This article is written by Vipul Kumar, pursuing a Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho.
This article has been published by Shoronya Banerjee.
Table of Contents
Considering the sheer size of the small enterprises based in India, Micro, Small, and Medium Enterprises (MSMEs) are the engines of the country’s economy. There are significant numbers of MSMEs in India; the number may be around 6.3 crores throughout the country as per the MSME ministry as of November 26, 2021.
The problems MSMEs face regularly are running out of money, poor technology adoption, labour issues, lack of collateral, and overall difficulties in doing business. India started celebrating Small Industry Day on August 30 every year to encourage small businesses around the country, which recognises the contribution of small-scale units to the economy and promotes their expansion. Some of the entrepreneur’s and industry experts’ opinions that due to lack of knowledge and not being willing to take more risks are holding back MSMEs from transforming from small to big. India’s MSME sector contributes over 33% to the nation’s GDP and over 45% to its manufacturing output. Furthermore, MSMEs comprise over 40% of India’s total exports, which is why they are considered the backbone of the country. Although MSMEs continue to face major challenges, direct guidance and handholding concerning different government processes and regulations could help businesses accelerate their growth. MSME promoters are rarely familiar with rules or terms and conditions and due to that a small mistake can cost them heavy penalties. The role of legal professionals becomes very crucial for entrepreneurs since they can help them comply with the law and take advantage of opportunities provided by the government through various schemes.
What is MSME?
MSME refers to Micro, Small, and Medium Enterprises, which were introduced by the Government of India by the Micro, Small, and Medium Enterprises Development Act, 2006. MSME is initiated and managed under the Ministry of MSME (MoMSME) and is an entity engaged in the production, manufacture, processing, and preservation of goods and commodities.
New MSME classification
The government notified a new rule that removes the distinction between the manufacturing and services enterprises by making the investment amount and annual turnover similar for enterprises engaged in both sectors.
|MSME – Merged Criteria: Investment and Annual Turnover
|Small Enterprise (SMEs)
|Medium Enterprise (MEs)
|Manufacturing & Services Sector, Both
|Investment less than Rs. 1 crore turnover less than Rs. 5 crore
|Investment less than Rs. 10 crore turnover up to Rs. 50 crore
|Investment is less than Rs. 50 crore turnover up to Rs. 250 crore
The definition of MSME is introduced in ‘Aatm Nirbhar Bharat Abhiyan‘ which is also known as the Self-reliant India Scheme 2020 by the Government of India.
The following are the key takeaways of the Aatm Nirbhar Bharat Abhiyan Scheme
- The government provides collateral-free loans to MSMEs.
- Unsecured loans up to Rs. 1 crore.
- Secured loans of up to Rs. 500 crore (lease rental discounting).
- The moratorium period offered is 12 months and can exceed as per the bank’s policies.
- Manufacturing and Service MSMEs shall be considered as the same entities.
- Repayment tenure up to 60 months.
- 100% credit guarantee, for several loan schemes.
- Approx. 45 lakh MSMEs to benefit from Rs 3 lakh crore loans, as per MoMSME.
What role does the MSMEs play in the economy?
As per the NITI Aayog reports the MSME sector is considered the backbone of the Indian economy that has contributed substantially to the socio-economic development of the nation. These enterprises have always played a vital role in the Indian economy. The 6.3 crores of MSMEs in India contribute 30% of the nominal GDP of the country and employ a large segment of the population, particularly the non-formal sector. The share of the sector in manufacturing output is 33%. Around 50% of all MSMEs operate in rural areas, employing 45% of the workforce. In this sector, about 97% of all employment is in the micro-segment and that plays a crucial help to the livelihood of nearly 110 million people.
What types of problems the MSMEs sectors are facing?
Small businesses face both costs and time constraints that result in complying with a bundle of regulations obtaining and maintaining innumerable licenses, registrations, approvals, and reporting requirements. A lack of proper knowledge frequently results in enterprises being fined and penalized, diverting management’s time and resources to resolve these disputes. SME and MSMEs intellectual property (IP) arising out of indigenous innovations/inventions has long been a grey area.
For the MSMEs, the most worrisome aspects are legal recourse and technology. These enterprises usually do not have optimum technologies exposure and legal help(due to their nature and scale of business) which results in these MSMEs failing to contend effectively with the big market players.
How can lawyers help MSMEs and SMEs?
Lawyers should go the extra mile to assist MSMEs not only in their field of expertise but also in other areas such as technical and operational challenges. These enterprises face the urgency and complexity of reopening their businesses and lawyers can help them to turn whopping challenges into meaningful change. With the help from lawyers, the MSMEs’ can freely drive their business and that can help business owners navigate the challenge they were facing in the operation. Lawyers can guide them to follow the standard procedures according to the law and ensure compliance with the government. Lawyers should also help the MSMEs’ to overcome the challenges in the restoration of their business.
The advice and support of a lawyer will help MSMEs or SMEs entrepreneurs to take critical decisions that will influence the lives of millions of people and shape society for the future. Lawyers have the power and potential that can create a mechanism that may help businesses and enterprises to make conceivable growth and move forward as they are the support system for business and enterprise.
Factors that may cause the failure of businesses
Many businesses fail because of a combination of these four factors.
