MSME – Registration, Benefits and the Legal Framework

The Micro, Small and Medium Enterprises (“MSME”) are the backbone of the Indian economy. The MSMEs contribute significantly in economic and social development of the country by fostering innovation, entrepreneurship and inclusive growth. The MSME sector is the second largest employer after agriculture and its share in the manufacturing output and export is also significant.

In 1993, the Government of India brought a legislation being “The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993” (“IDPSCAIU Act”) which provided for statutory arbitration as a mechanism to recover the pending dues and delayed interests on the delayed payments owed to small scale industrial undertakings.

Thereon in the year 2006, the IDPSCAIU Act was repealed and replaced by “The Micro, Small and Medium Enterprises Development Act, 2006” (“MSMED Act”) with an objective to bring a much better and elaborate protection for MSMEs. As per the statement of objects and reasons of the MSMED Act, the MSMED Act aims at “facilitating the promotion, development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto”.

What is an MSME

Section 7 of the MSMED Act defines and classifies an MSME as follows:

Manufacturing Sector [pertaining to any industry specified in the First Schedule of the Industry (Development and Regulation) Act, 1951]


Enterprises Investment in plant & machinery

Micro Enterprises Does not exceed 25 lakh rupees

Small Enterprises More than 25 lakh rupees but does

not exceed 5 crore rupees 

Medium Enterprises More than 5 crore rupees but does

not exceed 10crore rupees

Services Sector


Enterprises Investment in plant & machinery

Micro Enterprises Does not exceed 10 lakh rupees

Small Enterprises More than 10 lakh rupees but does

not exceed 2 crore rupees 

Medium Enterprises More than 2 crore rupees but does

not exceed 5 crore rupees

What is the process for registration as an MSME

Section 8 of the MSMED Act provides for registration of an industrial undertaking as an MSME. Although registration under the MSMED Act is not mandatory, except for a Medium Enterprise in the manufacturing sector, it is advisable to do so as the same yields a host of benefits and access to various government schemes and subsidies.

Following the implementation of the MSMED Act, the registration process for the MSMEs involved filing of two forms. These included Entrepreneurs Memorandum I (EM I), which was for the proposed or upcoming enterprises and discretionary in nature, and Entrepreneurs Memorandum II (EM II), which was required to be filed with District Industries Centre in the concerned state or union territory immediately after the project kicks off.

In the year 2015, in order to simplify the registration process and for the promotion of MSMEs, the Ministry of Micro, Small and Medium Enterprises, Government of India, by way of a notification bearing S.O. 2576 (E) dated 18.09.2015 (re – notified revised notification bearing S.O. 2052 (E) dated 30.06.2017) introduced “Udyog Aadhaar Registration” (“UAR”). The UAR supplanted the earlier method of registration of SSI enrolment and EM-I/EM-II and introduced a simple one-page registration form called ‘Udyog Aadhaar Memorandum’. The registration process defined under the notification is as follows:

a. UAM can be filed online on the website “www.udyogaadhaar.gov.in” and shall be filed by an MSME only after establishing the unit, obtaining all approvals and starting commercial operations.

b. In case of a proprietorship concern, a partnership concern and an HUF, the Aadhaar Number of the proprietor/managing partner/karta is to be provided; in case of a company, limited liability partnership, co – operative society, society or a trust, the Permanent Account Number (PAN), along with the Aadhar Number of the authorised signatory is to be provided.

c. The UAM shall be filed on self-certification basis and no supporting documents are required at the time such filing. However, the Central or the State Government may seek documentary proof of such information as provided in the UAM, whenever necessary.

d. In case an applicant does not have an Aadhaar Number or in any other case, where online registration is not possible, a hard copy of the filled in form shall be filed with the concerned District Industries Centre or with the office of the Micro, Small and Medium Enterprise – Development Institute, under the Development Commission, MSME along with such documents as specified in the notification.

e. Existing enterprises which have filled in EM – II, or the holders of Small-Scale Industry registration, prior to the coming into force of the MSMED Act, are not required to file the UAM, but may do so if such enterprises so desire.

f. There is no fee for filing the UAM.

