Detailed Overview of MSMED Act, 2006

Introduction

The Micro, Small and Medium Enterprises Development Act, 2006, also known as the MSMED Act, 2006(hereinafter MSMED Act, 2006), is one of the pioneering acts that provides a mechanism for the development of micro small, and medium industries and ensures their growth and sustenance. This Act is a pioneer that has been trivial in ensuring an ecosystem establishment that helps in the growth of the MSMEs. The objective of the act is to promote, develop, and enhance the competitiveness of the MSMEs in India.

What are MSMEs?

MSMEs or Micro, Small and Medium Enterprises may be defined as the business units that are determined by the amount of investment done in them and their annual turnover of the same. As per the MSMED Act, 2006, the units are classified as follows as per Section 7 of the Act where-

Section 7(1)(a) of the MSMED Act,2006 defines enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule of Industries (Development and Regulation) Act,1951 as:

• Micro Enterprise where the investment in plant and machinery does not exceed 25 lakh rupees
• Small Enterprise where the investment in plant and machinery is more than 25 lakh rupees but less than 5 crore rupees
• Medium enterprise where investment in plant and machinery is more than 2 crores and less than 5 crores.

Section 7(1)(b) of the MSMED Act, 2006 defines enterprises which are engaged in providing or rendering services where-

• Micro enterprise where investment in equipment is less than 10 lakhs
• Small enterprise where investment in equipment is more than 10 lakhs but less than 2 crores
• Medium enterprise where investment in equipment is more than 2 crores but less than 5 crores

However, as per a Gazette Notification dated 1 June 2020, there was a new classification of industries as per Section 7(1) of the act where-

• Micro Enterprise where investment in Plant and Machinery is less than rupees 1 crore and turnover is less than rupees 5 crores.
• Small Enterprise where investment in Plant and Machinery is less than rupees 10 crores and turnover does not exceed rupees 50 crores.
• Medium Enterprise where investment in Plant and Machinery is less than rupees 50 crores and turnover does not exceed more than rupees 250 crores.

More recently, the Union Budget of 2025-26 the new classification of MSMEs was done where-

• Micro Enterprise where investment in Plant and Machinery is less than rupees 2.5 crore and turnover is less than rupees 10 crores.
• Small Enterprise where investment in Plant and Machinery is less than rupees 25 crores and turnover does not exceed rupees 100 crores.
• Medium Enterprise where investment in Plant and Machinery is less than rupees 125 crores and turnover does not exceed more than rupees 500 crores.

Micro and Small enterprises are referred to as suppliers as per Section 2(n) of the Act when they have filed a memorandum with the authority referred to the Section 8(1) of the Act.

What are enterprises?

Enterprise as per Section 2(e) of the MSMED Act, 2006 is defined as those undertakings or business concerns that are engaged in the production of goods in any manner, in any industry as mentioned in the First Schedule to the Industries (Development and Regulation) Act, 1951, or any business concern engaged in rendering services.

Objectives

The object of the act is to develop the industrial landscape in India and provide a mechanism for dispute redressal for delayed payments for the MSMEs while ensuring a speedy redressal of the disputes by following a mechanism for the same.

Functions of MSMED Act-

• Creation of an Atmosphere that helps in the Growth of MSMEs- One of the basic features of the MSMED Act involves the creation of measures for the development of MSMEs and their development and enhancement by providing an ambit under Chapter IV of the Act. The ambit of measures for promotion being taken by the central government to enhance the competitiveness of MSMEs through promotion and development is given under section 9 of the act.
• Credit Facilities for MSMEs-Section 10 provides for credit facilities for minimizing incidents of sickness and enhancing the competitiveness of the enterprises. There are also facilities of procurement preference where the facilities of development and promotion of MSMEs would be done by notifications from central or state government where they would introduce preference in respect of procuring goods and services produced by MSMEs. The funds are given, administered and utilize the funds given as the manner prescribed.
• Provisions to Protect MSMEs from delayed Payments- Chapter V of the MSMED Act provides for provisions that protect the Micro and Small Enterprises or Suppliers from delayed payments to ensure their financial security.
• National Board for MSMEs- Chapter II of the MSMED Act provides for the establishment of a National Board for Micro, Small and Medium Enterprises as defined under Section 2(c) of the Act. The functions of the board involve the examination of factors which are affecting the development of MSMEs in India and review the policies in order to facilitate the promotion and development and Enhancement of competitiveness of the MSMEs. The board also has the function of making recommendations for the improvement of the MSMEs and advising the Central Government on the usage of funds constituted under Section 12 of the MSMED Act.

What is the process of Establishment of MSMEs?

The provision for the Establishment for MSMEs is provided under Section 8 of the MSMED Act, 2006 where the person who intends to establish a Micro, or small or medium enterprise shall file the memorandum with any authority specified by the state government or the central government. The MSMEs established before the commencement of the MSMED act are required to file the memorandum within 180 days of the commencement of the Act.

As per the Notification S.O. 2119(E) dated 26th June 2020 the government of India using its powers under Section 8(2) read with Section 8(3) of the Act established, ‘Udyam’ to facilitate the registration of the MSMEs.

The MSMEs that fall under the qualifying criteria of the MSMEs could register themselves through the Udyam portal. The registration of MSMEs in the Udyam Portal is optional but in order to avail the benefits which include eligibility to various government schemes, subsidies, lending, and credit facilities.