1. Poor business planning,
2. Poor financial planning,
3. Poor marketing,
4. Poor management.
Lawyers work closely with business owners, entrepreneurs, or start-ups that need legal as well as professional advice or solutions, that may help them to overcome their problems and drive ahead.
Why do many MSMEs fail to reach out to lawyers?
Lack of funds and poor financial condition are some of the main reasons that MSMEs fail to reach out to a lawyer. Often business owners are unaware of the law, and even if they are aware, they don’t know how to seek legal assistance. They fear the process is time-consuming and lawsuits in India drag out for years, which makes it difficult for them to pursue the case due to financial constraints and paucity of time. Entrepreneurs do not want to get involved in court cases or legal matters because they believe that it will harm their business.
The areas where lawyers can help MSMEs and SMEs
Lawyers can help entrepreneurs/business establishments to get registered under the MSMED Act, 2006, and advise them about MSME investment, benefits, and compliance-related matters. The MSME registration is free on the Udyam portal. They should inform the entrepreneurs/business establishments about the same. When the online MSME registration form has been successfully submitted to the portal then the reference number of registrations is generated. If the registration form submitted on the portal is verified, the Ministry of MSME will send the Udyam Registration Certificate or MSME Certificate to the entrepreneur’s registered email address.
When the company gets a Udyam Registration Certificate, after that they can update or modify their data if they find any error or due to a change in circumstance that creates a need to update or modify the data. In this case, lawyers may facilitate them with proper advice that helps in the update and modification of the data on the portal.
Advisory is the core expertise of the lawyer which comes from experience, knowledge, application of mind, and situation handling mindset. A good advisor may lead a business to reach great heights.
4. Drafting of contracts
Drafting is the art of presenting thoughts in words. It is a tool, writing out the terms and details of the contract, to outline the legal obligations of the two parties. A lawyer can draft a simple, effective, and understandable contract/agreement that defines the respective duties of the parties to avoid future conflict.
5. To get payment without delay
The Ministry of Micro, Small, and Medium Enterprise lends a helping hand to such enterprises by giving them the right to collect interest on the payments that are delayed from the buyer’s side. This is the most important benefit the MSMEs get post-registration under MSMED Act, 2006, which may help to resolve the liquidity problems. Arbitration or conciliation must be used to resolve such disputes within a reasonable timeframe. The Act has provided MSMEs protection against delay in payment from buyers and the right of interest on delayed payment in the following manner.
- Under the MSMED Act, 2006, lawyers should inform MSMEs that all pending dues of MSMEs are to be released within 45 days (maximum) after accepting the products or services.
- If the buyer delays payment for more than 45 days after accepting the products or services, then the buyer must pay compound interest at three times the bank rate as notified by the Reserve Bank of India at that time. Payment shall be made as per the timeline agreed upon under the agreement, but such a period cannot exceed 45 days from the date of acceptance of the products or services.
Therefore, a lawyer can assist them to draft the same clauses in the contract that have been made with the party/parties.
6. To help in IPR (Intellectual Property Rights)
Lawyers assist them in registering their IP, such as trademarks and patents. Then lawyers can inform them that they are entitled to a 50% subsidy for patent registration after they have been registered as professionals. In addition, lawyers can assist them in getting remedies for infringements of IPR and how to file a suit in the court of law to get remedies.
7. Tax and finances
As a lawyer, we can help in taxation and finance matters as well. Being professionals, we play a very important and crucial role in smoothing business operations, investment/fundraising which is always needed to run the business and expand the business as well. Lawyers must ensure that the important expenses are being met and the organisation remains in a situation that is manageable in terms of financial profitability. We can help them to get promoters and venture capitalists who are willing to invest in their business.
Compliance under the laws
MSMEs and SMEs are first registered under various laws like the Companies Act, 2013, LLP Act, 2008, and Partnership Act 1932. Lawyers decode the complexity of laws and do all the compliances in a time-bound manner to avoid penal provisions/litigation to the enterprises.
At the same time, the MSME industry is one of the most vulnerable industries. Many eligible enterprises do not get the maximum benefits due to a lack of awareness or professional guidance that they can avail themselves of. Despite getting registered as MSME, many entrepreneurs cannot take advantage of even a single government scheme due to a lack of knowledge or ignorance on the part of professionals. Therefore, this is the time when professionals like lawyers should come forward and find out the status of their clients and try to mentor and advise them accordingly. So that the clients can also take advantage and benefit to grow the business. Lawyers aim to provide standardised common legal services and cost-effective legal solutions for startups, MSMEs, and SMEs.
The government of India also acknowledged the importance of the MSMEs and SMEs sector which contributes almost 29 % towards the country’s GDP. The government has been planning to scale it up to 50% of India’s GDP and that can add 50 million fresh jobs over the next five years. If the government reduced the compliance burden, the business could grow, and production would increase. In scaling up, the plethora of rules and regulations and red-tape are major hindrances. In India, micro, small, and medium enterprises (MSMEs) play a huge role in GDP generation by generating mass employment throughout the country. Considering its importance, the government is expected to provide adequate support to ensure that MSMEs’ growth is not impeded at any time, especially during a pandemic that has brought global economies to a deadlock.
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