables. Based on these collaterals can the banks extend ad hoc working capital facilities or PCFC credit at nominal terms? Some banks have to learn to assess potential borrowers that contribute to 8% of the GDP. Today, the collectibles period for IT/ ITES companies is under reasonable control. However, the situation being what it is, there is every likelihood of prime clients too claiming extended credit periods. Under such situations, it is necessary to keep the operations afloat and the industry has no option but to depend on the banking sector to support it at this crucial juncture. Funnily enough banks are saying that credit offtake is not good, here is an opportunity to lend. Section 13 of the Disaster Management Act also provides for fresh grant of loans or relief on loans repayment. Thus, under all this additional/new credit can be provided for relief.
- Lease rentals & electricity
Lease rentals and electricity are the next big expenses. With mutual consent and upon advice from the government like the 29th March order of MHA, an IT/ITeS company may pay 50% and rest as deferred with or without nominal interest. This can be done also by enforcing the Force de Majeure clause. However commercial negotiations are better. As far as electricity is concerned, can discomms extend grace payment period to the extent of at least 50%?.
- Recruitment, training and skill development
Recruitment, training and skill development efforts is a cost consuming affair for an IT company. It is a continuing exercise. Not sure how many of us know; The Ministry of Labour & Employment has a website called National Career portal. This is a job portal where one can post jobs and select candidates. It works quite well. Certainly, no costs of a job portal and recruitment expenses. I have tried it and it seems quite good. On the very same website there are skill development programs which are very reasonably priced. It is an extensive portal which can help small and medium IT/ITeS companies spot talent. The budgetary allocation for skill development this year is in the region of Rs.3,000 crores, which we must try and take benefit of.
If this is done lakhs of jobs and the IT industry as a whole, will survive this situation without much damage. The stakeholders cannot be extreme in thinking and not willing to work this together. This is an abnormal situation and calls for abnormal acts. Our aspirational attitude needs to be shed for the moment, we need to work harder, be cooperative, be frugal, optimise and then we will see the sunshine not too far away!