MSMEs: The Engine of Growth Recent Compliance requirements helping MSMEs

MSMEs: The Engine of Growth Recent Compliance requirements helping MSMEs


Apr 26


Posted by: CS Shilpi Thapar

By CS Dr(h.c) Shilpi Thapar & Ajay Jaisingh

Background of recent steps by the Govt for MSMEs:

Why are MSMEs important?

MSMEs – an abbreviation of Micro, Small & Medium enterprises- are India’s second-largest job creators after agriculture, despite the fact that agriculture sector’s contribution to GDP is less than MSME. The MSME sector is seen contributing to around 30% the GDP while providing employment to more than 120 million people through about 65 million MSME Units, which is noteworthy given that a large section of the workforce in the nation lacks vocational skills. The MSME sector also demonstrates the entrepreneurship spirit of India.

A strong MSME sector is empowered to absorb the emerging workforce, especially the migrants from the agriculture sector, providing an answer to one of the biggest issues faced by the government today – the gap between employability and employment.

Definitions and Important provisions of MSME Development Act, 2006:

Definitions of Micro, Small & Medium Enterprises In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes:

  1. Manufacturing Enterprises: the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951) or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use. The Manufacturing Enterprises are defined in terms of investment in Plant & Machinery.
  2. Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. The limit for investment in plant and machinery / equipment for manufacturing / service enterprises, as notified, vide S.O. 1642(E) dtd.29-09-2006 are as under:
Manufacturing Sector
Enterprises Investment in plant & machinery
Micro Enterprises Does not exceed Rs.25Lacs
Small Enterprises More than Rs.25Lacs but does not exceed Rs.5crores
Medium Enterprises More than Rs.5crores but does not exceed Rs.10crores
Service Sector
Enterprises Investment in equipments
Micro Enterprises Does not exceed Rs.10Lacs
Small Enterprises More than Rs.10Lacs but does not exceed Rs.2crores
Medium Enterprises More than Rs.2crores but does not exceed Rs.5crores

Important Point to be noted: In the recent judgement of Delhi High Court dtd. April 7, 2018, in the matter of M/S Ramky Infrastructure Private Limited vs. Micro and Small Facilitation Council & Anr. W.P.(C) 5004/2017, wherein it has been held that an entity which falls within the definition of the micro/small enterprise will be treated as a ‘supplier’ under Section 2(n) of the MSMED Act even if it has not filed a Memorandum as required under Section 8(1) of the MSMED Act.

Internationally, SMEs are defined by two simple and clear parameters – the number of employees and revenues. In India, SMEs are defined only on the basis of assets: investment in plant and machinery and equipment.

The MSME Development (Amendment) Bill, 2018, which prescribed the following Turnover based criteria for defining MSMEs was introduced in the Lok Sabha during the last monsoon session but would have lapsed after recent Budget Session of 2019 after facing strong opposition from all corners:

Manufacturing & Service Sector
Enterprises Annual Turnover
Micro Enterprises Does not exceed Rs.5crores
Small Enterprises More than Rs.5crores but does not exceed Rs.75crores
Medium Enterprises More than Rs.75crores but does not exceed Rs.250crores


A clear definition is imperative for MSMEs to draw the benefits of government schemes/policies, nationally or internationally; especially, when relaxations/rebates are designed for a certain category of firms.

Section 15:  Liability of buyer to make payment

Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.

Section 2(b) Explanation—For the purposes 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 fifteen 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 fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;

 Section 22: Requirement to specify unpaid amount with interest in the annual statement of accounts

Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish various additional information in his annual financial statements related to the unpaid amount and interest thereon…

 Section 11:  Procurement preference policy

For facilitating promotion and development of micro and small enterprises, the Central Government or the State Government may, by order notify from time to time, preference policies in respect of procurement of goods and services, produced and provided by micro and small enterprises, by its Ministries or departments, as the case may be, or its aided institutions and public sector enterprises

 Section 9:  Measures for promotion and development

The Central Government may, from time to time, for the purposes of facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises, particularly of the micro and small enterprises, by way of development of skill in the employees, management and entrepreneurs, provisioning for technological upgradation, marketing assistance or infrastructure facilities and cluster development of such enterprises with a view to strengthening backward and forward linkages, specify, by notification, such programmes, guidelines or instructions, as it may deem fit.

What prompted the launch of the MSME sops?

Small businesses had a tough time in the past two years due to the cash crunch caused by the demonetization of high-value currencies in November 2016 and the business disruption caused by the July 2017 launch of the goods and service tax (GST). The fund crunch faced by non-banking financial companies after the failure of IL&FS is feared to have dried up a key source of funds for MSMEs. Stress in the sector has a huge socio-economic impact.

MSME Samadhaan: 9974 applications were filed by MSEs involving total amount of Rs. 2765.22 Crore in MSME Samadhaan Portal up to November, 2018. Out of these, 643 applications have been mutually settled involving Rs. 94.71crore. 2988 applications were converted into cases and 1911 applications have been rejected by MSEFC Council. 2739 cases have been disposed by MSEFC involving Rs. 942.39 crore.


Credit Flow: As per the RBI data on Sectoral Deployment of Bank Credit (published on 31st October, 2018), the year on year growth of deployment of gross bank credit in the micro and small sector decreased from 1.7 % in September 2016-17 to -1.4% in September 2017-18 period. The same figure for the medium sector increased from -8.0 % to 3.3 %.


Hon’ble Prime Minister of India on 2nd November 2018 launched Support and Outreach Programme and unveiled 12 key initiatives to help the growth, expansion and facilitation of MSMEs across the Country.

1) Loans up to Rs.1crore within 59 minutes through an online portal.

2) Interest subvention of 2% for all GST registered MSMEs on fresh or incremental loans.

