Promotion of MSMEs and ease of doing business in India – Part I

With their ability to exploit new technologies and to innovate in response to changing market needs, micro, small and medium enterprises (“MSMEs”) contribute tremendously to the socio-economic development of the country. MSMEs produce and export a diverse range of products and services to meet the needs of the local and global markets and value chains. Further, the MSME sector is a hotbed for entrepreneurial emergence and after agriculture, provides the largest share of employment in the country.

Governing body for MSMEs

On 9 May 2007, subsequent to an amendment of the Government of India (Allocation of Business) Rules, 1961, erstwhile Ministry of Small Scale Industries and the Ministry of Agro and Rural Industries were merged to form the Ministry of Micro, Small and Medium Enterprises (“the Ministry”). The Ministry directs and governs the establishment, registration and functioning of MSMEs and designs policies and promotes / facilitates programs, projects and schemes and monitors their implementation for the entire value chain of the MSME sector to assist MSMEs in scaling up their businesses.

Further, the implementation of policies and various programmes/schemes for providing infrastructure and support services to MSMEs is undertaken through the Office of the Development Commissioner, MSME, the Khadi and Village Industries Commission (KVIC), Mahatma Gandhi Institute for Rural Industrialisation (MGIRI), the Coir Board, the National Small Industries Corporation (NSIC), the National Institute for Micro, Small and Medium Enterprises (NIMSME) and the National Board for Micro, Small and Medium Enterprises (NB MSME). Khadi, village and coir enterprises occupy an important place in the development of the MSME sector as they create more employment opportunities at a relatively lower investment.

Background

The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) received the presidential assent and was notified on 16 June 2006 and came into force from 2 October 2006. Through the MSMED Act, the government seeks to facilitate the promotion and development and enhance the competitiveness of micro, small and medium enterprises and advocates the provision of marketing assistance, infrastructural facilities and backward as well as forward linkages to all MSMEs.

In furtherance of this objective, the MSMED Act provides for the establishing of National Board for MSMEs which seeks to examine the factors affecting MSME and make recommendations to the Central Government. It has also removed the provisions which provided for the inspection of small and medium enterprises by the government authorities.

In principle, the erstwhile Small and Medium Enterprises Development Bill, 2005 (“SMED Bill”)[1] and MSMED Act have the same objective. However, the MSMED Act was made more comprehensive by creating a separate carve out for micro enterprises.

The MSMED Act categorises ‘enterprises’ on the basis of whether they are a manufacturing enterprise or a service enterprise. Based on their investments, both categories are further classified into micro, small and medium enterprises. In case of manufacturing enterprises, investments in plant and machinery (original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No.S.O.1722 (E) dated October 5, 2006) or in case of service enterprises, investments in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act) as under[2]:

  Manufacturing Enterprises Service Enterprises
Micro Upto INR 25 lakhs Upto INR 10 lakhs
Small More than INR 25 lakhs and upto INR 5 crores More than INR 10 lakhs and upto INR 2 crores
Medium More than INR 5 crores and upto INR 10 crores More than INR 2 crores and upto INR 5 crores

Since investment is a key indicator of quantum of activities of an enterprise, this categorization ensures that the definition is time-relevant.

Creditor protection

Section 22 of the MSMED Act provides that the buyer is required to specify unpaid amount with interest in the annual statement of accounts. This requirement has also been incorporated by the Ministry of Corporate Affairs under Schedule III to the Companies Act, 2013 vide its notification dated September 4, 2015.

Additionally, Section 34 of the Limited Liability Partnership Act, 2008 read with Rule 24 of the Limited Liability Partnership Rules, 2009 provides that every LLP is required to file statement of accounts and solvency through Form-8. Further, there is now a mandatory requirement to attach the disclosure under the provisions of Section 22 of the MSME Act for LLP in Form 8.

Though the MSMED Act has tried to address various issues that have vexed MSMEs historically, some of the provisions of the MSMED Act, seem too onerous in relation to menace sought to be countered. A few such provisions are highlighted below:

  1. The MSMED Act has sought to address the issue of delayed payments to SME supplier by imposing liability on the buyer to pay compound interest at 3 (three) times of the bank rate notified by the Reserve Bank of India on account of default in the payment of the amount to the supplier. Though this is a step taken to facilitate the overall development of MSME, the compound interest rate at three times of the bank rate notified by the Reserve Bank seems too severe.
  2. The powers provided to the MSE Facilitation Council (“Council”) formed under the MSMED Act override the provisions of the Arbitration and Conciliation Act, 1996. Section 18 of the MSMED Act mandates the Council to either conduct conciliation by itself or seek assistance of any institution to resolve the dispute between the parties. This power of the Council to dispose-off the dispute overrides the provision for the appointment of the arbitrator as per the agreement entered between the parties.
  3. Section 19 of the MSMED Act specifies that the court will not entertain any application for setting aside a decree unless the appellant (not being a supplier) has deposited with it 75 % (seventy-five percent) of the amount in terms of the decree or the award. The court can also order such percentage of the amount deposited to be paid to the supplier, as it considers reasonable under the circumstances of the case.

