A Guide to the MSMED Act in India

Posted on Friday, December 2nd, 2022 | By IndusInd Bank

The MSME or Micro, Small, Medium Enterprises for long had demanded for a single comprehensive law which will ease the challenges for small businesses by easing rules and regulations.  In addition, groups like the Abid Hussain Committee (1997) and the Study Group led by Dr. S.P. Gupta (2000) recommended creating a proper legal framework for the small sector to free it from having to abide by numerous laws and regulations. 

While small-scale industries have remained crucial to the economy, small-scale services have recently emerged as a key sector that contributes significantly to the economy and employs millions of people. The natural transition of small businesses to medium-sized businesses in a rapidly expanding economy like ours need to be fostered through proper policy interventions and legal frameworks. That’s why the Micro, Small and Medium Enterprises Development Act of 2006 was created and a separate Ministry of MSME was set-up by the government with these goals in mind.  

What is the MSMED Act, 2006? 

The MSMED Act, 2006 aims at facilitating the promotion, development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto. A significant change has occurred with the enactment of the Micro, Small, and Medium Enterprises Development Act 2006, extending the ability to support Medium Enterprises while also including services in the definition of MSMEs. 

The Micro, Small and Medium Enterprises (MSME) are divided into two groups in compliance with the provisions of the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006:  

Manufacturing Enterprises: 

Companies that produce or manufacture goods for any of the industries listed in the First Schedule of the Industries (Development and Regulation) Act, 1951. Investment in plant and machinery is how the manufacturing industry is defined. 

Service Enterprises: 

The businesses that participate in offering or rendering services and are categorized based on investment in equipment. 

What are the features of the MSMED Act? 

The MSMED Act, 2006 offered the first-ever legal framework for recognizing the idea of an ‘enterprise’ (both manufacturing and services), as well as for combining the three levels of these enterprises, namely micro, small, and medium-sized. 

The important features of this Act are: 

• Creation of dedicated funds for the growth and promotion of the MSME. 
• Increase in the level of competitiveness amongst the MSMEs  
• Notification of initiatives or plans to support the expansion of MSMEs. 
• Adoption of modern procedures and policies for MSME loans. 
• Preference to goods & services provided by micro and small businesses for government contracts. 
• Simplification of the procedure of business termination for all three types of enterprises.

What is the main purpose of the MSMED Act? 

The Act seeks to promote the growth and development of small and medium-sized businesses while boosting their competitiveness by: 

• Ensuring that ‘small enterprise’ and ‘medium enterprise’ have legal meanings.
• Making provisions for the creation of the National Small and Medium Enterprises Board, a high-level forum with participation from all interested parties for reviewing policies and offering suggestions. 

ESTABLISHMENT OF BOARD: 

The National Board for Micro, Small, and Medium Enterprises, formed under section 3 of the MSMED Act of 2006, is referred to as the “Board.” The Board’s headquarters are in New Delhi. 

ESTABLISHMENT OF ADVISORY COMMITTEE: 

An advisory committee may be established by notification from the central government. 

Who are covered under the MSMED Act, 2006? 

All types of businesses, including Proprietorships, Hindu Undivided Families, Associations of people, Co-operative societies, Partnership firms, Companies, or Undertakings, can apply for MSME registration and become eligible for the MSMED Act’s benefits. 

Any individual who wishes to create a micro, small, or medium-sized business may do so by submitting the necessary paperwork to the authority designated by the State Government under subsection (4) or the Central Government under subsection (3) of the Act or apply online. 

Provisional Registration: During the pre-investment stage, a unit is given provisional MSME registration to allow it to take the appropriate actions for MSME loan applications, land or an industrial set, water, power, or telephone connections, among other things. 

• Permanent / Final Registration: A provisionally registered industrial unit must apply for a permanent or final MSME registration when it is prepared to begin production. An industrial unit that is already operational is qualified to apply for permanent registration without first completing the provisional registration procedures. 
• The MSMED Registration/Entrepreneurs Memorandum (EM) Number assigned by a competent body should be mentioned or written on the letterheads of Micro and Small Enterprises, supply order sheets, invoices, bills, and other pertinent documents to maintain the identification of being an MSE supplier. 

What are the benefits of the MSMED Act, 2006? 

A micro or small business can profit from a number of things by filing a memorandum with the District Industries Center (DIC) in its neighborhood, including:  

• Easy access to MSME loans from banks without the need of any collateral. 
• Preference in obtaining government tenders. 
• Benefits from Stamp Duty. 
• Cost reduction in electricity bills. 
• Reservation policies for manufacturing/production through mediation and arbitration. 
• Reimbursement of ISO Certification Expenses. 

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision.  IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.