This article is written by Kishita Gupta, a graduate from the Unitedworld School of Law, Karnavati University, Gandhinagar. The article discusses the provisions of the Micro, Small, and Medium Enterprises Development (MSME) Act of 2006 along with various judicial interpretations.
This article has been published by Sneha Mahawar.
India has one of the world’s fastest-developing economies. Small-scale industries have long been a top concern for the government because they constitute the foundation of the industrial sector of the nation’s economy. The micro, small, and medium enterprise sector accounts for 95% of all industrial facilities in India, 45% of the nation’s industrial employment, and 50% of the nation’s total produced exports. The micro, small, and medium enterprise sector offers the most chances for both employment and self-employment in the nation, second only to agriculture. There is significant room for future expansion and growth in the Indian small business sector. In actuality, no other economic sector can compare to the sector’s employment potential. This is where the Micro, Small, and Medium Enterprises Development (MSME) Act, 2006, comes into play. In this article, we shall be discussing all the factors relating to the statute along with its key provisions while also skimming through the latest developments that took place.
Scope and objective of the MSME Act
In terms of the nation’s industrial output, exports, and job opportunities, small-scale industries play a significant role in the Indian economy. On October 14, 1999, the government established the Ministry of Small-Scale Industries and Agro and Rural Industries as the nodal ministry for policy formulation, central sector programmes and schemes, and their implementation and related coordination to support the state’s efforts to promote and develop these industries in India. On June 9, 2001, the Ministries of Small-Scale Industries and Agro and Rural Industries were split into two independent Ministries, both the Ministry of Agro and Rural Industries and the Ministry of Small-Scale Industries
According to suggestions made by the western nations through the WTO, the Central Government chose to introduce the idea of small and medium companies into India instead of the term ‘small-sector.’ The Micro, Small, and Medium Enterprises Development Act of 2006, for example, offers the first legal framework to support the promotion and growth of MSMEs, which include both manufacturing and service companies.
On October 2, 2006, the Central Government passed the Micro, Small, and Medium Enterprises Development Act, 2006, with the intention of facilitating industrial establishments, regulating them, and removing them from bureaucracy and red tape. There was no all-encompassing legislation in place in India before this Act. Each state government has its own laws and regulations regarding the growth of the industrial sector.
Over 300 industrial groups, governmental organisations, and numerous stakeholders from all over India participated in a consultative process that resulted in the Micro, Small and Medium Enterprise Development Act, 2006. Many long-standing objectives of the government and stakeholders in the micro, small, and medium enterprise sector are achieved by the Act.
Key provisions of the MSME Act
Definition of MSME
The following two types of micro, small, and medium enterprises are used to classify them in compliance with the provisions of the Micro, Small, and Medium Enterprises Development Act, 2006.
These are the industries that produce goods for any of the sectors listed in the first schedule of the Industries (Development and Regulation) Act, 1951, or that use machinery and plants to add value to the finished product so that it has a unique identity, character, or use. Investment in plant and machinery is used to characterise manufacturing corporations, as mentioned below:
- Micro enterprise’s investment does not exceed 25 Lakh Rupees;
- The investments of small enterprises are more than 25 Lakh Rupees but do not exceed five crores;
- The investment for medium enterprises is more than Five crores but does not exceed ten crores.
Companies that provide or deliver services are referred to as service enterprises and are identified by their equipment investment.
- In micro-enterprises, the investment does not exceed ten lakh rupees.
- In small enterprises, the investment is more than ten lakh rupees but does not exceed two crore rupees.
- In medium enterprises, the investment is more than two crores but does not exceed five crores.
New criterion on definitions
To prepare the ground for the implementation of the upward adjustment in the definition and criteria of MSMEs in the nation, the Union Ministry of Micro, Small, and Medium Enterprises (M/o MSMEs) has issued a Gazette notification. The revised criteria and definition took effect on July 1st, 2020.
