Economic Downturn : Double impact for MSMEs

The news paper articles are talking about an impending economic downturn. The automobile industry is witnessing it already and so are many other sectors feeling the heat. A downturn means not only a reduction in revenues and squeezed profits, but also an issue on not receiving payments on time. Tax rates and rebates are certainly helpful.

Under Companies Act, if a company has not paid any Micro Small and Medium Enterprises (MSME) for more than 45 days, then the company has to inform the Registrar of Companies of the outstanding dues. This is one small step to address the giant issue of non-receipt of money.

There are several benefits that a MSME can avail and this post touches upon some of them.

Eligibility criteria for MSME

Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 mandates any MSME to file Udyog Adhaar Memorandum (UAM) in Form-I appended to the Gazette Notification No.S.O.2052(E) dated June 30, 2017. Also, Section 7 of the MSMED Act, provides the below classification of enterprises, which is proposed to be enhanced through a 2018 Bill, which is yet to be passed by parliament:

Type of Enterprise\n\n(All figures in INR) MSMED Act, 2006 2018 Bill
Manufacturing Services All enterprises
Investment in Plant and Machinery in INR Investment in Equipment in INR Annual Turnover in INR
Micro 25 lakh 10 lakh 5 crore
Small 25 lakh to 5 crore 10 lakh to 2 crore 5 to 75 crore
Medium 5 to 10 crore 2 to 5 crore 75 to 250 crore


 Benefits available to MSME

Section 15 of the MSMED Act, 2016 mandates maximum of 45 days for making payments by a buyer to the goods/service supplied by an MSME, failing which Section 16 imposes a compound interest at three times the notified bank rate. The MSME facilitation centre also acts as a conciliator/arbitrator to decide the cases within 90 days of a dispute. This is the most important factor and if this process can be made more robust, then one of the biggest pain points of MSMEs will get addressed.

Subject to certain conditions, below are few other benefits available to MSMEs:

    • Interest subvention/rebate by 2% on any new/incremental loans
    • Online Delayed Payment Monitoring portal
    • Exemption from 2% TDS on cash withdrawal above INR 1 Crore
    • No merchant discount rate (MDR) chargeable on accepting debit/credit cards transaction
    • Online bill discounting system by selling trade receivables (TreDS)
    • Legacy dispute resolution scheme for closure of pre-GST litigations
    • Each bank to provide up to 1 Crore finance for woman in Greenfield investment
    • Credit guarantee scheme to cover liability of collateral free credit
    • Capital subsidy of 15% for technology upgrading
    • Capital subsidy of 25% to promote energy conservation
    • 75% subsidy for acquiring product quality certification
    • 75% financial assistance for business incubation for innovative ideas
    • 25% financial assistance for air-fare, space rent for international trade fairs
    • 4% per annum interest on working capital for interest subsidy eligibility certificate holders
    • INR 25,000 financial support on domestic patent and 50% discount on trademark processing
    • 75% financial assistance for obtaining bar code registration


Link for a complete list of Schemes:

Compliances to be undertaken by a company towards MSME

Companies registered under the Companies Act, 2013 are also forewarned by the Ministry of Corporate Affairs (MCA) to settle payments due to MSMEs within 45 days of the deemed acceptance of the goods or services.  Further, MCA, vide Notification dated January 22, 2019, has mandated filing of a half yearly return in MSME Form I by April 30th and October 31st every year by specifying the reasons for delay and amount of all outstanding payment due to MSMEs. Non-compliance will lead to punishment with penalty up to INR 25,000 for the company and either imprisonment up to 6 (six) months or fine for each of the key managerial persons.  Hence the companies are required to enquire if the suppliers are registered as an MSME or have obtained an UAM, to be in compliance.

Cancellation of MSME or Udyog Adhaar Memorandum

The MSMED Act, 2006 is silent on the closure procedure and hence, a physical application need to be filed with the respective General Managers of District Industry Centres in respective Districts, to withdraw the registrar. It is recommended that MSME who do not fall within the eligibility criteria as they grow their businesses to cancel their registration. It helps in avoiding the  misuse of registration.

There are many benefits that MSMEs can avail, but the bureaucracy and the process has to be demystified substantially.

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