The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions of delayed payment to Micro and Small Enterprise (MSEs). (Section 15- 24). State Governments to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments. (Section 20 and 21).

It is important to note that MSME Act is applicable only to the manufacturers and the Service Providers and the classification of enterprises is as follows:

An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:–

(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

For being a MSME Unit, both the investment and turnover criteria has to be met. Even, if, one exceeds it will be covered under the other category. Thus, the Traders are not covered in this Act, which are the major part in running Industrial Units i.e. the manufacturers.

As per MSME Act, there has to be a Buyer and Seller, which has been appropriately defined in the Act. The ‘buyer’ means whoever buys any goods or receives any services from a supplier for consideration and the ‘supplier’ means a micro or small enterprise, who is having valid Udyog Adhaar through Udhyam Portal.

The Act has laid down the provisions for recovery of delayed/default payments for MSMEs. It provides that where there is delay in payment beyond 45 days from the day of acceptance or day of deemed acceptance of the goods or services, the recoveries of the principal with an interest with monthly rests to the suppliers three times of the Bank rates notified by RBI are to be paid, even if, the practice of agreed terms are different. Meaning thereby that  if there are agreed terms of payments of over 45 days, even then if, the payment is not received within 45 days then the buyer has to pay the principle alongwith the interest.

The MSME through Samadhaan can get the payment, if, there is default in payment beyond 45 days irrespective of dispute, if any. The dispute or the delayed payment of dues is to be redressed by MSME Facilitation Council to whom reference has to be made, who will conduct the conciliation proceedings or if, conciliation is not successful then through arbitration proceedings under the provisions of Arbitration and Conciliation Act, 1996 as amended from time to time. Mostly, conciliation is successful between the parties through the Council.

It is important to note that if, the conciliation is not successful then it shall be automatically terminated and the Council can refer the matter for arbitration, which has to be decided within 90 days. Generally, it is seen that the dispute or delayed payment is settled through mediation. In case of unsuccessful mediation, arbitration is there, which is a mode for recovery and is an alternative to civil / criminal litigation.

It is fast track legal dispute redressal system, as referred the matter is to be resolved within 90 days by the Facilitation Council. Composition of Micro and Small Enterprises Facilitation Council is as follows:

  • The Micro and Small Enterprise Facilitation Council shall consist of not less than three, but not more than five members to be appointed from amongst the following categories, namely:
  • Director of Industries, by whatever name called, or any other officer not below the rank of such Director, in the Department of the State Government having administrative control of the small scale industries or, as the case may be, micro, small and medium enterprises; and
  • One or more office-bearers or representatives of associations of micro or small industry or enterprises in the State; and
  • One or more representatives of banks and financial institutions lending to micro or small enterprises; or
  • One or more persons having special knowledge in the field of industry, finance, law, trade or commerce.
  • The person appointed under clause (i) of sub-section (1) shall be the Chairperson of the Micro and Small Enterprises Facilitation Council.
  • The composition of the Micro and Small Enterprises Facilitation Council, the manner of filling vacancies of its members and the procedure to be followed in the discharge of their functions by the members shall be such as may be prescribed by the State Government.

Thus, the substantial powers for redressal of disputes have been delegated to the State Government, without considering the plight of the industry at the Central level.

The procedure is as per the Arbitration Act. The Appeal has to be filed with prior payment of 75{551c903f756d5bf12b7d58e2eb1e8b74af35058efa7a05d3e7b41e9147979503} of the award to be paid to the Seller.

It is informed that the FAQ has been prepared by the office of DC(MSME), Ministry of MSME after consulting the legal persons in the field and information available.

MSME Samadhaan is a Portal created by Office of DC(MSME), Ministry of Micro, Small and Medium Enterprises (MSME) where Micro and Small Enterprises (MSEs) having Udyog Aadhaar Memorandum (UAM) can file their applications online regarding delayed payments. MSME SAMADHAAN online portal is developed by Ministry of MSME only to facilitate MSEs filing of their applications regarding delayed payments online. The application once filed is forwarded automatically online to the concerned Micro and Small Enterprise Facilitation Council (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. Only the MSEFCs have been empowered as per MSMED Act, 2006 for taking decisions regarding its reference made with them.