As we are aware, the MSME Development Act was established in 2006; thus, after 14 years, on May 13, 2020, through the Atmanirbhar Bharat package, an amendment was announced to the MSME definition. According to this notification, the definition of micro manufacturing and service units has been expanded to include investments of Rs. 1 crore and turnover of Rs. 5 crores. The small unit’s investment and turnover caps have been raised to Rs. 10 crore and Rs. 50 crore, respectively. Similar to this, the medium unit’s investment and turnover limits were raised to Rs. 20 crores. On June 1, 2020, the Indian Government decided to significantly increase the MSME definition. Now, medium-sized enterprises must invest 50 crore rupees and generate 250 crore rupees in revenue.
The MSMED Act of 2006 serves as the foundation for the current MSMEs’ defining criteria. For the production and service units, it was different. Financially speaking, it was also quite limited. The economy has changed significantly since then. Several arguments were made following the package’s announcement on May 13, 2020, arguing that the disclosed amendment is still out of step with current market and price conditions and should therefore be increased. In light of these representations, the Prime Minister made the decision to raise the limit for medium units even further. This has been done to make business easier to conduct, to provide an objective classification system, and to be realistic with time.
National Board for micro, small and medium enterprises
The Act creates the framework required to monitor and control the growth of India’s micro, small, and medium-sized enterprises. The Act makes clear the National Board for Micro, Small, and Medium Enterprises’ whole organisational structure and its composition. The Act is quite clear about the board’s responsibilities and long-term goals, which include managing cluster development, training entrepreneurs, building infrastructure, and increasing financial access. According to the Act, the board and advisory committees must have a diversified representation of interests from the government, business, finance, and civil society.
Section 3 of the MSME Act mentions the composition of the National Board. The Board shall consist of the following members:
- The ex-officio Chairperson of the Board shall be the Minister in charge of the Central Government Ministry or Department with administrative jurisdiction over Micro, Small and Medium Enterprises.
- The ex-officio Vice-Chairperson of the Board shall be the Minister of State or a Deputy Minister.
- Six state government ministers who oversee the administration of the micro, small, and medium enterprise departments.
- Two of the three members of Parliament must be chosen by the House of the People, and one must be chosen by the Council of States.
- The Administrator of a Union territory.
- The Secretary to the Government of India who oversees the administration of the micro, small, and medium enterprise departments.
- To represent the Ministries of the Central Government dealing with business and industry, finance, food processing industries, labour, and planning, the Government of India must appoint four secretaries.
- The ex-officio Board of Directors Chairman of the National Bank.
- The ex-officio chairman and managing director of the Small Industries Bank’s board of directors.
- The ex-officio chairman of the Indian Banks Association.
- An officer who is not below the rank of Executive Director who represents the Reserve Bank.
- Twenty individuals will represent the associations of small, medium-sized, and micro businesses where at least three persons must be from associations of women’s enterprises and associations of micro-enterprises.
- Three persons of eminence representing the fields of economics, industry and science and technology consisting of at least 1 woman.
- Two representatives of Central Trade Union Organisations.
- The Member-Secretary of the Board shall be one officer not below the rank of Joint Secretary to the Government of India.
However, these members are not permanent and can be removed from the board for the reasons mentioned in Section 4 of the MSME Act:
- If any person is now or ever has been deemed insolvent; or
- If any person is, or becomes, mentally unsound and a court has so declared; or
- If any person has been convicted of an offence that, in the eyes of the Central Government, includes moral turpitude; refuses to act or loses the ability to act as a member of the Board;
- If any person has, in the eyes of the Central Government, abused his authority as a Board member to the point where his continued membership on the Board would be against the interests of the general public.
Then Section 5 of the Act mentions the functions of the Board, such as the examination of factors affecting the promotion and development of MSMEs and further making recommendations on such matters as well. Further, the Board is required to make advice to the Central Government on the use of funds, as discussed under Section 12.
According to Sections 20 and 21 of the Micro, Small and Medium Enterprises Act of 2006, each State must establish a Micro and Small Enterprises Facilitation Council with a minimum of three and a maximum of five members, including the director of industries, the MSE Association, a bank, and individuals with specialised knowledge in business, finance, etc.
