Written by – Gunjan Chhabra[1] , Partner, Adwitya Legal LLP

Introduction

The Micro, Small and Medium Enterprises(MSMEs) are an important sector in India. MSMEs contribute to approximately 8% of India’s GDP, employs over 60 million people, has an enormous share of 40% in the exports market and 45% in the manufacturing sector.

Earlier, there was a complete lack of structured and proper legal framework governing MSMEs in India. With a view to facilitate the promotion and development and enhancing the competitiveness of MSMEs, The Micro, Small and Medium Enterprise Act, 2006 (“MSMED Act, 2006”) was been enacted.

The aim of this article is to understand the significance, scope, and developments in the law by analyzing the MSMED Act, 2006 under various heads such as, benefits to the MSMEs, formalities required for an enterprise to fall under the scope of the MSMED Act, procedure required to avail the benefits as provided under the MSMED Act, and the process and the method of dispute resolution.

Kinds of Organisation Covered

The scope and Applicability of the MSMED Act, 2006 is provided in Section 7 of the MSMED Act, 2006. Section 7 provides three kinds of enterprises which are covered under the MSMED Act, 2006, that is micro, small and medium enterprises.

Earlier, the criteria of classification of MSMEs under the MSMED Act, 2006 was Investment in Plant and Machinery/Equipment alone, and there were different thresholds for manufacturing enterprises, and different threshold for enterprises rendering services.

However, the said definition has been recently amended. The new classification of enterprises as per Notification dated 01.06.2020 (with effect from 01.07.2020) is as below:

Composite Criteria: Investment in Plant and Machinery/Equipment and Annual Turnover

Enterprises (Manufacturing and Service)	Investment in and Turnover	Limit
A Micro enterprise	Investment in plant and machinery or equipment;	does not exceed one crore rupees (<Rs. 1 crore)
Turnover	does not exceed five crore rupees (<Rs. 5 crore)
A Small Enterprise	Investment in plant and machinery or equipment;	does not exceed one crore rupees (<Rs. 10 crore)
Turnover	does not exceed five crore rupees (<Rs. 50 crore)
A Medium Enterprise	Investment in plant and machinery or equipment;	does not exceed one crore rupees (<Rs. 50 crore)
Turnover	does not exceed five crore rupees (<Rs. 250 crore)

Benefits Available to MSMEs under the Act

The MSMED Act, 2006 provides various benefits to registered enterprises.

Time Period for Making Payments

One of the most significant benefit of the MSMED Act, 2006 is to protect the seller/MSMEs from the delayed payment of the buyer. The MSMED Act, 2006 does this by putting in place heavy penalties on buyers for delayed payments.

As per the MSMED Act, 2006 the Appointed Day as defined by the act is relevant for deciding the time period for making payments by the Buyer. Section 2(b)[2] defines appointed day as the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

In any agreement between an MSMEs and a Buyer of goods/services there can be two scenarios[3]:

1. Where the agreement between the parties provides for a time by which the Payment has to be made by the Buyer- In such a scenario the payment has to be made before the time so fixed by the Agreement, or 45 days from the day of acceptance or deemed acceptance.
2. Where the Agreement is silent regarding the time period for making the Payment – In such a scenario, the Payment has to be made by the buyer before the Appointed day.

Provision for Payment of Penal Interest

The consequences of not making payments within the prescribed period of time are provided for under Section 16[4] and  Section 17[5] of the MSMED Act,2006 which provides the rate of interest as well as the date from which such interest needs to be paid to the MSMEs for Delayed Payments. Section 16 of the MSMED Act, 2006 accordingly provides as follows:

1. The relevant date for the start of interest, is the Appointed Date in the case of Agreements providing no time period, or incase where time for payment is provided, then the day immediately following the agreed date.
2. The rate of interest applicable to Delayed Payments under the MSMED Act, 2006 is compound interest with monthly rests at the rate of three times the bank rate notified by the Reserve Bank of India.
3. Even if the Principal amount has been paid by the Buyer, the MSMEs are free to avail remedies for the payment of interest amount alone.[6]

Remedies Available – Complaint to the MSEFC

The MSMED Act, 2006 has established the Micro and Small Enterprises Facilitation Council (“MSEFC”) under this Act. Thus, incase of default MSMEs can approach the MSEFC with complaints to enable initiation of Conciliation or Arbitration, which will be explained hereinafter. The timeline provided in the section for disposal of any proceedings is within 90 days from the date of making of such reference.[7]