Ministry of MSME does not intervene in the matters of MSEFC being individual functioning. MSME Samadhaan Portal has been created only to facilitate online applications regarding delayed payments. Physical applications can also be filed at the concerned MSEFC and the applications are converted into case by the concerned MSEFC. Thus, after submission, the application is automatically forwarded online to 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. The work order is compulsory for filing the application. However, in case purchase order is oral an affidavit to that effect is to be submitted. Multiple invoices can be combined into single PDF and can be uploaded. The affidavit of oral purchase order is to be included in single PDF. The OTP is sent to the registered email ID in Udyog Aadhaar.

Categories admitted in MSEFCs are in respect of goods manufacturing and service rendering sector for which UAM has been obtained. These categories cannot be challenged by the respondent/buyer. Application under Section 19 of the MSMED Act, 2006 cannot be entertained by any court. Deposited amount can be released to the applicant as per the directions to the Court. It is the act of court for which applicant cannot suffer. The silence of buyer is confirmation of liabilities upon him.

The 90 days period of settlement of claim begins only after notice of Arbitration under Section 18(3) of MSMED Act, 2006. The council should deliver a conciliation award after the successful conciliation. It is called award by mutual consent. It is valid award and buyer cannot make appeal against it. Council Members are judges having equal power. They should be well-versed in factual aspect of the case before them. Under administrative exigencies, the Chairperson can delegate the presiding power to another subordinate official or another member, but, the meeting/proceeding can take place, if Coram of three members is complete, members can elect the Chairperson and take further proceedings.

It is necessary to mention why Chairperson could not attend the hearing. There is provision for a Member Secretary as council Member and he can act as a Member in case of any exigency. Member Secretary is acting as Registrar of MSEFC and judge also when he sits in Council. A legal notice by the supplier to buyer is not necessary before filling the case in the Council. But, a claim can be filed for interest alone where the claimant has received principal of dues already. Only the claim under Section 6 of Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertaking Act, 1993 if pending, before IFC or Civil Courts, they can be considered. However, to approach the MSEFC, liberty of court is to be obtained on earlier claims.

If there is a false claim from the applicant, a penalty cannot be imposed by Council, but the petition is to be rejected summarily. A grace period given for MSEs registration to the supplier can be considered while entertaining the claim. It is not hurdle in the matter of claim. The receivables from buyer such as advance deposit, EMD, Statutory deposits as other than supply of goods and services can be claimed in the claim before the Council, which includes in the total due amount. Breach of contract is not within scope of MSMED Act, 2006. Rejection of goods should be genuine within 15 days of the receipt of goods and its immediate communication to supplier. The penal interest is calculated on a monthly compounding basis.

The jurisdiction of State Council can be extended to a district where no council is available. The power of dissent to a member of Council in the proceedings is available and recording in minutes is to be done, but majority decision prevails. If the conciliation conducted by Council fails, Council can take up Arbitration automatically, but diverse view is taken by Bombay High Court. Hon’ble Supreme Court says that conciliation and arbitration are the legally vested functions of the Council. It is not necessary for Full Council to conduct conciliation. It is sufficient for Chairman or any member alone to participate in conciliation. It is not commercial conciliation or analysis of various contractual liabilities. It is simple arbitration to get compliance of Section 16 of MSMED Act, 2006.

State Government under Section 20 of MSMED Act, 2006 is empowered to constitute additional Councils. The process/procedure of execution of Award and the role of Council in assisting the Claimant is under Section 36 of Arbitration and Conciliation Act, 1996 as amended from time to time. The Council has no power to review, revise or amend its own award. After final award it becomes “Funcous officio” means having no relation to award. A Government Department as a buyer can be proceeded against in the Council.

Whenever a notice is received by Council from an Appellate Court to represent as witness, the Council is not required to appear in any court as it is only a formal party. There is no limit of pecuniary jurisdiction for State and District Council. The date of receipt of the copy of award is only effective date. If amount is claimed in the Civil Court, then it cannot be claimed before MSEFC. If an Appellate Court reverts back the case to the Council, it is to be decided as per instructions of the Higher Court. In case of IBC proceedings, the Award by MSEFC is to be communicated to Interim Resolution Professional (IRP) and then to NCLT as per procedural law. An Award holder from MSEFC can gain any preference as creditor in Insolvency proceedings. The Award Holder is considered as a secured creditor. Notices should be served to a dissolved buyer firm and partners even if subsequently reconstituted/merged with a new entity in partnership liabilities are unlimited. It is a lengthy procedure as first claim is to be kept alive. Council cannot deal with criminal offences related to subject matter of claim.

