Entrepreneurship

UNIT 2 THE MICRO, SMALL AND MEDIUM Development &

ENTERPRISES DEVELOPMENT MSME

ACT, 2006 (MSMED ACT, 2006)

Structure
2.0 Introduction
2.1 Objectives
2.2 An Overview of the MSMED Act, 2006
2.3 Preliminary
2.4 National Board for Micro, Small and Medium Enterprises
2.5 Classification of Enterprises, Advisory Committee and Memorandum
of Micro Small and Medium Enterprises
2.6 Measures for promotion Development and Enhancement of
Competitiveness of Micro Small and Medium Enterprises
2.7 Delayed Payments to Micro and Small Enterprises
2.8 Miscellaneous
2.9 Let Us Sum Up
2.10 Key Words
2.11 Terminal Questions
2.12 Answers and Hints
2.13 References and Further Readings

2.0 INTRODUCTION
An ‘Act’ is a ‘Subset of Law’. It is a decree that is passed by the respective
legislature, such as the State Legislative Assembly or the Parliament of India.
Law ensures that people adhere to the established norms and regulations. In
some cases, an Act is used to establish regulations and laws in specific fields.
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33
Government (The Constitution of India is the longest Constitution in the world. It had 395
Initiatives and articles in 22 parts and 8 schedules at the time of its commencement. Now the
MSME
Constitution of India has around 448 articles in 25 parts and 12 schedules and
to add to this, all 105 amendments.)
This picture depicts that Law(s) (General), Act(s), Statute(s), Ordinance(s),
Regulations & Rules etc. must be in accordance with ‘Constitution’ as
constitution is supreme law.
The Micro, Small, and Medium Enterprises (MSME) scheme in India is
specifically designed for the Manufacturing and Service Industries, excluding
trading companies. This exclusion is because trading companies serve only as
intermediaries between manufacturers and consumers, and do not contribute
directly to the production or service sectors.
Under the MSME registration benefits, business owners and enterprises are
given authority to collect interest on payments that are delayed by the buyer.
The MSMED Act 2006 mandates that buyers must make payments for goods or
services within a specified period from the date of purchase. Key provisions of
the MSMED Act 2006 include:1. MSMEs receive various forms of incentives
and subsidies from the government to support their growth and development.2.
MSMEs benefit from lower rates of interest on loans, making it easier and more
affordable for them to access financing.3. MSMEs can avail of loans without
the need for collateral, reducing the financial burden and risk on small business
owners.4. MSMEs receive priority treatment when it comes to compliance with
regulations and registration approvals by both Central and State Governments.
The Act aims to facilitate the promotion, development, and enhancement of
competitiveness of micro, small, and medium enterprises. It addresses matters
related to these enterprises and any incidental issues. This is based on the
declaration of the expediency of controlling certain industries by the Union
under Section 2 of the industries (Development and Regulation) Act, 1951.The
MSMED Act is thus crucial for creating a supportive environment for MSMEs,
enabling them to thrive and contribute significantly to the Indian economy.

2.1 OBJECTIVES
After completion of this unit, you will be able to:
● Acquaint with the Government enacted MSMED Act, 2006;
● Analyse the MSME development Act;

2.2 AN OVERVIEW OF THE MSMED ACT 2006

MSMEs play very important role in socio-economic development. MSMEs are
also known as ‘Engine’ of Indian Economic Growth, ‘Backbone’ of the Indian
Economy, ‘Growth Catalyst’ for Indian Economy, ‘Job Creator’ of Indian
Economy, ‘Generator’ of Highest-rate of Employment Growth, ‘Pivotal
Contributor’ to Indian Economic Growth, ‘Micro to Mid-sized Manufacturer
to Export-oriented Entities’, ‘Core of Value Chain’ of the Indian Economy,
‘Spine’ of the Indian Economy, ‘Powerhouse’ of the Economy, ‘Cornerstone’

34
for Economic Prosperity. They are great employment generators. They also MSME Act 2006
contribute immensely to rural development as more than half of the MSMEs
operate in rural India. MSMEs have also contributed to the development of
handicraft industry, labour intensive industries, and export sector. It also helped
in the empowerment of local people, have made India self-sufficient through
emphasis on the production and use of swadeshi products, have increased rural-
urban interaction and self-employment. Growth Potential of MSMEs and their
significant contribution to the growth and development of our economy attracted
the attention of the Indian Government. MSMED Act, 2006 was enacted by the
parliament to encourage and promote this MSME sector.
The MSME Act is bifurcated into 6 chapters and 32 sections. The key provisions
of MSMED Act, 2006 are as under:
(A) Key Provisions of MSMED Act, 2006
1) To provide ‘Legal Framework’ for recognition of the concept of
“Enterprise”.
2) To classify the ‘Manufacturing and Services Entities’ into Micro, Small
and Medium.
3) To establish a National Board for Micros Small and Medium Enterprises
in order to exam in the factors affecting the promotion and development of
MSMEs, facilitation of MSMEs and review the policies and programmes
of Government.
4) To empower the Central Government to constitute an Advisory
Committee.
5) To provide for the procedure for the filling of forms for registration under
MSME.
6) To empower the Central Government to undertake programmes & issue
guideline & instructions to promote develop & enhance the competitiveness
of MSMEs.
7) To provide provisions for the delays payment to micro & small
enterprises.
8) To empower the Central State Government to make rule to carry out the
provisions of the Act.
(B) Eligibility Criteria for Business to Get Registered Under MSMED
Act, 2006
MSMEs are categorized under the Head of Manufacturing Enterprises
and Service Enterprises.