3) All companies with a turnover of more than 500 crores to be mandatorily on TReDS platform to enable entrepreneurs to access credit from banks, based on their upcoming receivables, thus, solving the problems of cash cycle. (Gazette notification S.O. 5622(E) dtd.02.11.2018 related to MSME FORM-I was issued along with the notification no.S.O. 5621(E) dated 02.11.2018 for TReDS platform mandate to provide overall relief to cash crunch of MSMEs)

4) All PSUs to compulsorily procure 25 percent from MSMEs instead of 20 percent of their total purchases.

5) Out of the 25 percent procurement mandated from MSMEs, 3 percent reserved for women entrepreneurs.

6) All CPSUs to compulsorily procure through GeM portal.

7) 100 Technology Centres to be established at the cost of Rs 6000 crore.

8) Govt. of India to bear 70 percent of the cost for establishing Pharma clusters.

9) Returns under 8 labour laws and 10 Union regulations to be filed once in a year.

10) Establishments to be visited by an Inspector will be decided through a computerised random allotment.

11) Single consent under air and water pollution laws. Returns will be accepted through self-certification and only 10 percent MSME units to be inspected.

12) For minor violations under the Companies Act, entrepreneurs no longer have to approach court but can correct them through simple procedures.

Mandatory reporting by Specified Companies- MSME-I



New Delhi, the 22nd January, 2019

S.O. 368(E).—Whereas, the Central Government vide notification number S.O. 5622(E), dated the 2nd November, 2018 has directed that all companies, who get supplies of goods or services from micro and small enterprises (medium enterprises not covered) and whose payments to micro and small enterprise suppliers exceed forty five days (even if agreed payment terms are more than 45days) from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) (hereafter referred to as “Specified Companies”), shall submit a half yearly return to the Ministry of Corporate Affairs stating the following:

(a) the amount of payment due; and

(b) the reasons of the delay;

And whereas, in exercise of power under section 405 of the Companies Act, 2013, (18 of 2013) the Central Government, considers it necessary to require “Specified Companies” to furnish above information under said section of the Act.

Now, therefore, in exercise of the powers conferred by section 405 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following Order, namely:-

  1. Short title and commencement- (1) This Order may be called the Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019.

(2) It shall come into force from the date of its publication in the Official Gazette.

  1. Every specified company shall file in MSME Form I details of all outstanding dues to Micro or small enterprises suppliers existing on the date of notification of this order within thirty days from the date of publication of this notification. (the same has been modified to “within 30days from the date the said e-form MSME Form I is deployed on MCA 21 Portal” vide MCA General Circular No.01/2019 dtd. 21.02.2019)
  2. Every specified company shall file a return as per MSME Form I annexed to this Order, by 31st October for the period from April to September and by 30th April for the period from October to March.  

Exemptions to this notification: Companies which are

  • not procuring goods and/or services from Micro and Small Enterprises (like, procuring from Medium Enterprises). Considering the recent High Court ruling, where filing Memorandum or taking MSME certificate is not mandatory for MSME, even declaration/undertaking from supplier of goods/services is sufficient to designate them as Micro or Small Enterprise.
  • if procuring from Micro and Small Enterprises, paying them within 45days from the date of acceptance or deemed acceptance as per MSMED Act, 2006

Non-Compliance of this notification:

Extract from section 405 of Companies Act 2013. Power of Central Government to direct companies to furnish information or statistics

(1) The Central Government may, by order, require companies generally, or any class of companies, or any company, to furnish such information or statistics with regard to their or its constitution or working, and within such time, as may be specified in the order……..

Non-compliance will lead to punishment and penalty under the provision of section 405(4) the Companies Act as follows:

On Company – fine upto Rs. 25,000

On Directors, CFO and CS (KMP) – Imprisonment up to 6 Months


Fine – not less than Rs. 25000 which can go up to Rs. 300000 per person

Mandate to Companies to register on TReDS platform

To achieve the same objective of improving MSME’s liquidity and 1 of the 12 steps mentioned hereinabove, Central Government vide notification no. S.O.5622(E) dated 02.11.2018, has mandated that all Companies with a turnover of more than Rs. 500 crores shall be required to get themselves on boarded on the TReDS (Trade Receivables Discounting System platform), set up as per the notification of the RBI. This is to ensure Trade Receivables Discounting of MSME’s Invoices raised on these companies.

  • Presently, there are 3 exchanges authorised by RBI,,,
  • Even after 4months of this notification, there is a little success in achieving this objective with Pvt sector Companies who are reluctant to get on board since they will have to make sure all the payments to MSME are done within 45days. Almost all public sector companies are already on boarded as per mandate.
  • To achieve maximum compliance under this notification, ICSI has started asking confirmation form CS of that large Corporate to confirm compliance.
  • Even ROCs have started issuing notices to specified Companies to confirm compliance of this notification.

Once all these big companies are on board, it is going to provide a big boost to MSME’s liquidity.

Effect of these steps on the Ground

It seems Government is able to achieve its objectives with the recent steps. According to a recent survey by the Confederation of Indian Industry (CII) which came out on 8th March 2019, among all the sectors, micro, small and medium enterprises (MSMEs) was the largest job creator in the last four years – with growth of 13.9 per cent – and will continue to be so in the next three years,. The survey mentioned that there was a need for greater hand holding of the MSMEs which are yet to take full advantage of government initiatives.

“There is an expectation of higher growth on employment for the next three years,” the survey said. This optimism emanates from the fact that government initiatives like the 2 per cent interest subvention given to all MSMEs and trade receivables e-discounting system (TReDS) among other steps taken in recent “Support & Outreach programme” for MSMEs would drive future growth leading to more employment, the report said.



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