Micro, small and medium enterprises (MSME) are playing a vital role in the economic growth of India. Being the second largest employer of manpower, the small-scale industrial sector contributes almost 40 per cent in the gross manufacturing output of the country. It accounts for 45 per cent of the total exports from India (direct as well as indirect) and 8 per cent of the GDP. Considering these points, the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 was enacted to promote, develop and increase the competitiveness of the MSME sector.
Classifying companies under micro, small and medium categories, the act offers a provision to check delayed payments from clients and has also introduced procurement preference policy, which helps in increased participation by micro and small enterprises in developing linkages with large enterprises.
Electronics hardware industry, which comprises many small and medium enterprises, can benefit from this act. As shared by Arun Kumar Jha, director, MSME, “The act gives small and medium enterprises a legal right to procure delayed payments from clients. Apart from that, every year the government gives away awards to oragnisations under various categories like entrepreneurship, innovation, research and development and in order to be eligible it is essential for them to have MSME registration.”
Who can file
MSMED Act 2006 divides enterprises into two categories—manufacturing and service enterprises. Registration under MSME is mandatory for all industries that have obtained licence to operate.
Manufacturing enterprises: Enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule of the Industries (development and regulation) Act, 1951, can file complaint under this act. A manufacturing enterprise is defined in terms of investment in plant and machinery.
The eligibility criteria to file complaint under manufacturing enterprise categories are:
• Micro enterprises: Investment up to Rs 25 lakh
• Small enterprises: Investment above Rs 25 lakh and up to Rs 5 crore
• Medium enterprises: Investment above Rs 5 crore and up to Rs 10 crore
Service enterprises: The enterprises which are engaged in providing services can file their complaints under various categories based on their investment in equipment. The categories are:
• Micro enterprises: Investment up to Rs 10 lakh
• Small enterprises: Investment above Rs 10 lakh and up to Rs 2 crore
• Medium enterprises: Investment above Rs 2 crore and up to Rs 5 crore
What benefits can be derived?
The act gives benefit to registered companies in checking delayed payments by offering effective mechanisms for mitigating the problems of delayed payments with other companies registered under this act. The act is implemented at state level hence companies don’t face any state or regional legal barriers. It also offers specific funds for the promotion, development, notification of schemes/programmes, progressive credit policies and practices to registered companies. While filing any delayed payment complaint, companies need to disclose the information about total amount of payment due in the balance sheet. The companies also have to make certain disclosure pertaining to registered vendors. Also, in order to make a claim, income tax department has made it mandatory for companies to mention PAN number while filing tax deducted at source. Therefore, the MSME number and the company’s PAN number must be shared with other registered industries while procuring delayed payments. The limitation of the act is that it’s essential for both the companies to have the MSME registration number to make claims for delayed payments.
“The scheme has been working fine until now and helps in controlling smooth cash inflow for MSMEs. If a company doesn’t receive payment in 45 days, it is liable to take a legal action, wherein the other company has to pay three times more than the RBI rate, which is presently 18 per cent. If there is a dispute, government provides necessary assistance in getting the delayed payments. It can help in forming better linkages between bigger organisations and MSMEs, provided they are registered,” shares Sandeep Rathi, assistant vice president, finance, ABB Ltd. However, A G Rohira, chairman and managing director, ELCOMPO, feels that the act is no more than a rubber stamp and no help is being provided by the government to recover the payments.
Provisions of the Act
• 45 days time to the buyers to make payments to MSEs
• Rate of interest on outstanding amount increased to three times the prevailing bank rate of Reserve Bank of India compounded on monthly basis
• Constitution of MSE Facilitation Councils mandatory for state governments
• Inclusion of one or more representatives of MSE associations in the Facilitation Council
• Jurisdiction of the council in a state to cover wherever the buyer may be located
• The council may utilise the services of any institution or centre for conciliation and alternate dispute resolution services
• Reference made to the council to be decided within 90 days from the date of reference
• Declaration of payment outstanding to MSE supplier mandatory for buyers in their annual statement of accounts
• Interest (paid or payable to buyer) disallowed to supplier for deduction for income tax purposes
• No appeal against order of Facilitation Council to be entertained by any court without deposit of 75 per cent of the decreed amount payable by buyer
• The appellate court may order payment of a part of the deposit to the supplier MSE.