35
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(C) Revised Definition of MSMEs:

A new composite criterion of classification for manufacturing and service units
was notified which came into effect on 1st July, 2020. The MSMEs are now
classified according to a composite criterion that includes both their investment
and sales turnover.
Micro Units : Those with investment upto Rs. 1 crore and turnover of Less than
Rs. 5 cores.
Small Units : Those with investment upto Rs. 10 crore and turnover of Less
than Rs. 50 cores.
Let us now know the definitions of MSMEs, both old as well as new so that we
can understand their nature and features.
Existing and Revised Definition of MSMEs

Existing MSME Classification

Criteria: Investment in Plant & Machinery or Equipment
Classification Micro Small Medium
Mfg. Enterprises Investment Investment <Rs Investment
<Rs25 Lac 5 Cr. <Rs10 Cr.
Services Enterprise Investment Investment Investment
<Rs10 Lac <Rs2 Cr. <Rs5 Cr.
Revised MSME Classification
Composite Criteria : Investment and Annual Turnover
Classification Micro Small Medium
Mfg. Enterprises Investment <Rs Investment <Rs Investment <Rs
1Cr. and 10Cr. and 20Cr. and
& Services
Turnover < Rs. Turnover < Rs. Turnover < Rs.
5 Cr. 50 Cr. 250 Cr.
36
Examples of few businesses which come under the MSMED are as follows: MSME Act 2006

1 Xeroxing 18 Electronic Surveillance and

Security.
2 Photographic Lab 19 Mechanical Engineering
Excluding Transport
Equipment. This is inclusive
of steel almirahs, cocks, and
valves, wire cutters, etc.
3 STD/ISD Booths 20 Engineering and Fabrication.

4 Placement & Management 21 Recorders, VCRs, Radios,

Consultancy services Transformer, Motors, Watches.
5 Coir Industry. 22 Micronutrients For Plants.

6 Furniture and wood products. 23 Active Pharmaceutical

Ingredients and Ayurvedic
Products.
7 Poultry Farm. 24 Khadi Products and Hosiery
Products.
8 Bicycle parts. 25 Handicraft activities like
Spinning, Weaving, Artisans.
9 Stationery Items. 26 Printing and other products
made of paper
10 Call centre. 27 Laundry & Dry Cleaning

11 Rubber Products. 28 Moulding – This includes

products like combs, umbrella
frames, plastic toys, etc
12 IT Solution Provider. Services 29 Natural Fragrance and Flavours.
include creating a server bank,
application service provider,
smart card customization,
service provider, etc.
13 Testing Labs for industries. 30 Placement and Management
Consultancy Services.
14 Auto Parts Components: 31 Training and Educational
This includes horn buttons, Institute.
door channels, wiper blade
components, battery cell tester.
15 Ceramics and glass products 32 Energy Efficient Pumps.
include roofing tiles, glass
flooring tiles, granite, etc.
16 Retail and wholesale business 33 Auto repair services and
garages.
17 Automotive Electronic 34. Toughened Metallic Ware etc.
Component products.

37
Government (E) Cycle of Business under MSME Sector
Initiatives and
MSME

Design of MSME Act, 2006

The MICRO, and Medium Enterprises Development Act, 2006, Act no. 27 of
2006.
The Overview of the MSMED Act 2006. BE it enacted by parliament in the
Fifty-seventh year of the Republic of India as follows: - This Act contains 6
Chapters and 32 Sections.

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 MSME Act 2006
Self-Assessment Questions (SAQ-1)
Notes: a) Write your answer in the space given below.
b) Compare your answer with those given at the end of the unit.
1. State whether the following statements are true or false by putting a ‘√’
over the appropriate word.
a) The MSME Act 2006 is bifurcated into 06 chapters and 32 sections
(True/False)
b) As per new definition of MSME, ‘Medium Units’ are those with
investment’ upto Rs. 30 crore and turnover of less than Rs. 100
crores. (True/False)
c) A subset of law is known as an ‘Act’ (True/False)
d) MSMEs are classified in two classes i.e., ‘Manufacturing,
Enterprises and Service Enterprises. (True/False)

2.3 PRELIMINARY (Chapter I )

Now turn your attention to this MSMED Act, 2006 and have a look at Sections,
Sub-section, Clauses and Sub-Clauses of this Act, given below.
1. Short title and commencement. — (1) This Act may be called the Micro,
Small and Medium Enterprises Development Act, 2006. (2) It shall come
into force on such date1 as the Central Government may, by notification,
appoint; and different dates may be appointed for different provisions of
this Act and any reference in any such provision to the commencement of
this Act shall be construed as a reference to the coming into force of that
provision.
2. Definitions. — In this Act, unless the context otherwise requires, —


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(a) “Advisory Committee” means the committee constituted by the Central

Government under sub-section (2) of section 7;
(b) “appointed day” means the day following immediately after the expiry of
the period of fifteen days from the day of acceptance or the day of deemed
acceptance of any goods or any services by a buyer from a supplier.