The request of any party to have representation by an attorney or any other authorized agent can be allowed by Council by way of irrevocable power of Attorney. His commitment must be binding upon buyer. Resolution is required for this. No limitation is applicable in Arbitration by Council, as law of limitation is not applicable. But, delay and latches principle is applicable. Supplier sleeping over his legal rights cannot get assistance of Council. It is only summery proceedings and on the basis of affidavits of both the parties, the dispute can be resolved.

The MSMED Act, 2006 is set in motion after supplies of goods and services made by supplier and buyer accepts them but does not pay the bill within 45 days. Petition with Purchase Order, Bills, delivery challans of goods and services and demand letter etc. are to be kept if the matter is challenged in any higher court. In any other case, where the amount is already realized by the supplier, it is at the discretion of the MSEFC. Notices can be served by e-mail/SMS/Whattsapp because Email is legal document and even Whattsapp. The claim should be submitted in hard copy because it is necessary as submission is required duly signed and verified.

The notice of Council is to be published in daily Newspaper of the area where the Respondent is located, with the orders of Council after 3 notices are issued. It is at the discretion of the MSEFC Council and it can exercise its own diligence by giving opportunity to the applicant since he has to prove his claim before council. When the supplier is a micro or small enterprises and agreement is made between Micro/ Small Enterprises in India. Goods are purchased/taken by foreign buyer and he returns to his country. Payment terms are not honored in these circumstances, matter can be filed before the Council. After following due procedure of law, the Council can issue award and same could be sent to both Consulates i.e. Foreign buyers Consulate in that country. It can be enforced.

A private Arbitration clause in sale contract prevents admission of claim for Arbitration by Council. The proceedings can be conducted in local language, but with English also so that Higher Court should understand later on. Claim preparation is the responsibility of the claimant. It is advisable to get certified from C.A. Deceased buyer is liable through his legal heirs, but dissolved company is always under some authority and claim is maintainable.

A Company through its M.D. with resolution of Board of Directors and Partnership firms through its Managing Partner/s. It is absolutely necessary to have purchase/work order as evidence. A Council cannot allow secondary and corroborated evidence. Acknowledgement on invoice, delivery challans or part payment, email etc. all are accepted. Members of Council are not liable for prosecution, if inadvertently an erroneous judgment is delivered by the Council. On the contrary they are expected to act without fear and favour.

Chairman has no veto power in judging a case. No GM, DIC is ex-officio member in Council and any new official in his official position can take over as Chairman. An Award should be with seal of the Council. Original is to be retained by the MSEFC and only certified copies to be delivered. Award should bear round seal on every page. The consent of absentee members for Award can be obtained by circulation to fulfil quorum requirement. The Coram of three Members physically is must.

It looks on the paper a fast track legal disputes redressal system, as the recoveries are very fast and as the award has to be given within 90 days of the reference made is a decree in itself. But, it is seen that this is not actual state of affairs for MSME Act, as generally as we have seen that when human intervention is there, there is always delayed decisions despite the fact that there is Champions Portal, which means Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength.

The single window system for the MSMEs 

It has been felt necessary to put up and promote a unified, empowered, robust, bundled and technology driven platform for helping and promoting the Micro, Small and Medium Enterprises (MSMEs) of the country. As the name suggests it will aim at Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength. Accordingly, the name of the system is CHAMPIONS. This is basically for making the smaller units big by helping and handholding, in particular, by solving their problems and grievances

Three basic objectives of the CHAMPIONS: 


  1. To help the MSMEs in this difficult situation in terms of finance, raw materials, labour, permissions, etc.
  2. To help the MSMEs capture new opportunities in manufacturing and services sectors.
  3. To identify the sparks i.e. the bright MSMEs who can withstand at present and become national and international champions.

As the composition & decision is to be taken by Micro & Small Enterprise Facilitation Council and is to be created and decided by State Government., the Act does not provide the provisions within what time the State Government has to constitute the Facilitation Council or to hold the meetings to decide the issue.

The experience says either there is delay in constitution of Facilitation Council and even when the said Council has been constituted, no meetings are held for disposal of application reference made under the Act for getting default payment recoveries. The Government must consider this aspect seriously and the Act is to be amended in such a way that minimum human intervention is there and there is maximum period to be allowed for Facilitation Council to get the award from date of reference including creation of the Facilitation Council, holding meetings, issuance of Notices, adjournment of hearings and holding of conciliation and arbitration proceedings, as maximum period to decide all legal issues of 300 days from the date of acceptance of application by adjudication authority is under IBC.