Measures for promotion, development and enhancement of competitiveness of micro, small and medium enterprises
Under Section 9 of the MSME Act, the Central Government may, from time to time, provide for technological advancement, marketing assistance, or infrastructure facilities, as well as the development of clusters of these businesses in order to strengthen their competitiveness and facilitate the promotion and development of micro, small, and medium-sized enterprises, particularly the micro and small enterprises.
Section 11 of the MSME Act mentions that to ensure a timely and smooth flow of credit to such enterprises, reduce the incidence of illness among them, and boost their competitiveness, the policies and practises with regard to credit to micro, small, and medium-sized enterprises shall be progressive and such as may be specified in the guidelines or instructions issued by the Reserve Bank from time to time.
The Central and state governments are given the authority to announce preference policies on the procurement of products and services produced and delivered by MSMEs under Section 11 of the MSME Act, 2006. In order to support and expand MSMEs, the Public Procurement Policy was made public under Section 11 of the MSMEs Act, 2006. Competitiveness, ethical purchasing procedures, and the execution of supplies in line with the system’s fair, equitable, competitive, transparent, and cost-effective requirements are the policy’s guiding principles.
Conflicts developed following the granting of a tender for the design, installation, and maintenance of firefighting and detection systems in Sterling and Wilson (P) Ltd. v. Union of India (2017). Therefore, the question that needed to be decided was whether “works contracts” would fall within the scope of the MSME Act, 2006. The Court described the key elements of the Policy for Micro and Small Enterprises Order, 2012, in detail while making its decision. Section 11 of the Act and Clause 3 of the Policy both allow for the purchase of “goods and services” made and offered by MSEs. Therefore, purchasing “goods and services” created and offered by MSEs is subject to the Act’s and the policy’s provisions. It is plainly evident from the answer to FAQ number 18 of the Policy, as observed by the Court, that the policy is only intended to be used for the purchase of products and services made or provided by MSEs. However, the Public Procurement Policy does not apply to traders. Work contracts, which are fundamental of a composite nature involving the supply of commodities as well as labour or other services, etc., would therefore not be subject to the Act’s restrictions.
Numerous courts, including the Allahabad High Court in Rahul Singh v. Union of India (2017), have recognised that the policy is relevant to MSMEs that offer “goods and services.” In the aforementioned case, the question that needed to be decided was whether the petitioner was eligible for a waiver of the earnest money requirement because it was an MSME and, as such, was subject to the Act’s rules as well as the exemption provided by the policy. The petitioner, being associated with an MSME, would have been eligible for benefits under the aforementioned Act and policy. However, since the tender in question was of a composite nature, i.e., a “works contract,” such contracts would not be covered by the aforementioned Act or the Policy. This observation pleased the High Court.
Delayed payments to micro and small enterprises
The MSMED Act specifies in Section 17 that the buyer must “pay the amount with interest thereon as required under Section 16” in exchange for any goods or services delivered by a provider. However, Section 18(1) states that “any party to a dispute may, with respect to any sum due under Section 17, make a referral to the Micro and Small Enterprises Facilitation Council” in the event that such payment obligations are not met.
In addition, Section 18 MSMED Act subsection (2) specifies that the Council shall, upon receiving a referral under Section 18(1), either undertake conciliation in the matter itself or request assistance from any institution or centre offering services of alternate conflict resolution for conciliation. In the event that these conciliation processes are unsuccessful, a procedure for conflict resolution through arbitration is then specified. Significantly, Section 18(3) of the MSMED Act makes it clear that, should arbitration proceedings be initiated, the provisions of the Arbitration and Conciliation Act, 1996 (Arbitration Act), apply to the disputes as if the arbitration were in pursuance of an arbitration agreement referred to in sub-section (1) of Section 7 of that Act.
It is noteworthy in this regard that the Hon’ble Calcutta High Court in the case of National Projects Construction Corporation Limited v. West Bengal State Micro and Small Enterprise Facilitation Council (2017) noted, among other things, that the Act of 2006 permits a party that is governed by it to apply to the Council established under the Act of 2006 to first mediate and then arbitrate disputes between it and the other parties. This was made in connection with the provisions under Section 18 of the MSMED Act.
