MSMED ACT

What is MSMED Act?

• Micro, Small & Medium Enterprises Development (MSMED) Act, 2006.
• The MSMESD Act replaced “The Interest on Delayed Payments to Small and Ancillary Industrial Undertakings Act, 1993” (the IDP Act[1]).
• The Act consists of total 32 sections.

Aim of the act:

• The MSMED, 2006 was implemented in order to support the creation and development of MSMEs.
• It also enhances their ability to compete with other domestic and larger foreign counterparts.
• The major objective of the Act is to promote the development and to enhance the competitiveness of small and medium scale enterprises.
• The act provides the statutory definitions of “small enterprise” and “medium enterprise”.
• It also provides the platform for establishment of a National Small and Medium Enterprises Board[2], a high-level board which consists of stake holders for making recommendations and review on the policies which are being implemented.
• The MSMED industry consists of 2 sectors i.e., the Manufacturing sector and service sector.  In India, the manufacturing sector comprises of at least 6% of the GDP whereas, the service sector contributes up to almost 25% of the GDP.
• The government revised the classification criteria, it removed the distinction between Manufacturing and Service Industries, by inserting composite criteria for both, investment and annual turnover:

1. Micro Enterprise: Investment up to Rs. 1 Crore and Turnover up to Rs. 5 Crore.
2. Small Enterprise: Investment up to Rs. 10 Crore and Turnover up to Rs. 50 Crore.
3. Medium Enterprise: Investment up to Rs. 50 Crore and Turnover up to Rs. 250 Crore.

PAYMENT TO MSMEs

• Section 10 of the act states about Credit facilities. The section states that – The practice of Credit for MSME should be progressive and that practice must be mentioned in the instructions which are issued by the Reserve Bank of India. (Those instructions are issued in a timely basis and the major purpose of the issuance is to ensure a smooth flow of credit in the enterprises and to minimise sickness and improve the competitiveness level).
• Payment against a service which is accepted by a buyer must be made within 15 days (or latest within 45 days, where agreed between the parties).
• For any payment not furnished within this period, it would constitute a delayed payment under the MSMED Act.
• The buyer must pay interest, compounded at three times the bank rate notified by the Reserve Bank of India, for the period of delay until the payment is finally made.

Sections which specify about the payment and interest:

• As per Section 15 of the MSMED Act, the buyer would make payment to the supplier for the supply of goods and services within 45 days from the day of their receipt.
• In case, the buyer of a goods or services, if fails to make payment which is required to be made as u/s 15 of the MSMED Act, the buyers are liable to pay compound interest with monthly interests to the supplier for delayed period exceeding that of 45 days[3].
• The interest will be charged on the amount which has to be paid, which will now be payable at 3 times the bank rate notified the RBI as provided u/s 16 of the MSMED Act, 2006.

Date from when the interest is payable:

• The buyer will be liable to pay the interest on that amount from the appointed data or from the date immediately after the expiration of agreed date.

 Rate at which interest is payable:

• The interest will be payableat three times of the bank rate notified by the Reserve Bank.

Thus, the buyer is directed to release the due payments of MSME well within 45 days of acceptance of goods so as to avoid penalty in the shape of interest at the rate of three times the rate notified by the RBI for the period of delay.

PENALTIES

• Section 405 of the Companies Act gives the power to the Central Government wherein it can direct the companies to provide information with regard to their constitution or working.
• Using this power, Ministry of Corporate Affairs issued the order requiring specified company to file details of all outstanding dues to micro or small enterprises suppliers in MSME Form I.
• As per Section 405(4) of the Act, if any company fails to comply with the order or intentionally furnishes some incorrect material, then they shall be liable for penalty which is mentioned below –
• Company shall be punishable with fine up to Rs.25,000/-; and
• Every officer in default, shall be punishable with imprisonment for a term not exceeding 6 months or with a fine not less than Rs.25,000/- but which may extend to Rs.3,00,000/- or with both.  (Penalty for not filing form MSME I or furnishing wrong or incomplete information in form)
• Section 27[4] of MSMED Act specifies penalty in case buyer fails to disclose the unpaid amount with the interest in the financial statement of the company –
• It provides that the buyer shall be punishable with a fine which shall not be less than Rs.10,000/ (In case of First Time Conviction).
• In case of second conviction or subsequent conviction, the fine shall not be less than one thousand rupees but it can be extended up to ten thousand rupees.
• In case the section 22[5] is contravene then he shall be punishable with fine not less than ten thousand rupees.
• Penalty in the shape of interest at the rate of three times the rate notified by the RBI for the period of delay.

MSME COUNCIL

• Section 18 of the Act states about the MSME Council.
• In case of any dispute regarding the amount due u/s 17, reference can be made to MSME Facilitation Council.
• When a receipt is received, in that case, the Council may conduct conciliation in the matter itself.
• Or, the council can seek any centre providing Alternate Dispute Resolutions Services for assistance. The council can make reference to such centre to conduct conciliation and in that case the provisions of the Arbitration and Conciliation Act, 1996 (Sec. 65 – 81).
• If the dispute stands terminated (in the above-mentioned case) without any settlement then the Council may take up the dispute itself or refer it to any institution providing ADR Services.
• The Council or the centre which is providing the Alternate Dispute Resolution shall have the jurisdiction to hear the dispute and act as an Arbitrator or Conciliator. In a dispute wherein, the supplier is located within its jurisdiction and the buyer may be located anywhere in India.
• Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.

Resolving period of a dispute:

• 90 days’ time period begins only after notice of Arbitration under Section 18(3) of MSMED Act, 2006.
• Process of execution of award and the role of council in assisting the claimant is mentioned u/s 36 of Arbitration and Conciliation Act, 2006.
• Section 19, 20, 21 of the Act states about the Establishment and Composition of the Council.
• The State Government can establish one or more MSME Council at places.
• The Council should consist of not less than three but not more than five members.

---