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Comprehensive Insights into the Micro, Small, and Medium Enterprises (MSME) Development Act of 2006 : Key Provisions and Significance in India

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Introduction

The MSME Development Act, enacted in 2006, was introduced to address various issues affecting Micro, Small, and Medium Enterprises (MSMEs), including the scope and investment limits of the sector. The primary objective of the act is to foster the growth of MSMEs and boost their competitiveness. It establishes a legal framework for recognizing the concept of an “enterprise,” encompassing both manufacturing and service entities. Notably, the act defines medium enterprises for the first time and aims to integrate the three tiers of MSMEs, namely Micro, Small, and Medium. The act grants authority to the Central Government to implement programs, issue guidelines, and provide instructions to promote the development and competitiveness of MSMEs.

In India, enterprises are broadly categorized into two groups: (i) Manufacturing and (ii) Services. These classifications are further detailed under Section 7 of the MSME Act, where enterprises are categorized as Micro, Small, and Medium based on specific criteria.

Under the Atmanirbhar Bharat Abhiyan (ABA), the Central Government, responding to the ongoing COVID-19 pandemic and aiming to fortify the economic framework, has revised the classification criteria. Notably, the distinction between Manufacturing and Service Industries has been eliminated, and a unified set of criteria for both investment and annual turnover has been introduced:

  • Micro Enterprise: Investment up to Rs. 1 Crore and Turnover up to Rs. 5 Crore.
  • Small Enterprise: Investment up to Rs. 10 Crore and Turnover up to Rs. 50 Crore.
  • Medium Enterprise: Investment up to Rs. 50 Crore and Turnover up to Rs. 250 Crore.

This initiative under the ABA also encompasses various additional provisions for the MSME sectors, including increased incentives, collateral-free loans, and subsidies.

The Micro and Small entities encompass a range of organizational structures, including: Company, Partnership Firm, Association of Persons, Hindu Undivided Family, Co-operative Society, Proprietorship.

Registration of MSME/Memorandum of MSME

The application for MSME registration is submitted through the Ministry of Corporate Affairs website, specifically the MSME Registration Portal, in the prescribed format. The attached documents must be self-certified and uploaded with the application. Upon acceptance, a registered email ID along with the Udyog Aadhar Number and Certificate of Registration will be issued. It’s worth noting that offline registration is also an available option.

Introduced by the Ministry of Corporate Affairs on May 1st, 2019, the e-form MSME I is a significant development. This form is mandatory for companies that procure goods or services from Micro or Small Enterprises and have outstanding payments due for more than 45 days from the date of acceptance or deemed acceptance of the provided goods or services. The Specified Companies (furnishing of information about payment to micro and small enterprise suppliers) Order, 2019, dated January 22, 2019, requires these companies to submit a half-yearly return to the MCA detailing the amount of payment due to Micro and Small Enterprises and the reasons for any payment delays.

Before commencing their operations, any micro, small, and medium enterprise (MSME) has the option to submit a Udyog Aadhaar Memorandum (UAM) in Form-I. This memorandum can be filed conveniently online through the official website of the Ministry of Micro, Small and Medium Enterprises, Government of India (http://udyogaadhaar.gov.in). By doing so, the enterprise can promptly receive a unique Udyog Aadhaar Number (UAN). Alternatively, a hard copy of the duly filled Form I can be submitted to the relevant District Industries Centre (DIC) or the Office of the Micro, Small and Medium Enterprise-Development Institute (MSME-DI) under the Development Commissioner, MSME. Upon submission, a Udyog Aadhaar Registration Certificate in Form II will be generated and sent to the enterprise’s email address provided in the UAM.

For existing MSMEs, it is mandatory to file the Memorandum within One Hundred and Twenty (120) days from the commencement of the Act. The UAM/Memorandum is a streamlined, one-page online registration system for MSMEs based on self-certification. This innovative approach replaces the earlier Entrepreneurs’ Memorandum (EM part-I & II), marking a significant step toward enhancing the ease of doing business for MSMEs in India.