Benefits of Udyog Aadhaar Registration

The following are some of the most important benefits that an entity can avail upon registration with Udyog Aadhaar:

· Eligibility for Government subsidies

· Opening a current bank account in the name of their business without any hassle

· Apply for the micro business loans and other schemes

· MSMEs become eligible for loans without the requirement for a guarantee and loans with a low-interest rate

· Exemptions under direct tax laws

· Concession in electricity bills

· Avail reservation of products which are to be exclusively manufactured by MSMEs

· Easier process of registration and application of licenses

· Reduction in fee for filing patents and trademark registration to get protection under the rights of intellectual properties

Recovery mechanism under MSMED Act

The MSMED Act provides a platform to suppliers (as defined under Section 2(n) of the Act) for expeditious disposal of cases pertaining only to recovery of its dues in a transaction of sale and supply of any goods and services by a supplier to any buyer. The MSMED Act ensures timely and smooth flow of credit to the suppliers and other applicable entities and minimize sickness among them. The MSMED Act strengthens the provisions relating to delayed payments to the suppliers by specifying the maximum credit period and higher penal interest if delayed beyond that period.

A supplier in terms of Section 2(n) of the MSMED Act is defined as a 'micro' or a 'small enterprise' which has filed a Memorandum with the designated authority under Section 8 and includes the (i) National Small Scale industrial Corporation, (ii) Industrial Corporations established by States or Union Territories and also includes a (iii) company, co-operative society, trust or a body, whether, registered or constituted under any law, which is engaged in the selling of goods produced by micro or small enterprises and rendering of services provided by such enterprises.

Section 15 of the MSMED Act states that where the supplier supplies goods or renders any services to any buyer, the buyer is obligated to make payment on or before the date mentioned in the agreement between the seller and the buyer and, in the absence of any such agreement, then before the appointed date. The proviso to this Section states that the period of credit given by the seller shall not exceed 45 days from the day of acceptance or from the date of deemed acceptance.

Section 2(b) of the MSMED Act provides as follows:

(b) “appointed date” means the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

Explanation - For the purpose of this clause –

(i) “the day of acceptance” means, –

(a) the day of the actual delivery of goods or the rendering of services; or

(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier

(ii) “the day of deemed acceptance” means where no objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of the delivery of goods or the rendes4ering of services, the day of the actual delivery of goods or the rendering of services;”

As per Section 16 of the MSMED Act, in case the buyer defaults in making payment to the supplier as required under Section 15 of the MSMED Act, the buyer shall be liable to pay compound interest with monthly rests on the due amount from the appointed day, or from the date immediately following the agreed date, at the rate of three times of the bank rate notified by the Reserve Bank of India.

However, in case the buyer does not make the payment to the supplier as stipulated in Section 15 and 16 of the MSMED Act, the MSMED Act provides for a legal mechanism for settlement of disputes in respect of pending dues. Section 18 of the MSMED Act provides that any party to a dispute with regard to pending dues, i.e. either the supplier or the buyer, can make a reference to the Micro and Small Enterprise Facilitation Council (“MSEFC”) as established pursuant to Section 20 of the Act.

Upon receipt of the reference, the MSEFC shall either itself or through an institution or a centre providing alternate dispute resolution services conduct conciliation in the matter. The conciliation proceedings shall be governed by the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996.

The MSMED Act provides for statutory arbitration as a dispute resolution mechanism for resolving disputes between the supplier and a buyer. Where the conciliation proceedings initiated by the MSEFC are not successful and stand terminated without any settlement between the parties, MSEFC shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall apply. The decision of the MSEFC shall be communicated to the parties by way of an award.

The reference under Section 18 shall be filed with the MSEFC under whose jurisdiction the registered office of the supplier is located.

A reference to the MSEFC can either be filed directly with the office of the MSEFC or online on the website “www.samadhan.msme.gov.in”. It must be noted that a reference can be filed on the online portal only by a Micro or Small Enterprise (MSE) having a valid Udyog Aadhaar Memorandum.

Either party to a dispute is entitled to challenge an award or an order passed by the MSEFC in the Court in terms of the provision of Section 34 of the Arbitration and Conciliation Act, 1996. Section 19 of the MSMED Act provides that in case an application for setting aside an award or order is filed by a buyer, it is mandatory for such buyer to deposit 75% of the amount awarded by the MSEFC in the court and it will be the discretion of the court to release such percentage of the amount deposited with the court to the supplier as it deems fit.

Section 22 of the MSMED Act further provides that a buyer is required to make certain disclosures with respect to the amount and the interest that has been paid by the buyer and the unpaid amount and interest in its annual statement of accounts.

Ousting the jurisdiction of Civil Courts

Section 18 of the MSMED Act provides for statutory arbitration as the dispute resolution mechanism for resolving disputes in relation to non – payment of dues of the supplier by the buyer. The question whether Section 18 ousts the jurisdiction of civil courts was taken up by the High Court of Madras in the case of M/s Refex Energy Ltd. v. Union of India [AIR 2016 Mad 139 (Mad) (DB)], wherein the petitioner had challenged the validity of Section 18 on the ground that it is violative of Article 14 as it does not permit a person to approach a court of his choice. However, the High Court observed that under Section 19 of the MSMED Act, a person aggrieved by the award or decree can approach the court and dismissed the petition.