Other Benefits

Benefits in addition to Section 17[8] and 18[9] of the MSMED Act, are available under Chapter IV of the Act. Section 9 to Section 14 of the Act provides for certain benefit to the MSMEs such as, Central Government initiatives to enhance the capabilities of MSMEs[10], easy credit facilities to MSMEs in form of bank loans or other,[11] procurement of preferential policies by the central govt. for promotion and development of MSMEs[12], creation and allocation of special funds for MSMEs.[13]

Some other benefits include[14] Collateral free bank loans, reservation policies, easy licencing approvals and registrations, tax benefits, exemptions and subsidies, waiver of fees, reduced bank rates, concessions in electricity bills, concessions in patent registration etc.

Registration required to avail the benefits

The benefits provided under the MSMED Act, 2006 can only be availed by enterprises which qualify the eligibility under Section 7 of the MSMED Act, 2006 and have completed all the formalities required under the MSMED Act, 2006. The MSMEs under Section 8[15] of the MSMED Act, 2006 is required to file a memorandum of micro, small or, as the case may be, of medium enterprise with the specified authority. The authority as stated by the Central Government via notification dated 29.09.2006[16] (manufacture/production of goods enterprises) and 07.11.2006[17] (Services enterprises) is the General Manager, District Industries Centre, or any District level officer of equivalent rank in the Directorate or the department dealing with MSMEs of the State Government or Union territory Administration.

The earlier registration process of obtaining Udyog Aadhaar Memorandum (UAM) number and Entrepreneur Memorandum (EM-I / EM-II) which had a lengthy procedure[18] has now been replaced by Udyam Registration in July 2020.[19]

The Udyam MSME registration process is a paperless, online process which is based on self-declaration methodology[20]. The requirements for the registration are as follows:

1. The Pan Card and Aadhaar Card of the Proprietor (Proprietorship firm), Managing Partner (Partnership firm), or Karta (Hindu Undivided family business).
2. In case of a company (Public/Private), Limited Liability Partnership, Co-operative Society, or Trust, the Aadhaar number shall be of the authorized signatory and the PAN number shall be of the organization.
3. Though GST number and Income-tax details are required but the same can be retrieved from the PAN number as they are interlinked.

The step wise registration process[21] includes:

1. Filling of Aadhaar Number and validation of the same via OTP;
2. Then PAN verification;
3. The next step requires the proprietor to fill the Udyam registration form and fill the require details;
4. After successful filing of the details, check on the box asking to agree on terms and conditions and click on final submit;
5. After clicking on final submit, the proprietor will receive an OTP which is required to complete the registration process.

After successful completion of the registration process, the proprietor will receive a permanent registration number and a certificate which will be issued online. The certificate contains a dynamic QR code which displays the details about the enterprise. Once the registration is completed there is no need to file for a renewal of registration and the proprietor is not required to do multiple registrations, all activities regarding manufacturing and service can be included in the same registration. In case of a grievance the same can be addressed to Champions control room at District Industries Centres.

The ministry vide Office Memorandum dated 06.08.2020[22] has made it mandatory, even for existing MSMEs to get themselves re-registered under the Udyam portal. The MSME ministry vide Notification dated 16.06.2021[23] has notified that the deadline for validity of UAM registration and re-registration under udyam is till 31.12.2021, whereafter the validity of Udyam Registration will no longer be valid.

Process to invoke conciliation & Arbitration proceedings under the Act

Section 18 of the MSMED Act, 2006 allows a supplier to file a reference to the MSEFC in case the buyer fails to pay the principle amount due and the compound interest generated on it since the day specified in the agreement or since the appointed day.

Procedure To File Complaint

The Ministry of MSMEs has developed the SAMADHAAN online portal[24] to facilitate MSMEs to file their applications regarding delayed payments online. The application once filed is forwarded automatically online to the concerned MSEFC established by the State/UTs as per the provisions of MSMED-Act 2006. Action on the applications regarding delayed payment is taken by the concerned MSEFC only.

The documents required to file an online complaint, are:

1. The scanned PDF documents of work orders of Respondent. (Maximum Three)
2. Invoices generated by the Complainant against those work orders. (Maximum Three)

Samadhaan portal is an alteranative to physical application but does not bar filing of physical application at the concerned MSEFC. Once the online application is filed, the application is automatically forwarded online to the concerned MSEFC. Therefore, concerned MSEFC is to be contacted after filing the application online on MSME Samadhaan Portal. The contact address of concerned MSEFC is mentioned on the acknowledgement sent on the registered email of the applicant.

