The MSMED Act, 2006 And Its Amendment In 2018

LegalKart Editor
LegalKart Editor 05 min read 1353 Views
Last Updated: Nov 06, 2023
MSMED Act, 2006 And Its Amendment In 2018

The Importance Of Laws 

Law is the formal expression of the features and characteristics of the rules and regulations, which decide, determine and govern the activities and developments prevailing in an arena of existence, as envisaged and interpreted from a human perspective. They are contained in legal acts & enactments, which are the written forms and formats of the laws and their applications. Like there are various laws describing and defining various aspects of the Republic of India, the industries falling under the ambit of Micro, Small and Medium Enterprises (MSMEs) are governed by Micro Small And Medium Enterprises Development Act, 2006 which was somewhat revised in the year 2018.

The Scope & Ambit Of MSMED Act 2006 

MSMEs is a wide range of industries and activities that cover a broad arena of human development, which is significant economically and very significant socio-economically. Let us now discuss about the most important law of MSMEs in the Republic of India: 

Read about Recent Budgets And The Growing Importance Of MSMEs.

 The Description And Basic Explanation Of The Micro, Small and Medium Enterprises Development Act, 2006

 The Micro, Small and Medium Enterprises Development Act, 2006 is an Act of the Parliament of India. According to the act, "any buyer who fails to make payment to MSMEs, as per agreed terms or a maximum of 45 days, would be liable to pay monthly compounded interest at three times the bank rate notified by RBI". Industries are divided into 2 categories. Manufacturing and services. They are further divided into micro, small and medium. For both, manufacturing and services sectors, micro industries' capital requirements are under 1 Crore rupees and an annual turnover of less than 5 Crore rupees. Small industries shall have cis 50 and 250 Crores respectively.

 The Main Objective Of MSMED Act, 2006

 As per the Statement of Objects and Reasons of the MSMED Act, 2006, one of the primary objects is to make provision for ensuring timely and smooth flow of credit to small and medium enterprises to minimize the incidence of sickness among and enhancing the competitiveness of such enterprises.

You may like to read The Shop And Establishment Act - The Law That Governs Indian Businesses

Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (hereinafter,  the IDPSSAIU Act, 1993  or  the 1993 Act ) was earlier the governing legislation in this field, which was repealed by the 2006 Act.

 The Pitfalls Of MSMED Act 2006, Which Paved The Way For The Revision Act In 2018 

At present, Aatmanirbhar Bharat has brought a slew of incentives including financial stimulus to MSMEs, in order to neutralise the effect of Covid-19 on the dream project Make in India. (It brings no surprise, as MSMEs are one of the emergent priorities for the present regime.). Though beneficial in its objective, announcement of the above economic concession is an acknowledgment of the lack of robust economic health of our MSMEs.

 The need to provide for special and faster mechanism in the 2006 Act as well as the 1993 Act (since repealed) for recovery of amount due to MSMEs from their defaulting customers/buyers is another acknowledgement of the economic fragility existing in MSME sector. MSME sector, though presently crutched, will be a key factor for India's economic growth in times ahead. 

To begin with, Section 15 of the MSMED Act, 2006 is an advancement over Section 3 of the IDPSSAIU Act, 1993 (since repealed), inasmuch as the liability of a buyer to make payment to the supplier/MSME is now within 45 days from the day of actual delivery of goods/rendering of services vis- -vis 120 days in the 1993 Act. The period of 120 days in the earlier law was thus found to be much more than what is endurable for a supplier/MSME.

Sections 16 and 17 of the MSMED Act, 2006 are also in the nature of substantial advancement over Sections 4 and 5 of the 1993 Act, inasmuch as under the 2006 Act, the defaulting buyer, in case of failure to make payment as per Section 15 above, must pay compound interest with monthly rests at 3 times of the Bank Rates notified by the Reserve Bank of India.

Thus, not only that the MSMED Act, 2006 got with itself the significant amendment in rate of interest, it also made such interest payable from after expiry of just fifteen days from the day of actual delivery of goods/rendering of service [See Section 16 with Section 2(b)], notwithstanding any contrary clause in any agreement between MSME supplier and its client/buyer or even in any law for the time being in force.

 However, success of substantive beneficial law requires an equally efficacious mechanism of enforcement. This is where the 2006 Act fails to rise upto the expectation, and, in the opinion of the authors, requires immediate attention of the Legislature.

 The Revision Of MSMED Act, 2006 In 2018 

 MSMEs Redefined

A proposal was made to redefine MSMEs by the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018, to classify them as manufacturing or service-providing enterprises, based on their annual turnover.

Classification of enterprises into micro, small and medium enterprises (in Rs)

Kind of enterprise

Act of 2006

Bill of 2018




All enterprises


Investment towards plant & machinery

Investment towards equipment

Annual Turnover


25 lacs

10 lacs

5 Cr


25 lacs to 5 Cr

10 lacs to 2 Cr

5 Cr to 75 Cr


5 Cr to 10 Cr

2 Cr to 5 Cr

75 Cr to 250 Cr

The Gains From The Proposed New Reclassification

According to the proposed reclassification or the new classification, there would be no need for frequent inspections to check the investment in plant and machinery. Also, the operations of MSMEs would be transparent, non-discriminatory, and objective in nature.

Also read Company Changing Its Activity - The Karmic Reorientation Of A Corporate Body.

 The Highlights Of New MSMEs:

‘Atma Nirbhar Bharat Abhiyan’ or the Self-Reliant India Scheme of 2020 by the Government of India has given a new definition for MSMEs.

Following are a few highlighting features of new MSMEs –

A provision of Collateral Free Loans to MSMEs

An arrangement of loans to MSMEs worth of Rs. 3 lac crores

An offer for MSMEs to get a Moratorium period of 12 months

Consideration of Manufacturing and Service MSMEs as the same entities

MSM is a granted a repayment Tenure of 48 months

MSMEs are assured a 100% Credit Guarantee

Reclassification of MSMEs will benefit approximately 45 Lac units.

The Conclusion

MSMED Act 2006 recognized, acknowledged and established the importance of MSMEs. The revision in 2018 further strengthened those provisions.

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