Revised MSME Definition: Legal Framework and Its Implications on Indian Businesses
Introduction
Micro, Small, and Medium Enterprises (MSMEs) are not only economic entities,
but are also the backbone of India's industry. Based in law and policy, MSMEs
represent an entrepreneurial spirit in India that is resilient, inclusive, and
future-oriented. By 2023, they account for nearly 30% of India's GDP and employ
over 110 million people. These numbers are meaningful, but MSMEs represent
economic justice and local empowerment and sustainable development.
This article will consider the legal framework,
economic dimension, policy environment, and ground realities that make up the
MSME landscape in India.
Legal Definition and Classification
Under the MSMED Act, 2006, MSMEs are classified
by investment in plant and machinery, or equipment and annual turnover. The
revised definition, will come into effect on July 1, 2020, it will apply
equally to the manufacturing sector as well as service sectors in the following
manner:
1. Micro Enterprise: Investment ₹ 1 crore and
Turnover ₹ 5 crore
2. Small Enterprise: Investment ₹ 10 crore and
Turnover ₹ 50 crore
3. Medium Enterprise: Investment ₹ 50 crore and
Turnover ₹ 250 crore.
An
enterprise must meet both to be classified under a category. The Central
Government retains the right to increase the investment and turnover disclosure
thresholds in accordance with the MSMED Act, to achieve that it has the ability
to stimulate sustainable economic and industrial development.
Legal Context and Administrative Authority
The principal legislation governing MSME is the
MSMED Act, 2006 and provides for:
1. Promoting and developing MSMEs
2. Delayed payment to MSMEs (Sections 15-24)
3. Adjudication through Micro and Small
Enterprises Facilitation Councils (MSEFCs)
4. Policy making by the Ministry of MSME
The Companies Act, 2013, Income Tax Act, GST
Act and Labour Laws also have a bearing on the legal aspects of MSMEs depending
on the nature and scale of business.
Important Legal Protections
1. Delayed Payment Protection
Section 15 of the MSMED Act specifically states
that MSMEs should receive payment within 45 days; if payment is not made the
MSME is entitled to penalty interest (3 times the rate notified by the Reserve
Bank of India).
This is a non-negotiable provision and is
intended to protect liquidity for small businesses that very often operate on a
slight margin.
2. Mandatory Purchase
The Public Procurement Policy Order, 2012
mandates that all Central Ministries/PSUs must purchase at least 25% of their
needs from MSMEs(with 4% of that quota from SC/ST-owned MSMEs and 3% from
female-owned MSMEs).
3. Udyam Registration
Udyam Registration was introduced to replace
the Udyog Aadhaar, and is a simplified digital recognition process. Udyam
registration is voluntary, but we recommend obtaining it for access to credit,
subsidies and protections.
How to Get Udyam Registration Number – Simple
Steps
1. Go to the Website
Visit the official site: udyamregistration.gov.in
2. Choose Registration Type
Click on “For New Entrepreneurs who are not Registered yet as MSME”.
3. Enter Aadhaar Number
o Use the Aadhaar number of the business owner or
authorized signatory.
o Verify using the OTP sent to your mobile.
4. Enter PAN & GST Details
o Provide PAN number (mandatory for Small and
Medium enterprises).
o GST number is optional for Micro enterprises.
5. Fill Business Info
Add details like:
o Business name and type (Proprietorship,
Partnership, etc.)
o Address
o Date of start
o Employee count
o Investment and turnover
6. Submit the Form
Check the details, accept the declaration, and click submit.
7. Get Udyam Number
After submission, you will receive your Udyam Registration Number and a
digital certificate on your screen.
That’s it! No documents or fees are required.
Once registered, your business is officially recognized as an MSME.
Government Schemes and Support
1. Credit and Financial Support
- Credit Guarantee Fund Trust for Micro and
Small Enterprises (CGTMSE):- Provides up to 2cr of collateral-free credit to
lenders with guarantees.
- Emergency Credit Line Guarantee Scheme
(ECLGS):- Created during the COVID-19 pandemic to help enterprises with
operational capital requirements.
- MUDRA Yojana:- The Pradhan Mantri MUDRA
(PMMY) Yojana allows to lend micro-units up to 10 lakh (Shishu, Kishor ,
Tarun).
2. Skill and Capacity Building
- Technology
Centres:- Over 15 tool rooms for skill training, prototyping and consultancy.
- Lean
Manufacturing Competitiveness Scheme (LMCS):- The effort to reduce waste and
increase productivity.