Qualifying Criteria

  1. The Specified Company must have received goods and/or services from Micro or Small Enterprises.
  2. Payment must be due or not paid to such Micro or Small Enterprise for 46 days from the date of acceptance of the provided goods and/or services.

Time Period

The form, MSME Form 1, is to be filed within 30 days of the completion of the corresponding half-year. Essentially, companies are required to file this form as a half-yearly return by October 31st of the year (for the period from April to September) and again by April 30th of the next year (for the period from October to March) in every financial year, relating to outstanding payments to MSMEs.

Exceptions to Rule

  1. Applies only to Specified Companies whose payment to the supplier MSME exceeds 45 days from the date of acceptance or deemed acceptance of goods and/or services.
  2. If the payment against the supplier exceeds 45 days but the supplier declares that they do not fall under the category of Micro or Small Enterprises.

Penalty

In case of non-compliance, as per Section 405(4) of the Companies Act, 2013, a fine extendable to Rs. 25,000 is applicable to the company. Additionally, any officer in default under the Specified Company may face punishment, including imprisonment up to 6 months or a fine ranging from Rs. 25,000 to Rs. 3 Lakhs, or both.

Provisions Governing Delayed Payments in MSME Act

Sections 15-24 of the Micro, Small and Medium Enterprises Development (MSME) Act, 2006, address concerns related to delayed payments to Micro and Small Enterprises (MSEs) by Buyers. According to Section 15, Buyers must make payments to Suppliers based on their commercial understanding, not exceeding 45 days from the acceptance or deemed acceptance of goods and services. Section 16 imposes compound interest on delayed payments to Supplier units.

In case of disputes over due amounts, Section 18 outlines the procedure to be followed, with a mandated resolution within 90 days. If the Buyer challenges the award or decree, Section 19 requires a deposit of 75% of the stipulated amount.

The MSME Samadhaan Portal, established by the Ministry of Micro, Small and Medium Enterprises, allows MSEs to file online applications for delayed payments. It provides information about pending payments from various entities and facilitates complaints, viewed by MSEFC Council for action. The portal aims to efficiently monitor delayed payments and publicly disclose information to pressure defaulting parties.

The MSMED Act, 2006 (Sections 15-24), mandates State Governments to establish Micro and Small Enterprise Facilitation Councils (MSEFC) for dispute resolution on delayed payments (Sections 20 and 21).

Prerequisites for MSEFC Claim:

  1. Udyog Aadhar Memorandum (UAM) or Udyam Registration before the dispute.
  2. A valid claim against the Buyer, supported by a written purchase agreement and a post-UAM or Udyam registered invoice.
  3. The statutory payment period of 45 days from acceptance or deemed acceptance of goods/services must have elapsed.

Claim Settlement Proceedings Under the MSME Act

Sections 15-24 of the Micro, Small and Medium Enterprises Development (MSME) Act, 2006, specifically focus on issues related to delayed payments to Micro and Small Enterprises (MSEs) by Buyers. According to Section 15, payment from the Buyer to the Supplier must adhere to their commercial understanding but should not exceed forty-five (45) days from the acceptance or deemed acceptance of goods and services. Section 16 outlines the imposition of compound interest on delayed payments to Supplier units.

In the event of disputes over due amounts, Section 18 establishes the procedure to be followed, with a mandated resolution period of ninety (90) days. If the Buyer challenges the award or decree, Section 19 requires a deposit of 75% of the stipulated amount. The MSME Samadhaan Portal facilitates online applications for delayed payments, aiming to efficiently monitor and publicly disclose information to pressure defaulting parties.

Filing a Complaint through the Samadhaan Portal

To file a complaint on the MSME Samadhaan Portal, MSEs must have a Udyog Aadhar Memorandum (UAM) or Udyam Registration before the dispute. The claim against the Buyer should be valid, supported by a written purchase agreement and a post-UAM or Udyam registered invoice. Additionally, the statutory payment period of 45 days from the date of acceptance or deemed acceptance must have lapsed.