39
Government Explanation. —For the purposes of this clause, —
Initiatives and
MSME (i) “the day of acceptance” means, —
(a) the day of the actual delivery of goods or the rendering of services; or
(b) where any objection is made in writing by the buyer regarding acceptance
of goods or services within fifteen days from the day of the delivery of
goods or the rendering of services, the day on which such objection is
removed by the supplier;
(ii) “the day of deemed acceptance” means, where no objection is made in
writing by the buyer regarding acceptance of goods or services within fifteen
days from the day of the delivery of goods or the rendering of services, the
day of the actual delivery of goods or the rendering of services;
(c) “Board” means the National Board for Micro, Small and Medium
Enterprises established under section 3;
(d) “buyer” means whoever buys any goods or receives any services from a
supplier for consideration;
(e) “enterprise” means an industrial undertaking or a business concern or any
other establishment, by whatever name called, engaged in the manufacture
or production of goods, in any manner, pertaining to any industry specified
in the First Schedule to the Industries (Development and Regulation) Act,
1951 (55 of 1951) or engaged in providing or rendering of any service or
services;
(f) “goods” means every kind of movable property other than actionable
claims and money;
(g) “medium enterprise” means an enterprise classified as such under sub-
clause (iii) of clause (a) or sub-clause (iii) of clause (b) of sub-section (1)
of section 7;
(h) ”micro enterprise” means an enterprise classified as such under sub-clause
(i) of clause (a) or sub-clause (i) of clause (b) of sub-section (1) of section
7;
(i) “National Bank” means the National Bank for Agriculture and Rural
Development established under section 3 of the National Bank for
Agriculture and Rural Development Act, 1981 (51 of 1981);
(j) “notification” means a notification published in the Official Gazette;
(k) “prescribed” means prescribed by rules made under this Act;
(l) “Reserve Bank” means the Reserve Bank of India constituted under section
3 of the Reserve Bank of India Act, 1934 (2 of 1934);
(m) “small enterprise” means an enterprise classified as such under sub-clause
(ii) of clause (a) or sub-clause (ii) of clause (b) of sub-section (1) of section
7;
2nd October, 2006, vide notification No. S.O. 1154(E) dated 18th July, 2006, see Gazette
40 of India, Extraordinary Part IIsec.3(ii).
(n) ”supplier” means a micro or small enterprise, which has filed a MSME Act 2006
memorandum with the authority referred to in sub-section (1) of section 8,
and includes,—
(i) the National Small Industries Corporation, being a company, registered
under the Companies Act, 1956 (1 of 1956);
(ii) the Small Industries Development Corporation of a State or a Union
territory, by whatever name called, being a company registered under
the Companies Act, 1956 (1 of 1956);
(iii) any company, co-operative society, trust or a body, by whatever
name called, registered or constituted under any law for the time
being in force and engaged in selling goods produced by micro or
small enterprises and rendering services which are provided by such
enterprises;
(o) ”Small Industries Bank” means the Small Industries Development Bank of
India established under sub-section (1) of section 3 of the Small Industries
Development Bank of India Act, 1989 (39 of 1989);
(p) ”State Government”, in relation to a Union territory, means the Administrator
thereof appointed under article 239 of the Constitution.

Self-Assessment Questions (SAQ-2)

Notes: a) Write the answer in the space given below the question.
b) Compare your answer with those given at the end of the unit.
1. What does MSME stands for?
.................…………………………………...…………………………
.................…………………………………...…………………………
.................…………………………………...…………………………
.................…………………………………...…………………………
2. Who covered under MSMED Act, 2006 ?
.................…………………………………...…………………………
.................…………………………………...…………………………
.................…………………………………...…………………………
.................…………………………………...…………………………
3. Under which Section, ‘Small Industries Bank’ of India established ?
.................…………………………………...…………………………
.................…………………………………...…………………………
.................…………………………………...…………………………
.................…………………………………...………………………… 41
Government
Initiatives and 2.4 NATIONAL BOARD FOR MICRO, SMALL
MSME AND MEDIUM ENTERPRISES (Chapter II )
Let us discuss the National Board for MSMEs under this Act in detail.
3. Establishment of Board.— (1) With effect from such date as the Central
Government may, by notification, appoint, there shall be established, for
the purposes of this Act, a Board to be known as the National Board for
Micro, Small and Medium Enterprises.
(2) The head office of the Board shall be at Delhi.
(3) The Board shall consist of the following members, namely:—
(a) the Minister in charge of the Ministry or Department of the Central
Government having administrative control of the micro, small
and medium enterprises who shall be the ex officio Chairperson
of the Board;
(b) the Minister of State or a Deputy Minister, if any, in the Ministry
or Department of the Central Government having administrative
control of the micro, small and medium enterprises who shall be
ex officio Vice-Chairperson of the Board, and where there is no
such Minister of State or Deputy Minister, such person as may be
appointed by the Central Government to be the Vice-Chairperson
of the Board;
(c) six Ministers of the State Governments having administrative
control of the departments of small scale industries or, as the case
may be, micro, small and medium enterprises, to be appointed by
the Central Government to represent such regions of the country
as may be notified by the Central Government in this behalf, ex
officio;
(d) three Members of Parliament of whom two shall be elected by
the House of the People and one by the Council of States;
(e) the Administrator of a Union territory to be appointed by the
Central Government, ex officio;
(f) the Secretary to the Government of India in charge of the Ministry
or Department of the Central Government having administrative
control of the micro, small and medium enterprises, ex officio;
(g) four Secretaries to the Government of India, to represent the
Ministries of the Central Government dealing with commerce
and industry, finance, food processing industries, labour and
planning to be appointed by the Central Government, ex officio;
(h) the Chairman of the Board of Directors of the National Bank, ex
officio;
(i) the chairman and managing director of the Board of Directors of
the Small Industries Bank, ex officio;
42
 (j) the chairman, Indian Banks Association, ex officio; MSME Act 2006

(k) one officer of the Reserve Bank, not below the rank of an
Executive Director, to be appointed by the Central Government
to represent the Reserve Bank;
(l) twenty persons to represent the associations of micro, small
and medium enterprises, including not less than three persons
representing associations of women's enterprises and not less
than three persons representing associations of micro enterprises,
to be appointed by the Central Government;
(m) three persons of eminence, one each from the fields of economics,
industry and science and technology, not less than one of whom
shall be a woman, to be appointed by the Central Government;
(n) two representatives of Central Trade Union Organisations, to be
appointed by the Central Government; and
(o) one officer not below the rank of Joint Secretary to the Government
of India in the Ministry or Department of the Central Government
having administrative control of the micro, small and medium
enterprises to be appointed by the Central Government, who shall
be the Member-Secretary of the Board, ex officio.
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Total 47 Members