3. Marketing and Export Support
- ED
Certification:- The scheme promotes Zero Defect - Zero Effect manufacturing.
- International
Cooperation Scheme:- Enable an Indian presence in International expos and
buyer-seller meetings.
Challenges on the ground
Even
with strong frameworks in place, there are still challenges for MSMEs facing an
array of challenges on the ground:
1. Access to Credit: Banks still require
collateral for loans, despite CGTMSE protections.
2. Regulatory Burdens: The multitude of
compliances requirements can hinder micro-entrepreneurs, especially in
semi-urban and rural areas.
3. Slow Payments: While there are laws in
place, such mechanisms to enforce the law struggle to support the small players
due to disparity in power.
4. Technology Divide: Most MSMEs do not possess
the technological advancements needed to compete in Industry 4.0.
5. Informality: MSMEs are patently informal and
unregistered; they comprise over 90% of the total MSME sector and thus remain
non-visible for access to the system formal benefits and advantages.
Therein lies the paradox: that the small
enterprise that powers India's industrial engine may find itself run over by
the large machine of a failing administration.
Judicial Interpretation and Role of Tribunals
Indian courts consistently reaffirm the
protective purpose of the MSMED Act, as seen in:
-
Shilpi Industries vs. Kerala State Electricity
Board (2020):
The Supreme Court decided that an MSME may
invoke arbitration rights under section 18 of the Act, despite separate
arbitration provisions in the contracts.
-
Principal Chief Engineer vs. Manibhai &
Brothers (2022):
Reaffirmed that delay in payment will attract
penal interest automatically, and that MSEFCs have powers to settle these
disputes.
These judgments illustrate the judiciary's
position not to allow MSMEs to not have remedy.
Conclusion: Towards a Resilient MSME Ecosystem
MSMEs are not just the foundation of industrial
growth—they are the cornerstone of India’s economic development. They seek
certainty, innovation, and inclusion, not handouts. With regulatory empathy,
digitized compliance, real-time credit, and decentralized skilling, the sector
can transform fundamentally.
Rooted in the spirit of economic justice under
Article 43, MSMEs are central to India’s progress. It’s time to legislate,
innovate, and collaborate—with MSMEs, not just for them.
FAQ’S (Frequently Asked Questions)
1. Under which legal framework are MSMEs
governed in India?
MSMEs in India are governed under the Micro,
Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006). This
central legislation lays down the legal definitions, regulatory framework,
rights, entitlements, and institutional mechanisms for MSME development and
protection.
2. What is the statutory basis for classifying
an enterprise as Micro, Small or Medium?
The classification is provided under Section 7
of the MSMED Act, 2006, as amended via Notification No. S.O. 2119(E) dated 26th
June 2020. It defines MSMEs based on a composite criterion of:
- Investment in plant and machinery or equipment, and
- Annual turnover of the enterprise.
Both criteria must be satisfied concurrently.
3. Can an enterprise engaged only in trading
activities be legally classified as an MSME?
As per the Office Memorandum dated 2nd July
2021 issued by the Ministry of MSME, retail and wholesale trade activities have
been brought under the purview of MSMEs only for the purpose of priority sector
lending. However, such enterprises are not eligible for benefits under
other MSME development schemes unless specifically notified.
4. Does Udyam Registration have statutory
validity and is it recognized across departments?
Yes. The Udyam Registration Certificate is
issued under the authority of the MSMED Act, 2006 and carries legal validity
across all Central and State Government departments, public sector undertakings
(PSUs), and banks. It is considered conclusive evidence of MSME status and does
not require renewal.
5. Is there a legal restriction on the number
of Udyam Registrations for a single enterprise?
Yes. As per the official guidelines under Udyam
Registration, only one Udyam Registration is permitted per enterprise,
even if the business has multiple branches or units. However, all activities
including manufacturing, services, or a combination thereof may be included in
the single registration.
6. What is the penalty for misrepresentation or
fraudulent MSME registration?
As per the provisions of the Indian Penal Code
(IPC), 1860 and other applicable laws, furnishing false information for MSME
classification or registration may attract penal consequences including fines
and imprisonment. Moreover, such entities are liable to be disqualified from
receiving government benefits, and may face recovery proceedings for wrongly
claimed subsidies or support.
7. Is Udyog Aadhaar Memorandum (UAM) still
legally valid?
No. The Udyog Aadhaar Memorandum system has
been superseded by Udyam Registration with effect from 1st July 2020.
Enterprises registered under UAM are legally required to migrate to the Udyam
Registration system to retain MSME status and benefits.