Overcoming hurdles

In the overall production/value chains, MSMEs are highly susceptible to volatile market conditions. During the global economic crisis of 2008-2009 and deceleration of industrial production in 2011-2012, due to limited direct help, weak demand and limited credit access, MSME sector was severely affected and faced a drastic slump in their growth rate. Slow recovery of the world economy along with Indian economy’s lack of momentum in infrastructure investment and development only added to the downward trajectory of growth in various sectors of Indian economy including the MSME sector.

To address this inherent problem, vide Order dated 23 March 2012, the Ministry of Micro, Small and Medium Enterprises notified the “Public Procurement Policy”. Under the Public Procurement Policy, with effect from 1 April 2015, it become mandatory for all central government ministries, departments and PSUs to procure a minimum of 20% of their total annual value of goods or services from MSMEs.

De-reservation of items reserved for exclusive manufacture in the MSME sector

From the year 1997-2015, the government of India gradually de-reserved all the items which were reserved for exclusive manufacture in the MSME sector. The de-reservation was completed over a very large period of time with a view to help MSMEs rearrange, amalgamate and build economies of scale and also to develop the requisite strength and skills for global competitiveness. Some of the items de-reserved are injection moulding thermos plastic product, full PVC footwear chappals, sandals and shoes, builders’ hardware, electric motors, pickles, pencils etc. As of today, there is no item specifically reserved for manufacture by the MSME sector.

Looking forward

With increased globalization of the Indian economy, the MSME sector is facing new challenges. A need for efficient flow of technology, supplies of finance, infrastructure, marketing and business skills and absence of in-house research and development, factors which are very crucial for the growth of this sector are not being met. Hence a growing need was felt by the government of India to extend policy support to the MSME sector to enable them to grow and adopt better technologies to achieve higher productivity and remain competitive in the era of globalization.

In light of the same, the Ministry’s Budget allocation for the financial year 2016-17 has been enhanced by 15% to INR 3000 crore in the financial year 2016-2017 from INR 2612.51 crore in the previous financial year 2015-16. Further RBI has advised banks that, inter alia, banks shall have to achieve a 20% year-on-year growth in extending credit to micro and small enterprises, allocation of 60% of the MSE advances to micro enterprises and 10% annual growth in number of micro enterprise accounts.

The next post outlines the various fiscal and supportive measures extended by the Government of India to promote ease of doing business in the MSME sector.

– Megha Manjunatha

[1] The conceptual and legal framework for small scale and ancillary industrial undertakings is derived from the Industries Development and Regulation Act, 1951. Due to the dynamic structure of the market, a need was felt for an independent piece of legislation with comprehensive set of legal provisions for small and medium scale industries. The SMED Bill after approval by the Cabinet at its meeting on 4th May 2005 was introduced in the Lok Sabha on 12th May 2005. Through the SMED Bill, for the first time ever, the government sought to provide a legal framework to promote the growth and development of the small and medium enterprises and enhance their competitiveness.

However, the SMED Bill sought to classify enterprises as small or medium and in this regard, the government faced strong protests from small-scale industry trade unions and associations. The unions and the associations were opposed to the change in the nomenclature and further raised concerns that the bigger industrial set-ups would usurp the benefits given to the smaller set-ups. The SMED Bill was thereafter referred to the Parliamentary Standing Committee on Industry for examination and report and most of the recommendations of the standing committee was incorporated into the SMED Bill. However, after being in the parliament for over a year, the SMED Bill was renamed and passed by the parliament as the MSMED Act.

[2] The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2015 seeks to increase the limit for investment in plants and machinery in MSMEs as under:

  Manufacturing Enterprises Service Enterprises
Micro Upto INR 50 lakhs Upto INR 20 lakhs
Small More than INR 50 lakhs and upto INR 10 crores More than INR 20 lakhs and upto INR 5 crores
Medium More than INR 10 crores and upto INR 30 crores

More than INR 5 crores and upto INR 15 crores

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