(4) The term of office of the members of the Board, other than ex officio
members of the Board, the manner of filling vacancies, and the
procedure to be followed in the discharge of their functions by the
members of the Board, shall be such as may be prescribed:
Provided that the term of office of an ex officio member of the Board
shall continue so long as he holds the office by virtue of which he is
such a member.
43
Government (5) No act or proceedings of the Board shall be invalid merely by reason
Initiatives and of—
MSME
(a) any vacancy in, or any defect in the constitution of, the Board;
or
(b) any defect in the appointment of a person acting as a member of
the Board; or
(c) any irregularity in the procedure of the Board not affecting the
merits of the case.`
(6) The Board shall meet at least once in every three months in a year.
(7) The Board may associate with itself, in such manner and for such
purposes as it may deem necessary, any person or persons whose
assistance or advice it may desire in complying with any of the
provisions of this Act and a person so associated shall have the right
to take part in the discussions of the Board relevant to the purposes for
which he has been associated but shall not have the right to vote.
(8) Without prejudice to sub-section (7) the Chairperson of the Board
shall, for not less than two of the meetings of the Board in a year,
invite such Ministers of the State Governments having administrative
control of the departments of small scale industries or, as the case may
be, the micro, small and medium enterprises, or the Administrators
of Union territories and representatives of such other associations of
micro, small and medium enterprises, as he may deem necessary for
carrying out the purposes of this Act.
(9) It is hereby declared that the office of member of the Board shall not
disqualify its holder for being chosen as, or for being, a member of
either House of Parliament.
4. Removal of member from Board.— (1) The Central Government may
remove a member of the Board from it, if he—
(a) is, or at any time has been, adjudged as insolvent; or
(b) is, or becomes, of unsound mind and stands so declared by a competent
court; or
(c) refuses to act or becomes incapable of acting as a member of the
Board; or
(d) has been convicted of an offence which, in the opinion of the Central
Government, involves moral turpitude; or
(e) has so abused, in the opinion of the Central Government, his position
as a member of the Board as to render his continuance in the Board
detrimental to the interests of the general public.
(2) Notwithstanding anything contained in sub-section (1), no member
shall be removed from his office on the grounds specified in clauses
(c) to (e) of that sub-section unless he has been given a reasonable
44 opportunity of being heard in the matter.
 MSME Act 2006
Section-4/Sub-Section (1)
Central Government may remove a member of the National Board for
MSMEs from it, If he:-
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Sub-Section (2)
Now member shall be removed from his office on the grounds specified
in clauses (c) to (e) of sub-section 1 unless has been given a reasonable
opportunity of being heard in the matter.

5. Functions of Board.—The Board shall, subject to the general directions

of the Central Government, perform all or any of the following functions,
namely:—
(a) examine the factors affecting the promotion and development of
micro, small and medium enterprises and review the policies and
programmes of the Central Government in regard to facilitating the
promotion and development and enhancing the competitiveness of
such enterprises and the impact thereof on such enterprises;
(b) make recommendations on matters referred to in clause (a) or on any
other matter referred to it by the Central Government which, in the
opinion of that Government, is necessary or expedient for facilitating
the promotion and development and enhancing the competitiveness of
the micro, small and medium enterprises; and
(c) advise the Central Government on the use of the Fund or Funds
constituted under section 12.

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45
Government 6. Powers and functions of Member-Secretary of Board.—Subject to other
Initiatives and provisions of this Act, the Member-Secretary of the Board shall exercise
MSME
such powers and perform such functions as may be prescribed.

Self-Assessment Questions (SAQ-3)

Notes: a) Write your answer in the space given below.
b) Compare your answer with those given at the end of the unit.
1. State whether the following statements are true or false by putting a ‘√’
over the appropriate word.
(a) The head office of the National Board for MSME shall be at Delhi
as per MSMED Act,2006, (True/False)
(b) The National Board for MSMEs shall meet at least once in every
three month in a year. (True/False)
(c) The Central Government may remove the members of National
of MSMEs from its , If he is, or becomes, of unsound mind and
stands so declared by a competent court. (True/False)

2.5 CLASSIFICATION OF ENTERPRISES,

ADVISORY COMMITTEE AND
EMORANDUM OF MICRO, SMALL AND
MEDIUM TERPRISES (Chapter III:
Section 7 & 8)
Let us look into Section 7 and 8 of this MSMEs Act, 2006 in detail.
7. Classification of enterprises.—(1) Notwithstanding anything contained in
section 11B of the Industries (Development and Regulation) Act, 1951 (65
xof 1951), the Central Government may, for the purposes of this Act, by
notification and having regard to the provisions of sub-sections (4) and (5),
classify any class or classes of enterprises, whether proprietorship, Hindu
undivided family, association of persons, co-operative society, partnership
firm, company or undertaking, by whatever name called,—
(a) in the case of the enterprises engaged in the manufacture or production
of goods pertaining to any industry specified in the First Schedule to
the Industries (Development and Regulation) Act, 1951 (65 of 1951),
as—
(i) a micro enterprise, where the investment in plant and machinery
does not exceed twenty- five lakh rupees;
(ii) a small enterprise, where the investment in plant and machinery
is more than twenty-five lakh rupees but does not exceed five
crore rupees; or
(iii) a medium enterprise, where the investment in plant and machinery
is more than five crore rupees but does not exceed ten crore
46
rupees;
 (b) in the case of the enterprises engaged in providing or rendering of MSME Act 2006
services, as—
(i) a micro enterprise, where the investment in equipment does not
exceed ten lakh rupees;
(ii) a small enterprise, where the investment in equipment is more
than ten lakh rupees but does not exceed two crore rupees; or
(iii) a medium enterprise, where the investment in equipment is more
than two crore rupees but does not exceed five crore rupees.
Explanation 1. For the removal of doubts, it is hereby clarified that in calculating
the investment in plant and machinery, the cost of pollution control, research
and development, industrial safety devices and such other items as may be
specified, by notification, shall be excluded.
Explanation 2.—It is clarified that the provisions of section 29B of the Industries
(Development and Regulation) Act, 1951 (65 of 1951), shall be applicable to
the enterprises specified in sub-clauses (i) and (ii) of clause (a) of sub-section
(1) of this section.
Advisory Committee
(2) The Central Government shall, by notification, constitute an Advisory
Committee consisting of the following members, namely:—
(a) the Secretary to the Government of India (GOI) in the Ministry or
Department of the Central Government having administrative
control of the small and medium enterprises who shall be the
Chairperson, ex officio;
(b) not more than five officers of the Central Government possessing
necessary expertise in matters relating to micro, small and medium
enterprises, members, ex officio;
(c) not more than three representatives of the State Governments,
members, ex officio; and
(d) one representative each of the associations of micro, small and
medium enterprises, members, ex officio.
(3) The Member-Secretary of the Board shall also be the ex officio Member-
Secretary of the Advisory Committee.
(4) The Central Government shall, prior to classifying any class or classes
of enterprises under sub-section (1) obtain the recommendations of the
Advisory Committee.
(5) The Advisory Committee shall examine the matters referred to it by he
Board in connection with any subject referred to in section 5 and furnish
its recommendations to the Board.
(6) The Central Government may seek the advice of the Advisory Committee
on any of the matters specified in section 9, 10, 11, 12 or 14 of Chapter
IV. 47
Government (7) The State Government may seek advice of the Advisory Committee on any
Initiatives and of the matters specified in the rules made under section 30.
MSME
(8) The Advisory Committee shall, after considering the following matters,
communicate its recommendations or advice to the Central Government
or, as the case may be, State Government or the Board, namely:—
(a) the level of employment in a class or classes of enterprises;
(b) the level of investments in plant and machinery or equipment in a
class or
classes of enterprises;
(c) the need of higher investment in plant and machinery or equipment
for technological upgradation, employment generation and enhanced
competitiveness of the class or classes of enterprises;
(d) the possibility of promoting and diffusing entrepreneurship in
micro,small or medium enterprises; and
(e) the international standards for classification of small and medium
enterprises.