Once the concerned MSEFC entertains the reference, it commences the dispute redressal

mechanism. The MSEFC may by itself conduct the conciliation proceedings or may seek

assistance of a centre which provides such services. If the conciliation is successful then the council records it, and it is called an award my mutual consent, which cannot be appealed against. If however, conciliation fails, then the matter proceeds to arbitration.

According to the act, the mechanism are chronological in order meaning that a complaint will first undergo conciliation and only if the conciliation fails and stands terminated without any settlement between the parties, will the matter then proceed to arbitration.

In case the dispute proceeds, then the council under Section 18(3) shall either take up the dispute for arbitration or may refer the dispute to an arbitral institution. Such reference to arbitral institution shall be deemed to be a reference as if the arbitration was in pursuance of an unequivocal arbitration agreement under Section 7(1) of the Arbitration and Conciliation Act, 1996.[25] Thus, the latter dispute mechanism method comes into picture after the conciliation process fails.

The arbitration proceedings under Section 18(3) of the MSMED Act, 2006 are governed by the provisions of Part I of the Arbitration and Conciliation Act, 1996.

Territorial Jurisdiction

In case where the MSEFC takes up the dispute for arbitration itself, the territorial jurisdiction of the MSEFC is decided as per Section 18(4) of the MSME Act, 2006. As per Section 18(4)[26], the territorial jurisdiction of the MSEFC is where the MSME/Supplier is located, irrespective of where the buyer is located.

Fate of Award & Deposit of Award Amount

The award passed by the arbitral tribunal can be challenged/appealed as per the provisions enshrined under the Arbitration and Conciliation Act, 1996 i.e. Section 34 to a Court of Competent Jurisdiction as per Section 19 of the MSMED Act, 2006.

However, in order to challenge the award, the buyer needs to deposit the seventy five percent of the award amount or any amount deemed fit by the competent court.

Alternate Remedies

Having noted the above, it is still open to an MSME to move directly to the Court, or avail some other remedy available under law, provided that the MSME has not first approached the MSEFC.[27]

Furthermore, the Hon’ble Punjab and Haryana High Court in the case of Welspun Corp. Ltd. v. The Micro and Small Enterprises Facilitation Council, Punjab & Ors.,[28] held that “considering the uncommon arrangement made for the headway and improvement of the MSMEs, at any rate, two parties can on mutual consent agree to remove the jurisdiction of the Micro and Small Enterprises Facilitation Council.” Thus, the parties can decide to directly move to arbitration and oust the jurisdiction of the MSEFC, provided there is an arbitration clause, or both parties consent to such an ouster.

Applicability of Law of Limitation

The Hon’ble Supreme Court in M/S Silpi Industries v. Kerala State Road Transport Corporation[29] held that the provisions of Limitation Act, 1963 apply to arbitration under Section 18(3) of the MSMED Act, 2006. The Hon’ble Court held, in paragraph 18 of the judgment, that “In view of the express provision applying the provisions of the Limitation Act, 1963 to arbitrations as per Section 43 of the Arbitration and Conciliation Act, 1996, we are of the view that the High Court has rightly relied on the judgment in the case of Andhra Pradesh Power Coordination Committee and held that Limitation Act, 1963 is applicable to the arbitration proceedings under Section 18(3) of the 2006 Act. Thus, we are of the view that no further elaboration is necessary on this issue and we hold that the provisions of Limitation Act, 1963 will apply to the arbitrations covered by Section 18(3) of the 2006 Act.”

Conclusion

The MSMED Act, 2006 envision to protect, promote, and uplift micro, small and medium enterprises in India during the globalisation era.

Amongst the various benefits available to MSMEs under the law, one of the most significant benefit is the right of the supplier to invoke action against the buyer who has defaulted the payment of dues as per Section 15[30] of the MSMED Act, 2006, and the compound interest available for the same at three times the bank rate.

The conciliation & arbitration mechanism available through an online portal are also major benefits which are available, where the entire conciliation process needs to be completed within a limited period of 90 days[31].

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[1] Working with Adwitya Legal LLP as Partner, Arbitration and Dispute Resolution, e-mail: gunjan@adwlegal.co.in.

Author is grateful to Mr. Utsav Saxena, who is currently interning with Adwitya Legal LLP, for his assistance.

