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Athena Legal Update On Micro, Small And Medium Enterprises Sector

By Rajat Prakash, Siddharth Mahajan & Ramanpreet Singh

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The Micro, Small and Medium Enterprises Development Act, 2006 (Act) was enacted to extend policy support for small enterprises so that they are enabled to grow into medium ones, adopt better and higher levels of technology and achieve higher productivity to remain competitive in a fast globalization era. The onset of the COVID-19 pandemic has led to economies worldwide being shut as means of precaution. 

This has caused severe losses to all industries but small industries have still been the most vulnerable ones because of their size, scale of operations and limited financial resources. The government recently announced the Atma-nirbhar Bharat Abhiyan through which India is being given itsstimulus/ economic package which shall infuse Rs. 20 lakh crores into the Indian economy in order to help it recover from the impact of the pandemic.

The economic package was announced by the Finance Minister in five tranches. The package has made provisions for launching various schemes in order to assist the Micro, Small and Medium Enterprises (MSMEs).

The government is also bringing reforms to the legislations and policies in order to boost the MSME sector such as with suspension of insolvency proceedings. One of the most important reform that the government has proposed to bring is to the definitionof MSME under the Act. The Finance Minister on May 13, 2020 announced that the Act would be amended to increase the threshold and help the MSMEs gain the benefits for a longer duration. Below is a comparison of the existingdefinition and the proposed definition.

Existing Definition of MSMEs

The Act classifies Micro, Small and Medium Enterprises (MSMEs) under two sectors – manufacturing and service.Both the sectors incorporate different criterion for defining MSMEs as shown in the chart below:

ClassificationMicroSmallMedium
ManufacturingEnterprisesInvestment up toRs. 25 LakhInvestment up toRs. 5 CroresInvestment up toRs. 10 Crores
Services EnterprisesInvestment up toRs. 10 LakhInvestment up toRs. 2 CroresInvestment up toRs. 5 Crores

Proposed Definition

According to Finance Ministers announcement, the criterion will be merged for both Manufacturing and Services sector and a new threshold of Turnover will be incorporated as well, as shown in the chart below

ClassificationMicroSmallMedium
Manufacturing and Services EnterprisesInvestment up to Rs. 1 Crore and Turnover up toRs. 5 CroresInvestment up to Rs. 10 Crores and Turnover up to Rs.50 CroresInvestment up to Rs. 20 Crores and Turnover up to Rs.100 Crores

The new definition will be brought into effect through a legislative amendment to the Act.

Registration Process for MSMEs

Registering an enterprise under the Act can enable that enterprise to avail the benefits provided by both Central and State Governments. The registration process is relatively simple as it merely requires filing of the form provided in the Micro, Small and Medium Enterprises Development (Furnishing of Information) Rules, 2016. The form, which is called the Udyog Aadhaar Memorandum (UAM), can be submitted online through the designated portal.

Submission of the online form requires the applicant to have an Aadhaar Card, in the absence of which the offline registration process needs to be followed, by filling the form and submitting the same through any District IndustryCentre. In case the applicant wishes to update any information, the same can be done through the Udyog Aadhaar portal with ease. For the purpose of the UAM, any person or entity can be registered.

Benefits of MSME Registration

There are abundant benefits to being registered as an MSME and the Government has launched multiple schemes over the ages which provide the MSMEs with benefits, including but not limited to:

  1. The Public Procurement Policy for MSMEs Order, 2012 insists on mandatory procurement from MSMEs. Every PSU has to set an annual goal of 20% procurement from MSME;
  2. Priority lending is available for MSMEs as per the directions of the RBI which has earmarked funds to be given to MSMEs;
  3. Reduced rate of interest from banks;
  4. The government has set up a Credit Guarantee Fund Trust for Micro and Small Enterprises in order to provide collateral free loans to MSMEs;
  5. The Government provides access to several exchange programs, craft fairs, exhibitions and trade related events internationally. The MSMEs also get incentives on export of goods and services by way of subsidies, tax exemptions and technical support;
  6. Technology and quality upgradation support to the MSMEs; and
  7. Reimbursement on payment made for obtaining Trade Mark, Patent or any other intellectual property;

Benefit for MSMEs under the Atman-nirbhar Bharat Abhiyan

The Government through the Finance Ministry announced its economic package to protect the Indian economy against the Covid-19 pandemic. Under the economic package, the benefits accorded to the MSMEs are:

  1. The Government shall disallow global tenders for government procurement for projects worth up to Rs.200 crores, which shall help the MSMEs bid on the tenders more successfully;
  2. An e-market linkage will be made available to the MSMEs to act as a replacement for the trade fairs andexhibitions;
  3. Equity funding will be provided to the MSMEs which have shown growth potential and viability. This will bemade through a Fund of Funds with a corpus of Rs.10,000 crores;
  4. Automatic collateral free loan will be provided up to 20% of the outstanding credit of the MSMEs. This willcarry a pay-out tenor of 4 years with a moratorium of 12 months;
  5. For the MSMEs which are declared as Non-Performing Assets or Stressed, a subordinate debt facility will be made available by issuing debt to promoters who will then infuse the same by way of equity; and
  6. Special insolvency resolution framework for the MSMEs will be provided through Section 240A of the Insolvency and Bankruptcy Code 2016.

Apart from the above benefits, the State Government have their own schemes for MSMEs which can be availed by the MSMEs within that particular state.

It is evidently clear that the government is working toward the benefit of the MSMEs as seen from the multitude of schemes that have been put in place for them under the Atam-nirbhar Bharat Abhiyan. The amended definition will increase the number of enterprises which could avail MSME benefits. MSMEs can look forward to achieve theirgrowth scale goals and in the long run hope to become large enterprises. Foreign collaborators would be willing to collaborate with the relatively bigger enterprises which will be result from the revision to the Public Procurement Policy, which has prohibited foreign bidders to participate in public procurement tenders of value up to Rs. 200 crore. The MSMEs can look toward a healthier restart post the pandemic due to such schemes that have been put in place exclusively for their benefit.

The authors are Rajat Prakash (Managing Partner), Siddharth Mahajan (Partner) & Ramanpreet Singh (Associate) at Athena Legal

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