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(9) Notwithstanding anything contained in section 11B of the Industries MSME Act 2006
(Development and Regulation) Act, 1951 (65 of 1951) and clause (h) of
section 2 of the Khadi and Village Industries Commission Act, 1956 (61 of
1956), the Central Government may, while classifying any class or classes
of enterprises under sub-section (1), vary, from time to time, the criterion of
investment and also consider criteria or standards in respect of employment
or turnover of the enterprises and include in such classification the micro
or tiny enterprises or the village enterprises, as part of small enterprises.
What does a memorandum means?
A memorandum(abbrev.: memo; from the Latin memorandum est, “It must
be remember”) is a written message that typically used in a professional
settings. A memorandum is a document recording the terms of contract/
agreement/understanding or other legal details. We can say that an
informal record, in the form of a brief written note or outline, of a particular
legal transactions or document for the purpose of aiding the parties in
remembering particular points or for future reference. A memorandum
may be used in course to prove that a particular contract was made.
8. Memorandum of micro, small and medium enterprises.—(1) Any
person who intends to establish,—
(a) a micro or small enterprise, may, at his discretion; or
(b) a medium enterprise engaged in providing or rendering of services
may, at his discretion; or
(c) a medium enterprise engaged in the manufacture or production of
goods pertaining to any industry specified in the First Schedule to
the Industries (Development and Regulation) Act, 1951 (65 of
1951),shall file the memorandum of micro, small or, as the case
may be, of medium enterprise with such authority as may be
specified by the State Government under sub-section (4) or the
Central Government under sub-section (3):
Provided that any person who, before the commencement of this Act,
established—
(a) a small scale industry and obtained a registration certificate, may, at
his discretion; and
(b) an industry engaged in the manufacture or production of goods
pertaining to any industry specified in the First Schedule to the
Industries (Development and Regulation) Act, 1951 (65 of 1951),
having investment in plant and machinery of more than one crore
rupees
(c) but not exceeding ten crore rupees and, in pursuance of the notification
of the Government of India in the erstwhile Ministry of Industry (Department
of Industrial Development) number S.O. 477(E), dated the 25th July, 1991
filed an Industrial Entrepreneur's Memorandum, shall within one hundred
and eighty days from the commencement of this Act, file the memorandum,
in accordance with the provisions of this Act. 49
Government (2) The form of the memorandum, the procedure of its filing and other matters
Initiatives and incidental thereto shall be such as may be notified by the Central Government
MSME
after obtaining the recommendations of the Advisory Committee in this
behalf.
(3 )The authority with which the memorandum shall be filed by a medium
enterprise shall be such as may be specified, by notification, by the Central
Government.
(4) The State Government shall, by notification, specify the authority with
which a micro or small enterprise may file the memorandum.
(5) The authorities specified under sub-sections (3) and (4) shall follow, for the
purposes of this section, the procedure notified by the Central Government
under sub-section (2).

Self-Assessment Questions(SAQ-4)
Notes: a) Write your answer in the space given below.
b) Compare your answer with those given at the end of the unit.
1. State whether the following statements are true or false by putting a ‘√’
over the appropriate word.
a) Section 8 of the MSMED Act, 2006 deals with Memorandum of
Micro, Small and Medium Enterprises. (True/False)
b) Section 7 of the MSMED Act, 2007 deals with ‘Classification of
Enterprises’ (True/False)