The Division Bench of the Bombay High Court in Sonali Power Equipment v. Chairman, Maharashtra State Electricity Board [2018 SCC Online Bom 2253] was of the view that under the MSMED Act there was no availability of recourse to courts to resolve disputes. However, considering another division bench of the Bombay High Court in M/s. Delton Electricals vs. MSEDCL and Others [(2017) 6 AIR Bom R 487]by had held that civil courts have jurisdiction over matters related to recovery of dues by MSMEs, the matter was referred to a larger bench and the same is pending adjudication.

Which dispute resolution mechanism is to be followed: Arbitration agreement agreed between the parties or Section 18 of MSMED Act

The courts in India vide various judgments have held that the arbitration agreement would be superseded by the statutory arbitration provided under the MSMED Act. In the case of GE T & D India Limited v Reliable Engineering Projects & Marketing [(2017) 238 DLT 79] before the High Court of Delhi, the Petitioner challenged the validity of Section 18 when the contract between the parties contained an arbitration clause. The High Court held that the contractual clause cannot override the statutory provision provided under the MSMED Act. Similar view was taken by the Punjab & Haryana High Court in Welspun Corp. Ltd. v. The Micro and Small Enterprises Facilitation Council, Punjab and Others[(2013) 5 RCR (Civil) 150], wherein the High Court was of the opinion that in view of the special provision made for the promotion and development of the MSME’s, parties cannot mutually agree to oust the jurisdiction of the facilitation council.

Applicability of the MSMED Act

As has been stated earlier in this article, Section 8 of the MSMED Act provides for registration of an MSME and the earlier registration process has now been replaced by the Udyog Aadhaar Registration. However, a question arises as to whether the provisions of the MSMED Act would be applicable to entities which have not registered themselves as an MSME and different High Courts in the country have given divergent views on the said question.

· The High Court of Madhya Pradesh in Frick India Ltd. v Madhya Pradesh MSEFC [WP No. 19319/2014 decided on 24th July 2015] and the High Court of Bombay in Faridabad Udyog Ltd. v Anurag Deepak [(2013) 7 Bom CR 631] have held that the MSMED Act does not have retrospective operation and a registration subsequent to the execution of the contract or the arising of the dispute would not attract the provisions of the Act.

· The High Court of Delhi in GE T & D India Limited v Reliable Engineering Projects & Marketing [(2017) 238 DLT 79] has held that if an industrial unit obtains registration during the course of making supplies to the buyer, i.e. while the performance of the agreement is underway, it would suffice to attract the provisions of the Act.

· The High Court of Delhi in M/s Ramky Infrastructure Pvt. Ltd. V Micro and Small Enterprises Facilitation Council [2018 SCC Online Del 9671]has gone a step head and has taken a view that since the definition of a “supplier” as provided under Section 2(n) of the Act also includes entities which are selling goods and services offered by micro or small units and does not require registration, it is not mandatory for an entity to be registered as an MSME to approach the MSEFC for resolution of its disputes, till such an entity fulfils the pre – requisites of an MSME. Similar view has been taken by the High Court of Andhra Pradesh in the case of The Indur District Cooperative Marketing Society Ltd., Nizamabad vs M/s. Microplex (India), Hyderabad, and Another [Writ Petition No. 35872 OF 2012 decided on 27th October, 2015]

· In the case of M/s Easun Reyrolle Limited v. M/S Nik San Engineering Co Ltd [2019 SCC Online Guj 2474], the supplier had registered itself as an MSME much after the supply of goods to the buyer and has thereafter approached the MSEFC with respect to a dispute as regards non payment of dues. The High Court of Gujarat has held that only a unit which has registered itself as per the provisions of the MSMED Act prior to the transaction and the supply of goods can have recourse to Section 18.

· In a recent judgment, the Bombay High Court, in the case of Scigen Biopharma Pvt. Ltd. vs. Jagtap Horticulatuer Pvt. Ltd [Arbitration Appeal No 23 of 2018 decided on 21st November, 2019] has held that “The respondent thus could not have become a small enterprise or a supplier within the purview of MSMED Act, 2006 by such prospective filing of an entrepreneurs memorandum which on the face of it had a consequence from a prospective date and not retrospectively so as to enable the respondent to take benefit of Chapter V and more particularly of Section 18.”