Therefore, under this Act also, such provisions has to be laid down otherwise on one or the other ground, the buyer tries to get the matter delayed in Facilitation Council and the purpose of laying the said provisions is forfeited.

The government’s move to change the definition of the micro, small and medium enterprises (MSMEs) to assist companies in dealing with the COVID-19 aftermath, has brought about a surprising and welcome change. India is now a country of small businesses with over 99 percent of companies falling under this category. The introduction of the twin factors of investment and turnover over the earlier definition based only on investment on plant and machinery has brought about this change.

The earlier definition based on investment in machinery and equipment was to get the main benefit of excise duty relief apart from other government benefits. Excise duty has been done away with the introduction of GST.

An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely: —

(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

Government has organised a full system of Facilitation for Registration Process:

  • An enterprise for the purpose of this process will be known as Udyam and its Registration Process will be known as ‘Udyam Registration’
  • A permanent registration number will be given after registration.
  • After completion of the process of registration, a certificate will be issued online.
  • This certificate will have a dynamic QR Code from which the web page on the Portal and details about the enterprise can be accessed.
  • There will be no need for renewal of Registration.
  • The single window systems at Champions Control Rooms and at DICs will help you in the process.
  • Registration Process is totally free. No Costs or Fees are to be paid to anyone.

MSME Registration is free, paperless and based on self- declaration

  • MSME registration process is fully online, paperless and based on self-declaration.
  • No documents or proof are required to be uploaded for registering an MSME.
  • Only Adhaar Number will be enough for registration.
  • PAN & GST linked details on investment and turnover of enterprises will be taken automatically from Government data bases.
  • The online system will be fully integrated with Income Tax and GSTIN systems.
  • Having PAN & GST number is mandatory from 01.04.2021.
  • Those who have EM-II or UAM registration or any other registration issued by any authority under the Ministry of MSME, will have to re-register themselves.
  • No enterprise shall file more than one Udyam Registration. However, any number of activities including manufacturing or service or both may be specified or added in one Registration.

Register a Micro, Small and Medium Enterprise

  • Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof.
  • On registration, an enterprise (referred to as “Udyam” in the Udyam Registration portal) will be assigned a permanent identity number to be known as “‘Udyam Registration Number”.
  • An e-certificate, namely, “Udyam Registration Certificate” shall be issued on completion of the registration process.

MORE ON REGISTRATION PROCESS

  • The form for registration shall be as provided in the Udyam Registration portal.
  • Aadhaar number shall be required for Udyam Registration.
  • The Aadhaar number shall be of the proprietor in the case of a proprietorship firm, of the managing partner in the case of a partnership firm and of a karta in the case of a Hindu Undivided Family (HUF).
  • In case of a Company or a Limited Liability Partnership or a Cooperative Society or a Society or a Trust, the organisation or its authorised signatory shall provide its GSTIN and PAN along with its Aadhaar number.
  • In case an enterprise is duly registered as an Udyam with PAN, any deficiency of information for previous years when it did not have PAN shall be filled up on self-declaration basis.
  • No enterprise shall file more than one Udyam Registration: Provided that any number of activities including manufacturing or service or both may be specified or added in one Udyam Registration.
  • Whoever intentionally misrepresents or attempts to suppress the self-declared facts and figures appearing in the Udyam Registration or updation process shall be liable to such penalty as specified under section 27 of the Act.

Section 27 of MSME Act provides:

27. Penalty for contravention of section 8 or section 22 or section 26.—

(1) Whoever intentionally contravenes or attempts to contravene or abets the contravention of any of the provisions contained in sub-section (1) of section 8 or sub-section (2) of section 26 shall be punishable—

(a) in the case of the first conviction, with fine which may extend to rupees one thousand; and

(b) in the case of any second or subsequent conviction, with fine which shall not be less than rupees one thousand but may extend to rupees ten thousand.

(2) Where a buyer contravenes the provisions of section 22, he shall be punishable with a fine which shall not be less than rupees ten thousand.

FOR EXISTING ENTERPRISES

  • All existing enterprises registered under EM–Part-II or UAM shall register again on the Udyam Registration portal on or after the 1st day of July, 2020.
  • All enterprises registered till 30th June, 2020, shall be reclassified in accordance with this notification.
  • The existing enterprises registered prior to 30th June, 2020, shall continue to be valid only for a period up to the 31st day of March, 2021.
  • An enterprise registered with any other organisation under the Ministry of Micro, Small and Medium Enterprises shall register itself under Udyam Registration.