2.6 MEASURES FOR PROMOTION,

DEVELOPMENT AND ENHANCEMENT OF
COMPETITIVENESS OF MICRO, SMALL AND
MEDIUM ENTERPRISES (Chapter IV)
Section 9 to 14 are related to the promotional development and enhancement
of competiveness of MSMEs along with credit facilities to MSME to minimize
the incidence of the sickness and facilitating preference policies in respect
of procurement of goods and services produced and provided by MSMEs.
Government may consider necessary to provide funds and grants to the
MSMEs.
9. Measures for promotion and development.—The Central Government
may, from time to time, for the purposes of facilitating the promotion
and development and enhancing the competitiveness of micro, small and
medium enterprises, particularly of the micro and small enterprises, by way
of development of skill in the employees, management and entrepreneurs,
provisioning for technological up gradation, marketing assistance or
infrastructure facilities and cluster development of such enterprises with
a view to strengthening backward and forward linkages, specify, by
notification, such programmes, guidelines or instructions, as it may deem
50 fit.
10. Credit facilities.—The policies and practices in respect of credit to the MSME Act 2006
micro, small and medium enterprises shall be progressive and such as may
be specified in the guidelines or instructions issued by the Reserve Bank,
from time to time, to ensure timely and smooth flow of credit to such
enterprises, minimise the incidence of sickness among and enhance the
competitiveness of such enterprises.
11. Procurement preference policy.—For facilitating promotion and
development of micro and small enterprises, the Central Government or
the State Government may, by order notify from time to time, preference
policies in respect of procurement of goods and services, produced and
provided by micro and small enterprises, by its Ministries or departments,
as the case may be, or its aided institutions and public sector enterprises.
12. Funds.—There shall be constituted, by notification, one or more Funds to
be called by such name as may be specified in the notification and there
shall be credited thereto any grants made by the Central Government under
section 13.
13. Grants by Central Government.—The Central Government may, after
due appropriation made by Parliament by law in this behalf, credit to the
Fund or Funds by way of grants for the purposes of this Act, such sums of
money as that Government may consider necessary to provide.
14. Administration and utilisation of Fund or Funds.—(1) The Central
Government shall have the power to administer the Fund or Funds in such
manner as may be prescribed.
(2) The Fund or Funds shall be utilised exclusively for the measures
specified in sub-section (1) of section 9.
(3) The Central Government shall be responsible for the coordination and
ensuring timely utilisation and release of sums in accordance with
such criteria as may be prescribed.

Self-Assessment Questions (SAQ-5)

Notes: a) Write your answer in the space given below.
b) Compare your answer with those given at the end of the unit.
1. State whether the following statements are true or false by putting a ‘√’
over the appropriate word.
a) Section 14 of the MSMED Act 2006 deals with ‘Administration /
and utilisation of Fund of Funds. (True/False)
b) Section 10 of The MSMED Act deals with Credit facilities. (True/
False)
c) Section 9 of the MSMED At 2006 deals with measures for
Promotion and Development. (True/False)

51
Government
Initiatives and 2.7 DELAYED PAYMENTS TO MICRO AND
MSME SMALL ENTERPRISES(Chapter V )
The MSMED Act,2006 makes provisions for the matters relating to the delayed
payments between the buyers and micro and small enterprise suppliers of goods
& services.
15. Liability of buyer to make payment.—Where any supplier supplies any
goods or renders any services to any buyer, the buyer shall make payment
therefore on or before the date agreed upon between him and the supplier in
writing or, where there is no agreement in this behalf, before the appointed
day:
Provided that in no case the period agreed upon between the supplier and
the buyer in writing shall exceed forty-five (45) days from the day of
acceptance or the day of deemed acceptance.
16. Date from which and rate at which interest is payable.—Where any
buyer fails to make payment of the amount to the supplier, as required
under section 15, the buyer shall, notwithstanding anything contained in
any agreement between the buyer and the supplier or in any law for the
time being in force, be liable to pay compound interest with monthly rests
to the supplier on that amount from the appointed day or, as the case may
be, from the date immediately following the date agreed upon, at three
times of the bank rate notified by the Reserve Bank.

Supplier (MSMEs)
Supplier, supplies Goods or render any Services to Buyer :
Buyer
Under Buyer shall make payment on or before the date agreed
Section 15 upon to supplier (MSMEs).In case of no agreed date, the
payment period should not exceed 45 days from the day of
acceptance.
Under If buyer fails to make payment to supplier, he/she liable to
Section 16 pay compound interest at three times of bank rate notified by
the Reserve Bank.
Section 17 There is provision to recovery of amount due.
For any dispute related with delayed payment, the concerned party may
move to Micro & Small Enterprises Facilitation Council for Redressal.
17. Recovery of amount due.—For any goods supplied or services rendered
by the supplier, the buyer shall be liable to pay the amount with interest
thereon as provided under section 16.
18. Reference to Micro and Small Enterprises Facilitation Council.—(1)
Notwithstanding anything contained in any other law for the time being
in force, any party to a dispute may, with regard to any amount due under
section 17, make a reference to the Micro and Small Enterprises Facilitation
Council.