In a similar circumstance, the Hon’ble High Court of Gujarat noted in Yamuna Cable Accessories Pvt. Ltd. v. Gujarat Chamber of Commerce and Industries (2018) that the respondent council is empowered to initiate the dispute for arbitration on its own or to refer it to any institution or centre offering alternative dispute resolution services for such arbitration if the conciliation conducted by the respondent council is unsuccessful and terminates without any settlement between the parties. Clearly, the failure or termination of a conciliation proceeding is what triggers arbitration under the MSMED Act after a dispute is referred to the Council.
However, despite the MSMED Act’s machinery for dispute resolution appearing to be perceptive and complete on the surface, disagreements frequently emerge regarding its applicability, particularly when a contract between a customer and a supplier has an arbitration clause. Notably, in such cases, arguments in support of arbitration in accordance with the terms of the contract are typically predicated on the idea that an arbitration clause would not be voidable solely because one of the parties to the contract meets the description of a supplier under the MSMED Act.
In fact, those in favour of contractual arbitration make an effort to make their case even stronger by asserting that because Sections 15 to 23 of the MSMED Act and the Arbitration Act do not conflict with one another, there is no reason why Section 24 of the MSMED Act should prevent the invocation or initiation of such arbitration.
The Bombay High Court in the case of Steel Authority of India Ltd. v. Micro, Small Enterprise Facilitation Council (2010) observed that after being persuaded by similar reasons, among other things, noted that there is no clause in the Act that nullifies or invalidates an agreement the parties made to arbitrate their dispute. Additionally, since Section 24 of the Act only supersedes things that are in conflict with Sections 15 to 23, it would not have the effect of invalidating an arbitration agreement. Since the overriding clause only applies to things that are inconsistent with it, there is no concern that an independent arbitration agreement will lose all of its force. Likewise, since both an arbitration conducted by the Council under Section 18 and an arbitration conducted under an individual clause are subject to the provisions of the Arbitration and Conciliation Act, 1996, there is no conflict between the two.
In a similar case, the Hon’ble Court held in Porwal Sales v. Flame Control Industries (2019), that the legislature’s intent was to prevent a party from using the aforementioned provision under the Arbitration Act, rejecting the argument that Section 18(4) of the MSME Act bars courts from hearing any application under Section 11 of the Arbitration Act.
While recognising the provisions under Section 18(3) of the MSMED Act and Section 43 of the Arbitration Act, the Hon’ble Apex Court in the M/s. Silpi Industries v. Kerala State Road Transport Corporation (2021) case further clarified that the Limitation Act of 1963‘s provisions would apply to the statutory arbitration under the MSMED Act. However, in light of the Hon’ble Apex Court’s ruling in the M/s. Silpi Industries case, it is settled as of this writing that by filing a memorandum under sub-section (1) of Section 8 of the MSME Act that, subsequent to entering into a contract and supplying goods and services, one cannot assume the legal status of being classified under the MSME Act, 2006, as an enterprise, to claim the benefit retroactively from the MSME Act, 2006.
No application to set aside any decree, award, or other order made by the Council itself, or by any institution or centre providing alternative dispute resolution services to which the Council refers shall be entertained by any court unless the appellant has deposited with it 75% of the amount in terms of the decree, award, or, as the case may be, the other order. This is stated in Section 19 of the Micro, Small, and Medium Enterprises Act of 2006.
In Snehadeep Structures (P) Ltd. v. Maharashtra Small Scale Industries Development Corpn. Ltd. (2019), Chatterjee, J., of the Supreme Court further reaffirmed the point by observing that the requirement of a pre-deposit of interest is introduced as a disincentive to prevent the buyers from using dilatory tactics to avoid paying the award that small-scale industry may have obtained, just as in cases of a decree or order. The legislature’s aim behind Section 7 presumably was to target purchasers who, in an effort to delay the inevitable occurrence of payment to the small-scale industry endeavour, filed legal challenges against the award/decree/order made against them. Such purchasers cannot be permitted to arbitrarily contest arbitral awards, particularly since the clause mandates a pre-deposit of 75% interest even when an appeal is lodged against an award as opposed to an order or decree.