MSME Samadhaan Portal and National E – Governance Services Limited (NeSL) Information Utility (IU)

The MSMED Act provides for a legal framework for quick and speedy disposal of a dispute in relation to payment of dues between a supplier and a buyer. However, in most cases, despite the issuance of the award from the MSEFC in favour of the supplier, the buyer delays the payment to the supplier. In order to expedite the recovery, the Ministry of Micro, Small and Medium Enterprises has now interlinked the MSME Samadhaan portal with NeSL IU.

NeSL is India’s first information utility that acts as a repository of legal evidence pertaining to any debt/claim submitted by a creditor. NeSL IU is registered with the Insolvency and Bankruptcy Board of India (“IBBI”) that operates under the aegis of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Upon registration of a case on the Samadhaan portal, the MSME can give its consent to share the information with the NeSL. Upon receipt of the documents including the unpaid invoices, NeSL IU automatically generates a ‘Demand Notice’ and sends it to the buyer on behalf of the MSE.

If the buyer fails to respond to the Demand Notice within 14 days of receiving the same, NeSL IU shall automatically generate a ‘Record of Default’ and send the details of such default to all lenders of the concerned buyer. As per the legal framework, the said ‘Record of Default’ acts as a legal piece of evidence to initiate bankruptcy proceedings against the buyer under IBC.

MSME Schemes introduced by the Government of India

The Ministry of MSME has a number of schemes and programmes to help and assist entrepreneurs. An entire list of the schemes introduced by the Government of India is available on “https://msme.gov.in/sites/default/files/MSME_Schemes_English_0.pdf”.

However, a few of the most important and beneficial schemes are highlighted hereinbelow:

Single Point Registration Scheme of National Small Industries Corporation

Micro or Small Enterprises (“MSE’s”) or Small Scale Industries (“SSI”) are eligible for registration under the said scheme of NSIC and to avail a host of benefits, including the following:

· MSE’s are exempted from paying the Earnest Money Deposit while applying for a tender;

· While applying for a government tender, the MSEs are allowed to supply 25% of the requirement, when the quoting price of such MSE is within the price band of L1+15 and where L1 is a non - MSE.

· Central Ministries/Departments/PSUs are required to procure a minimum of 25 per cent of their annual purchases of the products or services by MSEs registered under the scheme.

· A list of 358 items are reserved for exclusive purchase from the SSI Sector.

Credit Guarantee Scheme for Micro and Small Enterprise (CGTMSE)

CGTMSE scheme is launched by the Indian government to facilitate credit facility to the MSME units through a collateral-free credit facility. Small Industries Development Bank of India (SIDBI) and the Ministry of MSME together established a trust named Credit Guarantee Fund Trust for Micro and Small Enterprises in order to implement Credit guarantee schemes.

Zero Defect Zero Effect

Under this scheme, the Government of India has prescribed such standards for the goods which are manufactured for export purposes. Registration under this scheme provides easier acceptance of goods manufactured by MSME’s in foreign nations and keep them from being returned to India if the goods are manufactured as per the prescribed standards. MSME’s registered under this scheme further enjoy certain rebates and concessions for their exported goods.

Quality Management Standards and Technology tools

This scheme is aimed at helping MSME’s produce quality products at competitive prices by adopting the tools. Through the tools, businesses will be able to optimize the resource, improve quality, reduce rejection and rework. Under this scheme, businesses will be sanitised about the tools through activities like workshops, campaigns and seminars.


Credit linked Capital Subsidy Scheme

This is one of the schemes launched by the government in which the MSME’s can directly visit the bank for the subsidies in case they want to upgrade their business with new technologies. This scheme is aimed at helping MSME’s produce quality products at competitive prices by adopting the tools. Through the tools, businesses will be able to optimize the resource, improve quality, reduce rejection and rework. Under this scheme, businesses will be sanitised about the tools through activities like workshops, campaigns and seminars.

Entrepreneurship choice for Women

The MSME Sector of our country has launched this scheme, especially for the women who want to start their own business. Apart from this, the government also imparts credit, counselling, training and delivery techniques to these women so that they can operate and manage and expand their business efficiently.

Conclusion

MSMED Act is a statute for the benefit and promotion of all establishments which fall within the definition of MSME including the speedy dispute resolution mechanism. As such, all establishments which satisfy the requirement of an MSME should register themselves with the UAM registration, thereby becoming eligible for the benefits and schemes introduced by the Government of India.

Kindly treat this as an information update and the same shall not constitute as an advisory by the firm.

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