52
 (2) On receipt of a reference under sub-section (1), the Council shall MSME Act 2006
either itself conduct conciliation in the matter or seek the assistance of
any institution or centre providing alternate dispute resolution services
by making a reference to such an institution or centre, for conducting
conciliation and the provisions of sections 65 to 81 of the Arbitration and
Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the
conciliation was initiated under Part III of that Act.
(3) Where the conciliation initiated under sub-section (2) is not successful
and stands terminated without any settlement between the parties, the
Council shall either itself take up the dispute for arbitration or refer it to
any institution or centre providing alternate dispute resolution services for
such arbitration and the provisions of the Arbitration and Conciliation Act,
1996 (26 of 1996) shall then apply to the dispute as if the arbitration was
in pursuance of an arbitration agreement referred to in sub-section (1) of
section 7 of that Act.
(4) Notwithstanding anything contained in any other law for the time being
in force, the Micro and Small Enterprises Facilitation Council or the centre
providing alternate dispute resolution services shall have jurisdiction to
act as an Arbitrator or Conciliator under this section in a dispute between
the supplier located within its jurisdiction and a buyer located anywhere in
India.
(5) Every reference made under this section shall be decided within a
period of ninety days from the date of making such a reference.
19. Application for setting aside decree, award or order.—No application
for setting aside any decree, award or other order made either by the Council
itself or by any institution or centre providing alternate dispute resolution
services to which a reference is made by the Council, shall be entertained
by any court unless the appellant (not being a supplier) has deposited with
it seventy-five percent. of the amount in terms of the decree, award or, as
the case may be, the other order in the manner directed by such court:
Provided that pending disposal of the application to set aside the decree,
award or order, the court shall order that such percentage of the amount
deposited shall be paid to the supplier, as it considers reasonable under the
circumstances of the case, subject to such conditions as it deems necessary
to impose.
20. Establishment of Micro and Small Enterprises Facilitation Council.—
The State Government shall, by notification, establish one or more Micro
and Small Enterprises Facilitation Councils, at such places, exercising such
jurisdiction and for such areas, as may be specified in the notification.
21. Composition of Micro and Small Enterprises Facilitation Council.—
(1) The Micro and Small Enterprise Facilitation Council shall consist of
not less than three but not more than five members to be appointed from
amongst the following categories, namely:—
(i) Director of Industries, by whatever name called, or any other officer
not below the rank of such Director, in the Department of the State
53
Government Government having administrative control of the small scale industries
Initiatives and or, as the case may be, micro, small and medium enterprises; and
MSME
(ii) one or more office-bearers or representatives of associations of micro
or small industry or enterprises in the State; and
(iii) one or more representatives of banks and financial institutions lending
to micro or small enterprises; or
(iv) one or more persons having special knowledge in the field of industry,
finance, law, trade or commerce.
(2) The person appointed under clause (i) of sub-section (1) shall be the
Chairperson of the Micro and Small Enterprises Facilitation Council.
(3) The composition of the Micro and Small Enterprises Facilitation
Council, the manner of filling vacancies of its members and the
procedure to be followed in the discharge of their functions by
the members shall be such as may be prescribed by the State
Government.
22. Requirement to specify unpaid amount with interest in the annual
statement of accounts.— Where any buyer is required to get his annual
accounts audited under any law for the time being in force, such buyer
shall furnish the following additional information in his annual statement
of accounts, namely:—
(i) the principal amount and the interest due thereon (to be shown
separately) remaining unpaid to any supplier as at the end of each
accounting year;
(ii) the amount of interest paid by the buyer in terms of section 16, along
with the amount of the payment made to the supplier beyond the
appointed day during each accounting year;
(iii) the amount of interest due and payable for the period of delay in
making payment (which have been paid but beyond the appointed day
during the year) but without adding the interest specified under this
Act;
(iv) the amount of interest accrued and remaining unpaid at the end of
each accounting year; and
(v) the amount of further interest remaining due and payable even in the
succeeding years, until such date when the interest dues as above are
actually paid to the small enterprise, for the purpose of disallowance
as a deductible expenditure under section 23.
23. Interest not to be allowed as deduction from income.—Notwithstanding
anything contained in the Income-tax Act, 1961 (43 of 1961), the amount
of interest payable or paid by any buyer, under or in accordance with the
provisions of this Act, shall not, for the purposes of computation of income
under the Income-tax Act, 1961, be allowed as deduction.

54
24. Overriding effect.—The provisions of sections 15 to 23 shall have effect MSME Act 2006
notwithstanding anything inconsistent therewith contained in any other
law for the time being in force.
25. Scheme for closure of business of micro, small and medium
enterprises.—Notwithstanding anything contained in any law for the time
being in force, the Central Government may, with a view to facilitating
closure of business by a micro, small or medium enterprise, not being a
company registered under the Companies Act, 1956 (1 of 1956), notify a
Scheme within one year from the date of commencement of this Act.

Self-Assessment Questions (SAQ-6)

Notes: a) Write your answer in the space given below.
b) Compare your answer with those given at the end of the unit.
1. State whether the following statements are true or false by putting a ‘’
over the appropriate word.
a) Clay Pot making business can come under Micro Enterprise. (True/
False)
b) Proprietorships, Hindu undivided Family, Partnership Firm, one
person company, Limited liability Partnership, Private limited
company, Limited company, producer company, Any association
of persons, co-operative societies or any other undertaking can
obtain MSME registration in India. (True/False)

2.8 MISCELLANEOUS (Chapter VI ; Section

26 to 32)
Let us now know the Section 26 to 32 of this MSMED Act, 2006.
26. Appointment of officers and other employees.—(1) The Central
Government or the State Government may appoint such officers with such
designations and such other employees as it thinks fit for the purposes of
this Act and may entrust to them such of the powers and functions under
this Act as it may deem fit.

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ILWIRUWKHSXUSRVHVRIWKLVDFW  PD\GHHPILW 

(2) The Officers appointed under sub-section (1) may, for the purposes of this
Act, by order require any person to furnish such information, in such form,
as may be prescribed.
55
Government 27. Penalty for contravention of section 8 or section 22 or section 26.—
Initiatives and (1) Whoever intentionally contravenes or attempts to contravene or abets
MSME
the contravention of any of the provisions contained in sub-section (1) of
section 8 or sub-section (2) of section 26 shall be punishable—
(i) in the case of the first conviction, with fine which may extend to
rupees one thousand; and
(ii) in the case of second or subsequent conviction, with fine which shall
not be less than rupees one thousand but may extend to rupees ten
thousand.
(2) Where a buyer contravenes the provisions of section 22, he shall
be punishable with fine which shall not be less than rupees ten
thousand.