According to Section 19, the court must direct that the pre-deposit amount be paid to the supplier under the terms it deems appropriate in the circumstances of the case, pending resolution of the application to set aside the decree, award, or order.
The terms that the court typically imposes are a directive to provide a bank guarantee for all or a portion of the money paid out of the pre-deposit. Despite anything to the contrary contained in any other law now in force, the provisions of Sections 15 to 23 shall be applicable.
Requirement to specify unpaid amount with interest in the annual statement of accounts
The MSMED Act also made it a requirement for buyers to include payments owed to suppliers in their audited financial accounts. Unpaid sums to suppliers must be disclosed in the buyer’s financial accounts under Section 22 of the Act. According to Section 27(2) of the MSMED Act, a violation of Section 22 constitutes a crime with a minimum mandatory fine of Rs. 10,000.
Under Section 405 of the Companies Act, 2013 (the “Companies Act”), the Specified Companies (Furnishing of Information on Payment to Micro and Small Enterprise Suppliers) Order, 2019 (the “MSME Order”), was published in January 2019. Every specified company was obliged by Rule 3 of the MSME Order to submit a biannual MSME Form 1 return containing information on payments owing to suppliers.
For any infringement of the MSME Order, further penalties were set down under Section 405 of the Companies Act. The MSME Order made sure that any errors or omissions in a company’s declarations would result in up to Rs. 3 lakh in fines or perhaps jail time for officers under the Companies Act. In essence, the MSME Order changed an offence that might only result in a fine (as was the case under Section 22 of the MSME Act) into one that might result in a prison sentence.
In addition to the aforementioned, it is important to take into account the impact of disclosing a debt in the financial statements from the standpoint of the consequences it may have under the Limitation Act. Most recently, the Mumbai bench of the National Company Law Tribunal in the case of TJSB Sahakari Bank Ltd. v. Unimetal Castings Ltd. (2019) maintained that the inclusion of a debtor’s amount in the financial statements constitutes an “acknowledgement of debt.” The inclusion of debt in a buyer’s financial statements suggests that with each act of disclosure, the buyer “acknowledges the obligation” owing to a supplier, giving birth to a new cause of action for the supplier and lengthening the statute of limitations. Thus, the act of disclosure would prevent a corporate buyer from claiming that a debt owed to a supplier had been time-barred.
This results in a situation wherein the buyer could receive a prison sentence for failing to disclose while doing so would keep the claims that could otherwise have expired from becoming time-barred.
The MSME Act represents a turning point in the growth of the micro, small, and medium-sized business sector in India. It is the newest step the government has taken to support small-scale industries. The Act imposes obligations on those who purchase goods and services from micro, small, and medium-sized businesses in addition to providing specific benefits for these businesses. One can say that a very vibrant and effective Act is the Micro, Small, and Medium Enterprise Development Act, 2006. It has offered micro and small enterprises unprecedented opportunities to expand and thrive like never before.
Frequently Asked Questions (FAQs)
What are the salient features of the MSME Act, 2006?
The MSME Act, 2006 has the following salient features:
- Creation of a legal national board for micro, small, and medium-sized businesses;
- Submitting a memo;
- Protective, growth, and competitiveness-enhancing measures for micro, small, and medium-sized businesses;
- Credit resources;
- Restrictions on payments to micro, small, and medium-sized businesses that are delayed.
What was the objective behind the formation of the MSME Act of 2006?
The following objectives made up the framework for the Micro, Small, and Medium Enterprises Development Act:
- To aid in the development and promotion of micro, small, and medium-sized businesses;
- Increasing the competitiveness of small, medium-sized, and microbusinesses;
- To focus on issues concerning micro, small, and medium-sized businesses;
- To broaden the scope of gains from undertakings by small-scale industries and supporting industries to micro, small, and medium-sized businesses.
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