[2] Section 2(b), Micro, Small and Medium Enterprises Development Act, 2006.

[3] Section 15, Micro, Small and Medium Enterprises Development Act, 2006.

[4] Section 16, Micro, Small and Medium Enterprises Development Act, 2006.

[5] Section 17, Micro, Small and Medium Enterprises Development Act, 2006.

[6] Question 11, FAQ on Legal Issues Pertaining to the Provisions of MSMED ACT, 2006, MSME Samadhaan, Micro, Small and Medium Enterprises Development Act, 2006, available at https://samadhaan.msme.gov.in/MyMsme/MSEFC/FAQ.aspx.

[7] Section 18(5), Micro, Small and Medium Enterprises Development Act, 2006.

[8] Section 17, Micro, Small and Medium Enterprises Development Act, 2006.

[9] Section 18, Micro, Small and Medium Enterprises Development Act, 2006.

[10] Section 9, Micro, Small and Medium Enterprises Development Act, 2006.

[11] Section 10, Micro, Small and Medium Enterprises Development Act, 2006.

[12] Section 11, Micro, Small and Medium Enterprises Development Act, 2006.

[13] Section 13, Micro, Small and Medium Enterprises Development Act, 2006.

[14]Benefits Of Having MSME / SSI Registration Certificate,  Micro, Small and Medium Enterprises Registration Consultancy, available at https://www.msmeregistration.org/benefits.

[15] Section 8, Micro, Small and Medium Enterprises Development Act, 2006.

[16] The Gazette of India, Ministry of Small Scale Industries Notification No. REGD NO. D.L.-33004/99, dated 29.09.2006, available at https://msme.gov.in/sites/default/files/gazette%201636-E-Hindi-English.pdf. 

[17]The Gazette of India, Ministry of Small Scale Industries Notification No. REGD NO. D.L.-33004/99, dated 07.11.2006, available at https://msme.gov.in/sites/default/files/gazette%201909-E-Hindi-English.pdf.

[18]Notification, Ministry of Micro, Small & medium enterprises, Govt. of India, dated 18.09.2015, available at http://www.dcmsme.gov.in/GazetteNotification2576.pdf. 

[19]Office Memorandum No. 5/2(1)/2020-P&G/Policy, Ministry of Micro, Small & Medium enterprises, Govt. of India, dated 17.07.2020, available at https://udyamregistration.gov.in/docs/OM_UAN_17_7_2020.pdf

[20]MSME/Udyam Registration Portal, Ministry of Micro, Small and Medium enterprises, available at https://udyamregistration.gov.in/msme-registration-process/free-government-portal.html. 

[21] Notification, Ministry of Micro, Small and Medium Enterprises, dated 26.06.2020, available at https://egazette.nic.in/WriteReadData/2020/220191.pdf.

[22] Office Memorandum No. 2/1(5)/2019-P&G/Policy (pt. IV), Office of the Development Commissioner(MSME) Ministry of Micro, Small & Medium Enterprises, dated 06.08.2020, available at https://udyamregistration.gov.in/docs/Clarification_on_existing_EM_06082020.pdf

[23]Notification, Ministry of Micro, Small and Medium Enterprises, dated 16.06.2021, available at https://udyamregistration.gov.in/docs/227649.pdf.  

[24]MSME Samadhaan- Delayed Payment Monitoring System, Ministry of Small and Medium Enterprises, Govt. of India, available at https://samadhaan.msme.gov.in/MyMsme/MSEFC/COM_MSEFC_EntLogin.aspx

[25] Section 7(1), Arbitration and Conciliation Act, 1996.

[26] Section 18(4), Micro, Small, and Medium Enterprises Development Act, 2006.

[27] Delton Electricals v. Maharashtra State Elecricity Board, 2017 SccOnline Bom 9000; Q. 31 FAQ, Procedural Issues, MSME Samadhaan, Ministy of Micro, Small, and Medium Enterprises, Govt. of India, available at https://samadhaan.msme.gov.in/MyMsme/MSEFC/FAQ.aspx.

[28]Welspun Corp. Ltd. v. The Micro and Small Enterprises Facilitation Council, Punjab & Ors., 2011 SccOnline P&H 16956.

[29]M/S Silpi Industries v. Kerala State Road Transport Corporation, 2021 SccOnline SC 439.

[30] Section 15, Micro, Small and Medium Enterprises Development Act, 2006.

[31] Section 18, Micro, Small and Medium Enterprises Development Act, 2006.