Penalty for Contravention of Section 8 or Section 22 or Section 26

Provisions of Sub- First Conviction With fine may extend
Section 1 of section to Rs. 1000/-
8 or sub-section 2 of
section 26 shall be
punishable
Second Conviction With fine not less than
Rs. 1000/- may extent
to Rs. 10,000/-
Provisions of Sub- Punishable Not less than Rs.
Section 22 10,000/-
28. Jurisdiction of courts.—No court inferior to that of a Metropolitan
Magistrate or a Magistrate of the first class shall try any offence punishable
under this Act.
Now we will discuss the power of the Central Government to make rules
for MSMEs
29. Power to make rules.—(1) The Central Government may, by notification,
make rules to carry out the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing
power, such rules may provide for all or any of the following matters,
namely:—
(a) the term of office of the members of the Board, the manner of
filling vacancies, and the procedure to be followed in the discharge
of functions by the members of the Board under sub-section (4)
of section 3;
(b) the powers and functions of the Member-Secretary under section
6;
(c) the manner in which the Fund may be administered under sub-
section (1) of section 14;the criteria based on which sums may be
released under sub-section (3) of section 14;
56
 (e) the information to be furnished and the form in which it is to be MSME Act 2006
furnished under sub-section (2) of section 26; and
(f) any other matter which is to be or may be prescribed under this
Act.
(3) Every notification issued under section 9 and every rule made by the
Central Government under this section shall be laid, as soon as may
be after it is made, before each House of Parliament, while it is in
session, for a total period of thirty days which may be comprised in one
session or in two or more successive sessions, and if, before the expiry
of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in
the notification or rule or both Houses agree that the notification or
rule should not be made, the notification or rule shall thereafter have
effect only in such modified form or be of no effect, as the case may
be; so, however, that any such modification or annulment shall be
without prejudice to the validity of anything previously done under
that notification or rule.
Let us discuss the power of the state government to make rules for MSMEs
30. Power to make rules by State Government.—(1) The State Government
may, by notification, make rules to carry out the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing
power, such rules may provide for all or any of the following matters,
namely:—
(a) the composition of the Micro and Small Enterprises Facilitation
Council, the manner of filling vacancies of the members and the
procedure to be followed in the discharge of their functions by the
members of the Micro and Small Enterprises Facilitation Council
under sub-section (3) of section 21;
(b) any other matter which is to be, or may be, prescribed under this
Act.
(3) The rule made under this section shall, as soon as may be after it is
made, be laid before each House of the State Legislature where there
are two Houses, and where there is one House of the State Legislature,
before that House.
31. Power to remove difficulties.—(1) If any difficulty arises in giving
effect to the provisions of this Act, the Central Government may, by order
published in the Official Gazette, make such provisions not inconsistent
with the provisions of this Act as may appear to be necessary for removing
the difficulty:
Provided that no order shall be made under this section after the expiry of
two years from the commencement of this Act.

57
Government (2) Every order made under this section shall, as soon as may be after it is
Initiatives and made, be laid before each House of Parliament.
MSME
32. Repeal of Act 32 of 1993.—(1) The Interest on Delayed Payments to Small
Scale and Ancillary Industrial Undertakings Act, 1993 is hereby repealed.
(2) Notwithstanding such repeal, anything done or any action taken under
the Act so repealed under sub-section (1), shall be deemed to have
been done or taken under the corresponding provisions of this Act.

Self-Assessment Questions (SAQ-7)

Notes: a) Write your answer in the space given below.
b) Compare your answer with those given at the end of the unit.
1. State whether the following statements are true or false by putting a ‘’
over the appropriate word.
a) The Central Government may, by notification make rules to carry
out the provisions of this Act. (True/False)
b) The State Government may, by notification make rules to carry
out the provisions of this Act. (True/False)

2.9 LET US SUM UP

The Micro, Small and Medium Enterprises Development (MSMED) Act was
notified in 2006 to address policy issues affecting MSMEs as well as the coverage
and investment ceiling of the sector. The Act seeks to facilitate the development
of these enterprises and enhance their competitiveness. In order to provide a
sense of security to small businessman and to promote them government has
enacted MSMED Act, 2006. These MSMEs have always been considered as
‘Backbone of the Country.”

2.10 KEY WORDS

● Legal Framework: The structure of laws and regulations provided by the
Act.
● Policy Formulation: The process of creating policies to support MSMEs.
● Regulatory Compliance: Adherence to laws and regulations by
enterprises.
● Advisory Committee: A group that provides recommendations and
guidance on MSME-related matters.
● Memorandum: A document detailing the registration and essential
information about MSMEs.
● Dispute Resolution: The process of settling disagreements regarding
payments.

58
 MSME Act 2006
2.11 TERMINAL QUESTIONS
1. What is the primary objective of the MSMED Act, 2006? How does the
MSMED Act, 2006 support the growth of micro, small, and medium
enterprises in India?
2. What are the criteria used for the classification of enterprises under the
MSMED Act, 2006?
3. What is the role of the National Board for Micro, Small, and Medium
Enterprises under the MSMED Act, 2006?
4. What is the purpose of the Advisory Committee under the MSMED Act,
2006? Explain the process of filing a memorandum by micro, small, and
medium enterprises.
5. What provisions does the MSMED Act, 2006 make to address the issue
of delayed payments to micro and small enterprises? Discuss the role of
the Micro and Small Enterprises Facilitation Council in resolving payment
disputes.

2.12 ANSWERS AND HINTS

Self-Assessment Questions
1. (a) True; (b) True; (c) True; (d) True:
2. (1) Micro, Small and Medium Enterprise.
(2) (i) Manufacturing Enterprises: Engaged in manufacturing and
production of goods and defined in terms of investment in Plant
Machinery
(ii) Service Enterprises: Engaged in providing or rendering of services
and defined in terms of investment in equipment
(3) Section 3
3. a. True; b. True; c. True
4. a. True; b. True
5. a: True; b: True; c: True
6. a: True; b: True
7. a: True; b: True
Terminal Questions
1. Refer to section 2.2
2. Refer to section 2.5
3. Refer to section 2.4
4. Refer to section 2.5
5. Refer to section 2.6 59
Government
Initiatives and 2.13 REFERENCES AND FURTHER READINGS
MSME
https://www.indiacode.nic.in/handle/123456789/2013?sam_handle=
123456789/1362
https://samadhaan.msme.gov.in/WriteReadData/DocumentFile/
MSMED2006act.pdf

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