The application process involves filing the form online on the Samadhaan Portal, accessible at https://MSME.gov.in/. Detailed information as specified in the Act is required, accompanied by intensive scrutiny of relevant documents such as purchase agreements, invoices, and notices served. The application is automatically forwarded online to the concerned Micro and Small Enterprise Facilitation Council (MSEFC) established by the State/UTs. After 15 days of online filing, the MSEFC registers the case and takes action on applications related to delayed payment.

Claim Settlement Process

After the relevant Micro and Small Enterprise Facilitation Council (MSEFC) accepts the application, it issues a notice to the buyer, demanding immediate payment within a specified timeframe. In the event that the buyer fails to initiate payment during the stipulated period mentioned in the notice, the MSME can proceed to file an application for default in payment, attaching the necessary documents on the portal as per the Act’s provisions.

Upon the filing of a reference application for a dispute under Section 17 (Recovery of delayed payments) within Section 18 of the MSME Act, the Council undertakes conciliation independently or seeks the assistance of an institution or center providing alternate dispute resolution services. Notably, for conducting such conciliation, the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) apply to the dispute as if the conciliation were initiated under Part III of the 1996 Act.

If conciliation proves unsuccessful, and the parties cannot reach an agreement, the Council proceeds to address the dispute through arbitration. It may refer the matter to an institution or center providing alternate dispute resolution services. The provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) apply to the arbitration proceedings as if they were conducted in accordance with an arbitration agreement referred to in the arbitration agreement.

In the case of Jharkhand Urja Vikas Nigam Limited Vs State of Rajasthan & Ors. [Civil Appeal No. 2899 of 2021], the Supreme Court clarified that conciliation and arbitration proceedings under the MSME Act cannot be combined if the appellant did not submit a response during the conciliation stage. According to the legislative mandate, the Council is obligated to initiate an arbitration procedure if the conciliation procedure fails.

Pre-deposit of Award Amount

Section 19 of the MSME Act mandates that any appeal challenging a decree, award, or order made by the Council or any alternate dispute resolution institution referred by the Council requires the appellant (excluding the supplier) to deposit 75% of the awarded amount as a pre-deposit before the court entertains the application. The Supreme Court, in the case of Gujarat State Disaster Management Authority vs. Aska Equipments Limited (2022) 1 SCC 61, emphasized the mandatory nature of this requirement. The court may, however, allow the pre-deposit to be made in instalments if undue hardship is demonstrated.

According to Section 20, State Governments are obligated to establish Micro and Small Enterprises Facilitation Councils, defining their jurisdictions. These Councils adjudicate disputes between suppliers and buyers across India. Section 21 outlines that the Council should have three to five members appointed from various categories, including a Chairman with administrative control of small-scale industries, representatives of micro and small industry associations, representatives from banks and financial institutions supporting these enterprises, and individuals with expertise in industry, finance, law, trade, or commerce.

Overriding Effect of Claim Settlement Proceedings Under MSME Act over Arbitration and other Applicable Laws

Section 24 of the MSME Act establishes an overriding effect of the provisions from Section 15 to Section 23 over those of the Arbitration Act, and this aspect has been subject to extensive judicial scrutiny.

In the case of Principal Chief Engineer M/s. Manibhai and Bros (Sleeper) [Diary 16845/2017], the Supreme Court upheld the Gujarat High Court’s judgment regarding the interpretation of Section 18. The Gujarat High Court emphasized that the MSME Act, being special legislation, takes precedence, and parties governed by it are obligated to adhere to the mechanisms outlined in Section 18 of the Act.

Applicability of the Limitation Act to Disputes/Claim Settlement Proceedings Under the MSME Act 2006

The issue of the applicability of the Limitation Act to disputes and claim settlement proceedings under Section 18 of the MSME Act has historically been a matter of uncertainty. However, the recent judgment by the Hon’ble Supreme Court of India in the case of Silpi Industries and Ors. Vs. Kerala State Road Transport Corporation and Ors. 2021(224) AIC 18 has provided clarity to this discussion.

The Court highlighted that in cases arising under Section 17 of the MSME Act, a reference is made to the Council. Subsequently, the parties undergo conciliation facilitated by the Council. If the conciliation process proves unsuccessful, the Council then refers the case for arbitration, administered either by itself or by any institution or center deemed suitable by the Council, as per the provisions of Section 18 of the MSME Act.

