MSME IN INDIA: ISSUES, CHALLENGES & INITIATIVES BY GOVT TO BOOST MSME SECTOR


By Grishma Mehta (Associate, Lex Services)

INTRODUCTION:

The Indian economy is characterized as a developing economy.The long-term goal is to positively own to country’s youth, increase the savings, leverage exports, increase domestic and foreign investment in ‘Make in India’, better investment rates, education, health and increase its integration with global economies. The Micro, Small and Medium enterprises (MSMEs) shall play a pivotal role in achieving this goal and to further make India emerge as one of the leading economies in the world. Often termed as “engine of economic growth”, MSME’s have played a significant role in social and economic development by promoting entrepreneurship and generating employment opportunities at low capital cost, next only to agriculture. As per the facts produced by Union Minister of MSME Nitin Gadkari, MSME’s contribute nearly 29% towards India’s GDP, export contribution is 50% from the sector and employment generation is around 11.10 crores. MSME’s in India is governed by the Micro, Small & Medium Enterprises Development Act, 2006 (“the Act”). Thus, with the existence of MSME’s and their continuous contribution to the Indian economy, the question that arises for us is what exactly is MSME, what are the legal issues, essential benefits and the key sections of the Act that protect the MSME’s.

WHAT IS A MSME?

The definition of MSME has been revised as a part of AtmaNirbhar Bharat Abhiyan (self-reliant India) economic relief package during the COVID-19 global pandemic and the same is as under:

MANUFACTURING & SERVICE SECTOR
Enterprise Investment & Annual Turnover
Micro Investment < 1 Crore and Turnover < 5 Crore
Small Investment < 10 Crore and Turnover < 50 Crore
Medium Investment < 20 Crore and Turnover < 100 Crore

LEGAL ISSUES:

  • Choosing the wrong Business structure:

    Picking a wrong business structure from the variety offered by the Indian Law such as Sole Proprietorship, Partnership, LLP, Pvt. Ltd. Co. One Person Company, etc. is a tricky business but one of the most important decisions. Numerous MSME’s in India are sole proprietorship or partnership firms which in the event of any claims being made against the business, the Proprietor or the Partners become personally liable in contrast to an LLP or One Person Company or Pvt. Ltd. Co.

  • Complex Labour Laws:

    The manufacturing establishment and factories are governed by numerous labour laws of India. Most of the provisions of the labour laws are either overlapping or are in serious need to be amended. Following different legislations all the times becomes a very difficult task by these enterprises especially when these enterprises are not run by educated people.

  • Tax Liability:

    Tax Compliance in India has always been a very high-pressured task by most of the tax payers. With the introduction of GST has on one hand helped in bringing the central and state level levies and taxes under one roof making it easier for start ups but on the other hand has increased the already high compliance pressure on MSME’s.

  • Issues connecting to IPR:

    India lacks in stringent IPR laws especially concerning patents and has a very long drawn process of patent registration, thereby making it severally affect MSME’s where the enterprises are small and run majorly by people who are not well versed with the laws of the country. Most of the MSME’s think that IPR is an issue for big corporates but this may result in their innovations being stolen and utilized by another business and thereby resulting in an issue with its survival in the market.

  • Micro and Small Enterprises Facilitation Council:

    The MSEFC Council established under the Act is for the purpose of only delayed payments from the buyer’s end. However, the Council doesn’t cover or the Act has no provisions in respect of a buyer who also comes under the category of MSME and has been defrauded by the Supplier with respect to the goods or services.

    • HIGHLIGHTS OF THE ECONOMIC PACKAGE IN CONNECTION WITH MSME:

      • Rs. 3 Lakh Crores collateral free automatic loans for businesses including MSME.
        • Borrowers with upto 25 Crore outstanding and Rs. 100 Crore turnover eligible.
        • Loans to have 4 year tenor with moratorium of 12 months on Principal repayment
        • Interest to be capped
        • 100% credit guarantee cover to Banks and NBFC on principal and interest.
        • Scheme can be availed till 31.10.2020.
        • Emergency credit line to businesses including MSME from Banks and NBFC’s upto 20% of the entire outstanding credit as on 29.02.2020
        • No guarantee fee and no fresh collateral.
        • 45 Lakh unit can benefit.
      • Provide stressed MSME with equity support, Govt. will facilitate provision of Rs. 20,000 crore as subordinate debt.
        • Functioning MSME which are NPA or are stressed will be eligible.
        • Support of Rs. 4,000 crore to CGTMSE
        • CGTMSE will provide partial guarantee support to Banks.
      • Funds of Funds (FoF)
        • FoF with corpus of Rs. 10,000 crore will be set up.
        • FoF will be operated through a Mother Fund and few Daughter Funds.
        • Fund structure will help leverage Rs. 50,000 Crore of funds at daughter fund level.
        • Will help MSME to expand in size as well as capacity
        • Will encourage MSME to be listed on stock exchange.
      • Definition of MSME gets a revision
        • Investment limit will be revised upwards
        • Additional criteria of turnover being introduced.
        • Distinction between manufacturing and service sector to be eliminated.
        • Necessary amendments will be brought to law.
      • Global Tenders to be disallowed in Govt. procurement upto Rs. 200 Crores
        • MSME and other companies have often faced unfair competition from global companies.
        • Necessary amendments of General Financial Rules will be effected.
      • Govt of India and Central Public Sector Enterprises will honour every MSME receivable
        • e-market linkages to be provided across the board to help make up for lack of trade fairs
        • within the next 45 days, all receivables of MSMEs will be cleared by the GoI and CPSE.
        • ESSENTIAL BENEFITS OF MSME’S:

          • Collateral Free Loans:
            Scheme Credit Guarantee Fund Trust for Micro and Small Enterprises(CGTMSE)
            Description To provide collateral free loans.75% of the loan amount to that Bank is guaranteed by theCGTMSE
            Nature of Assistance Collateral free loan up to a limit of ₹ 100 lakh is available for individual MSE on payment of guarantee fee to bank by the MSE
            Who can apply? Both existing and new enterprises are eligible.
          • Technology Upgradation:
            Scheme Credit Linked Capital Subsidy Scheme (CLCSS)
            Description Technology upgradation would ordinarily mean well established and improved technology. It does not include replacing existing equipment/technology with the same equipment/technology. Further it shall also not include units upgrading with used machinery.
            Nature of Assistance Provide 15% subsidy for additional investment up to ₹ 1 cr for technology upgradation by MSEs
            Who can apply? Any MSE Unit
          • Energy Efficient Technologies:
            Scheme Technology and Quality Upgradation Support to MSME’s
            Description To adopt energy efficient technologies (EET’s) in manufacturing units so as to reduce Cost of production and adopt clean development mechanism
            Nature of Assistance 25% of the project costs subject to maximum of Rs. 10 Lakh for implementation of EET’s.
            75% of the actual expenditure subject to maximum of 1.5 Lakh for acquiring product certification/licenses to National Standards and Rs. 2 Lakh for international standards.
            Who can apply? Expert organizations like PCRA, BEE, TERI, IITs, NITs, etc.
            State Govt. agencies like MITCON, GEDA, etc.
            Cluster/industry-based associations of MSMEs NGOs and Technical Institutions.
          • Entrepreneurial & Management Development of SME’s through Incubators:
            Scheme Entrepreneurial and Managerial Development of SMEs through Incubators
            Description To provide early stage funding to nurture innovative business ideas that could be commercialized in a year. In other words, this Scheme provides financial assistance for setting up business incubators (BI).
            Nature of Assistance Each BI shall be given between Rs. 4 Lakh and Rs. 8 Lakh per idea/unit limited to a total of Rs. 62.5 Lakh for 10 units.
            Each BI shall be given Rs. 2.50 Lakh for infrastructure upgradation.
            Each BI shall be given Rs. 1.28 Lakh for Orientation/Training.
            Each BI shall be given Rs. 0.22 Lakh for administrative expenses.
            Who can apply? Any individual or MSME with innovative ideas ready for commercialization can apply to the host institution (e.g., IITs, NITs, technical colleges, research institutes, etc.) in order to obtain fund support.
          • Intellectual Property Rights (IPR):
            Scheme Building Awareness on Intellectual Property Rights (IPR)
            Description To enhance awareness among the MSMEs about IPR, to take measure to protecting their ideas and business strategies.
            Nature of Assistance Registered Indian MSME will be provided 1 time financial support limited upto Rs. 25,000/- for grant of domestic patent and Rs. 2 Lakh for international patent.
            For registering under Geographical Indications of Goods Act, 1 time financial support limited upto Rs. 1 Lakh.
            Who can apply? Registered MSME units, association, consultancy firms, expert agencies, IPR Facilitating Units etc.
          • Protection against Delayed Payments:
            Act Section 15 & 16 of the Micro, Small & Medium Enterprises Development Act, 2006
            Description Establishment of Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting reference/filling on delayed payments
            Nature of Assistance MSEFC of the State after examining the case filed by MSE unit will issue directions to the buyer unit for payment of due amount along with monthly compound interest i.e. three times of the bank rate notified by RBI. This is the only Law of India which makes the defaulting party liable to pay monthly compound interest at 3 times of the bank rate notified by RBI
            Who can apply? Seller (MSE) having valid Udyog Aadhaar Memorandum (UAM)
            • KEY SECTIONS OF THE ACT:

              • Section 15 of the Act states that where any supplier supplies any goods or renders any services to the buyer, the buyer shall make the payment thereof on or before the date agreed upon between the supplier and the buyer in writing not exceeding 45 days from the day of acceptance or deemed acceptance.
              • Section 16 of the Act states that in the event buyer fails to make the payment within 45 days from the date of acceptance or deemed acceptance, the buyer is liable to pay compound interest with the monthly rests to the supplier on the amount at the three times of the bank rate notified by RBI.
              • Section 18 of the Act states that any party to a dispute may, with regard to any amount to be recovered, shall make a reference to Micro and Small Enterprises Facilitation Council (MSEFC), the provisions of Section 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such dispute and the same shall be resolved by MSEFC within 90 days from the date of making such reference.
              • Section 19 of the Act states that no application for setting aside any decree or award by the MSEFC itself or any institution or centre providing alternate dispute resolution services to which a reference is made by the MSEFC, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award as the case maybe.
              • Section 23 of the Act states that the amount of interest payable or paid by the Buyer under the Act, shall not, for the purpose of computation of Income under Income Tax Act, 1961 be allowed as deduction.
                • APPLICATION PROCEDURE FOR DELAYED PAYMENTS:

                  • STEP 1: You have to visit the official portal of MSME samadhaan (https://samadhaan.msme.gov.in/) to file the application.
                  • STEP 2: Click on the Tab “Case Filing for Entrepreneur/MSE Units” on the Homepage.
                  • STEP 3: Enter your valid Udyog Aadhar No., the registered mobile no. and the verification code as displayed and then click validate udyogaadhaar button to receive OTP on registered email id. In the event of not being registered than register in UAM (https://udyogaadhaar.gov.in/UA/UAM_Registration.aspx) and come back to MSME Samadhaan Portal.
                  • STEP 4: An option of Application entry will help you file the application. Upload the scanned PDF of work orders of Respondent and invoices generated by you. Each file size shall not be more than 1MB. Max. 3 work orders and 3 invoices are allowed. Multiple invoices can be submitted into single pdf and can be uploaded. In case of purchase order being oral and affidavit to that effect needs to be submitted. On submission of the application, one more page will pop-up for final review before final submission.
                  • STEP 5: On submission of the Application, the Applicant can check the status of the application in the tab “Check Case Status” on the Homepage.
                  • STEP 6: MSEFC of the State shall examine the Application shall issue directions to the Buyer for payment of the amount along with interest as per the provisions of the Act.
                  • STEP 7: MSEFC shall then call for hearing and accordingly an award shall be passed.
                    • CONCLUSION:

                      To conclude, GoI has come out with some impressive schemes to facilitate the growth of MSME sector including the recent revision in the definition of MSME to facilitate the expansion of the sector and give the sector access to institutional working capital.Let’s also applaud the GoI for coming out with some terrific schemes during the global pandemic to promote the growth of MSME. However, there are various legal issues the sector is facing which can be removed by way of easier tax compliances, better IPR regulations, unified code for labour laws and constantly taking essential steps to provide better policy and legal framework from time to time for the growth and development of MSME’s. The future of MSME sector in India is promising for promoting equitable development.

                      References:

                      • – All the information i.r.o. the Schemes of MSME has been obtained from https://msme.gov.in/all-schemes
                      • – Micro, Small & Medium Enterprises Development Act, 2006
                      • – Announcement made by GoIi.r.o. MSME in AtmaNirbhar Bharat economic package.

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                      This article is the personal view and opinion of the author. This article is for information purpose only. This newsletter is not a substitute for professional advice. Lex Services disclaim all responsibility and accept no liability for consequences of any person acting or refraining from acting on the basis of any information contained herein.

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