The important points which are to be kept in mind while applying for registration at udyam portal are as follows-

• MSME Registration is free, paperless and based on self- declaration
• MSME registration process is fully online, paperless and based on self-declaration.
• No documents or proof are required to be uploaded for registering an MSME.
• Only Adhaar Number will be enough for registration.
• PAN & GST linked details on investment and turnover of enterprises will be taken automatically from Government data bases.
• The online system will be fully integrated with Income Tax and GSTIN systems.
• Having PAN and GSTIN (As per applicability of CGST Act 2017 and as notified by the ministry of MSME vide S.O. 1055(E) dated 05th March 2021 is required for Udyam Registration.
• Those who have EM-II or UAM registration or any other registration issued by any authority under the Ministry of MSME, will have to re-register themselves.
• No enterprise shall file more than one Udyam Registration. However, any number of activities including manufacturing or service or both may be specified or added in one Registration.

Effect of Registration under MSMED Act, 2006

As per the case of M/s. Silpi Industries etc. vs Kerala State Road Transport Corporation & Anr.,[1] the registration obtained is said to be prospective and the supplier could claim benefits of the act post-registration. The case also held that the registration cannot operate retrospectively because any other interpretation would lead to arbitrariness.

Liabilities of Buyer in Case of Delayed Payment

Chapter V of the Act talks about the process of payment in case of delayed payments to Micro and Small Enterprises.

Section 15 of the Act provides for the liability of the buyer in case of defaults in Payments where the buyer failed to make payment on the date agreed by the supplier and buyer or when the goods have been delivered to the buyer. The payment must be made within 45 days from the day of acceptance after delivery of goods or deemed acceptance.

Section 16 provides the date from which the interest will be calculated and the rate at which interest must be paid where the buyer is liable to pay compound interest every month where the principal amount is calculated at the end of every month. The rate of interest would be three times the bank rate notified by the Reserve Bank of India.

Section 17 of the act provides for the recovery of the amount where the buyer is liable to pay the amount with interest with the supplier.

MSMED Act ensures the timely payment to the supplier and protecting the interests of supplier by ensuring timely payment of dues with strict provisions.

Process of Dispute Resolution under MSMED Act, 2006

Section 18 of the MSMED Act, 2006 provides for the dispute resolution where the reference is made to the Micro and Small Enterprises Facilitation Council. The process is as follows-

• Section 18(1) tells that any party to a dispute concerning amount under Section 17 of the Act shall refer the Micro and Small Enterprises Facilitation Council, as defined under Section 21 of the Act.
• Section 18(2) defines the power of the council to conduct conciliation proceedings where the Facilitation Council after receiving the reference under Section 18(1) shall conduct conciliation where the provisions under Section 65-81 of the Arbitration and Conciliation Act, 1996 shall apply to the dispute under MSMED Act.
• Section 18(3) provides the situation where the conciliation proceedings are unsuccessful without any settlement between the parties, the process of arbitration shall be taken up by the council and the provisions of Arbitration and Conciliation Act,1996 shall apply as if Arbitration was in pursuance of an arbitration agreement.

Section 24 of the act provides for an overriding effect of the MSMED Act,  2006 sections 15-23 over other laws in force.

The case of Shanti Conductors Pvt. Ltd. & Anr. etc. v. Assam State Electricity Board & Ors.[2] held that any enterprise could not become a micro or small enterprise by submitting a memorandum to obtain registration after entering into a contract of supply.

The case of Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (Unit 2) & Anr.,[3]observed the powers of the Facilitation Council to act as an Arbitral Tribunal under the MSMED Act, 2006.

Challenges for the Medium Enterprises

If we observe the provisions of the MSMED Act, 2006 the definition of supplier under Section 2(n) of the act does not include medium enterprises where the medium enterprises don’t have the power to be a part of the facilitation council proceedings to get a speedy redressal of the disputes.

Conclusion

After analyzing the provisions of the MSMED Act, 2006 we observe that the Act is a litigation which is beneficial for the industrial growth in India where the industrial progress as well as development and promotion of the industries while also increasing their competitiveness is an important function performed by this act. The Act has opened various ambits for the small industries to get themselves registered under the Udyam portal and ensure various government schemes and benefits for themselves where industrial growth is ensured.

The provision of liabilities of buyers in case of delay in payments is an important step to ensure timely payment of dues to the Micro and Small industries who are considered as suppliers for the act and the provision of Facilitation Council in the act provides an important grievance redressal mechanism for the smaller industries who lack the necessary provisions and the fact that the buyer is bound to pay the amount with interest is a positive legislation which is crucial for the industrial development in India.

The grievance redressal process in the MSMED Act, 2006 provides speedy redressal to the Micro and Small industries which gives them an incentive to continue their business while also providing them with security and assurance to continue with their business while ensuring that the small businesses are not exploited by the bigger business who buy the goods from the small businesses and don’t pay their dues on time.

The MSMED Act, 2006, therefore could be said as an important legislation in a developing country like India where the industries are growing and this act provides incentives to those small-scale industries that lack financial strength to pursue legal discourse and get their disputes resolved.

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This article is written by Suyash Shukla

Edited and Published by Jeet Sinha

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[1] CIVIL APPEAL NOS.1570-1578 OF 2021.

[2] Shanti Conductors Pvt. Ltd. & Anr. etc. v. Assam State Electricity Board & Ors. etc. (2019) 19 SCC 529.

[3] Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (Unit 2) & Anr. 2022 Livelaw SC 893.