The Supreme Court, drawing on the precedent set by the case of Andhra Pradesh Power Coordination Committee & Ors. v. Lanco Kondapalli Power Ltd. & Ors., (2016) 3 SCC 468, affirmed that Section 43 of the Limitation Act is applicable to arbitrations. It further clarified that the provisions of the 1996 Act, governing arbitrations, are similarly applicable to arbitrations initiated under the MSME Act, as if an agreement between the parties under Section 7(1) of the 1996 Act exists. Consequently, the Supreme Court definitively held that the provisions of the Limitation Act apply to arbitration proceedings initiated under Section 18 of the MSME Act.

Conclusion

The Micro, Small, and Medium Enterprises (MSME) Development Act is a crucial framework in India, supporting the growth of small businesses. It provides streamlined processes for registration, dispute resolution, and financial assistance to MSMEs. The Act’s focus on prompt settlement of delayed payments through dedicated councils reflects the government’s commitment to economic resilience. While the Act enjoys an overriding effect over arbitration and other laws, there is a continuous need for improvement in the dispute resolution process. The government’s efforts to create a more vibrant ecosystem for MSMEs are commendable, emphasizing a balance between regulatory compliance and ease of doing business for sustained growth.

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Written by- Afshan Ahmad

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Delhi High Court Clarifies MSME Act’s Applicability: Timing of Registration Matters 

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Case Title: JKS Infrastructure Private Limited v. MSME Facilitation Council and Others 

Date of Decision: 18th September 2023 

Case Number: W.P.(C) 16567/2022 

Coram: Justice Prathiba M. Singh 

 

Introduction 

 

This case involves a petition filed by JKS Infrastructure Private Limited (the petitioner) seeking an order to set aside a reference made by the MSME Facilitation Council (Respondent No.1) under section 18(2) of the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act), and subsequent proceedings initiated based on the said reference. The dispute arose between the petitioner and Lamba Techno Flooring Solutions (Respondent No.3), leading to a reference to arbitration. 

 

Facts 

 

  • The petitioner, JKS Infrastructure Pvt. Ltd., filed a petition seeking the setting aside of the reference UDYAM-DL-10-0032365/M/00003 dated 10th September 2022, made by Respondent No.1 (MSME Facilitation Council) under section 18(2) of the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act).  
  • The dispute arose between the petitioner and Respondent No.3 (Lamba Techno Flooring Solutions), which led to a reference to arbitration by Respondent No.1.  
  • The petitioner argued that the MSME Act did not apply as the purchase order and invoice between the petitioner and Respondent No.3 were dated before Respondent No.3’s registration as an MSME on 8th February 2021. 

   

Legal Issue 

 

Whether the MSME Act is applicable when the registration as an MSME occurred after the completion of the works or services? 

   

Contentions 

 

The petitioner contends that the MSME Act does not apply because the purchase order and invoice were dated before Respondent No.3’s registration as an MSME. This argument is based on the timing of registration relative to the contract.  

 

Legal Principles 

 

  • Registration under the MSME Act must occur before entering into a contract for the benefits of the Act to apply retroactively.  
  • The registration’s timing determines the Act’s applicability to goods and services supplied, with the Act applying only prospectively to post-registration supplies. 

   

Observation and Analysis 

 

The Court considered recent judgments in Municipal Corporation of Delhi v. Ram Prakash, and M/s. Grand Mumtaz Hotel v. Deputy Commissioner North East Government of NCT of Delhi to resolve the legal issue. These judgments emphasized that registration under the MSME Act must occur before the contract and supply of goods or services for the Act’s benefits to apply. Registration after the fact does not grant retrospective benefits under the MSME Act.  

   

Decision of the Court 

 

In light of the legal precedent established in the aforementioned judgments, the Court ruled that if registration under the MSME Act occurs after the completion of works or the execution of the contract, the Act would not be applicable. Therefore, the impugned references were quashed. Respondents were advised to pursue remedies in accordance with the law.  

 

“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.” 

 

Written by – Ananya Chaudhary 

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