Spirited enquiry by the government to further plug the gaps

The GST data now reveals that almost 99 per cent of businesses now fall into the MSME definition on the turnover criteria, and more than half the companies registered with GST have less than 20 lakh turnover. The export turnover criteria has also been excluded from the definition, providing relief support to several units while allowing them to grow bigger without restriction. The Income tax department’s data and analysis show that after considering the depreciation of assets, only a few thousand firms in India have an investment in machinery and equipment that exceeds Rs. 50 crore, the upper limit of the medium enterprise.

Encouraged on by the information released by the GST authorities, the government now intends to fill the gaps using the IT and GST data. The MSME ministry has detected that one Aadhaar number can be used to create up to five Udyog Aadhaar numbers, the unique number given by the MSME ministry to the small businesses that register with them. Business enterprises can now develop into multiple, separate supportive entities and continue to claim all the benefits given by the government.

As per latest RBI Notification Number FIDD.MSME & NFS.BC.No.4/06.02.31/2020-21 dated 21.08.2020, clarifications regarding new definition of Micro, Small and Medium Enterprises is as follows:

The circular FIDD.MSME & NFS.BC.No.3/06.02.31/2020-21 dated July 2, 2020 on ‘Credit flow to Micro, Small and Medium Enterprises Sector’.

2. In view of the representations from IBA and banks regarding applicability of certain aspects contained in the Gazette notification No. S.O. 2119(E) dated June 26, 2020 on new criteria for classifying the enterprises as micro, small and medium enterprises, the Ministry of MSME, vide their Office Memorandum (OM) No.2/1(5)/2019 – P & G/Policy (pt. IV) dated August 6, 2020 and letter F.No.5/2(2)/2020 – P & G/Policy dated August 13, 2020 has, inter alia, clarified the following:

2.1 Classification of Enterprises as per new definition

(i) Classification / re-classification of MSMEs is the statutory responsibility of the GoI, Ministry of MSME, as per the provisions of the MSMED Act, 2006.

(ii) As per para 2 of the said Gazette notification all enterprises are required to register online and obtain ‘Udyam Registration Certificate’. All lenders may, therefore, obtain ‘Udyam Registration Certificate ’from the entrepreneurs.

2.2 Validity of EM Part II and UAMs issued till June 30, 2020

(i) The existing Entrepreneurs Memorandum (EM) Part II and Udyog Aadhaar Memorandum (UAMs) of the MSMEs obtained till June 30, 2020 shall remain valid till March 31, 2021. Further, all enterprises registered till June 30, 2020, shall file new registration in the Udyam Registration Portal well before March 31, 2021.

(ii) ‘Udyam Registration Certificate’ issued on self-declaration basis for enterprises exempted from filing GSTR and / or ITR returns will be valid for the time being, upto March 31, 2021.

2.3 Value of Plant and Machinery or Equipment

The online form for Udyam Registration captures depreciated cost as on 31st March each year of the relevant previous year. Therefore, the value of Plant and Machinery or Equipment for all purposes of the Notification No. S.O. 2119(E) dated June 26, 2020 and for all the enterprises shall mean the Written Down Value (WDV) as at the end of the Financial Year as defined in the Income Tax Act and not cost of acquisition or original price, which was applicable in the context of the earlier classification criteria.

3. In view of the above, instructions contained in circular FIDD.MSME & NFS.BC.No.10/06.02.31/2017-18 dated July 13, 2017 on ‘Investment in plant and machinery for the purpose of classification as Micro, Small and Medium Enterprises – documents to be relied upon’ are superseded.

4. Further, other instructions contained in circular FIDD.MSME & NFS.BC.No.3/06.02.31/2020-21 dated July 2, 2020 remains the same.

If, written down value is to be taken then it has to be as per Income Tax Act, 1961 rates but, no where specified at what rates whether on SLM or WDV basis. This is an anomaly. If, the assets were appreciated by the enterprise then what is to be taken as investment. The Government must come out with clarification on this.

It is important to note that the MSME covers only the manufacturing and service sector and not the Traders, which are in large numbers in the Country. They have to take huge amount of money from the manufacturing sector. Thus, the trading community must be included in MSME sector.