Latest Government Notifications on MSMEs
September 26, 2019
What are MSMEs
Small and medium enterprises might be classified as such due to their smaller size, lack of scale and limited capital assets, yet interestingly enough, they form over 90% of the industry in India and employ a huge number of people (upwards of 100 million.) Studies confirm that after the agriculture industry, MSMEs are the second-highest generators of employment in terms of the sheer number of people that they bring into the workforce. Also, they generate around 30% of the GDP of our country. On the occasion of the UN MSME day conference last year, Union Minister Giriraj Singh even mentioned that there had been 4 crore jobs created by MSMEs in the span of four years, and this marks a tremendous feat for smaller establishments.
The new notification pertaining to MSMEs was published by the government on the 22nd of January, 2019 and follows a notification dated 2nd November, 2018.
What is the classification requirement of MSMEs based on a recent notification
An Amendment was introduced by the government in 2015, which was formally adopted in the year 2018.
As per the recent classification, MSMEs are now identified and segregated on the basis of their business turnover. This notification does not make any distinction between manufacturing companies and service companies. There was earlier a need to make a distinction between the nature of the firm, however, this is not the way to go now. The Act has now made a distinction between three tiers-
A micro-enterprise is a unit, the annual turnover of which does not cross 5 crores.
A small enterprise is a unit which has a turnover of more than 5 crores, but less than 75 crores.
A medium enterprise is a unit which has an annual turnover of more than 75 crores, but less than 250 crores.
These amounts are subject to modification by the government, but would not be allowed to be in excess of thrice the amount that is mentioned in Section 7 of the MSME Act.
On what basis enterprises were earlier classified as MSMEs
Enterprises which fall within the purview of section 7 of the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 are considered to be MSMEs. The Act makes for segregation of companies into manufacturing or service firms respectively.
Section 7 took into account the quantum of investment in plant and machinery by either a manufacturing firm or a service firm. In the case of a manufacturing company, the applicable threshold was 10 crores as an investment, and in the case of service companies, the threshold stood at 5 crores.
What are the advantages that MSMEs are entitled to the statute
MSMEs enjoy certain definite advantages when it comes to day to day business. Firstly, as per Section 15 of the MSME Act, where a seller delivers any goods or performs any service, then the buyer is bound to pay on or before the due date of payment. This should not exceed 45 days from the date of acceptance or the deemed date of acceptance.
Section 16 provides for even more stringent measures to reward a seller. It says that where the buyer fails to make good his payment to the seller, then he will be bound to pay compound interest at three times the rate that has been prescribed by the RBI. This section makes it very difficult for a buyer to not pay on time, or to evade payment.
There are also other statutory benefits that are given to MSMEs in the form of privileges and preference in the insolvency and bankruptcy process, and also by means of benefits through easy loans and better access to finance and also subsidised interest rates on loans.
What are some of the other privileges that MSMEs enjoy, as per the law
MSMEs have a distinct advantage where it comes to tenders floated by the government. They are also entitled to waiving of electricity bills and stamp duty exemption. Banks also give loans to MSMEs without imposing any collateral requirements. Registration under the MSME Act,2006 is also beneficial in terms of speedy resolution of disputes that go up for arbitration.
What is the new notification that applies to MSMEs in India
Vide notification no. S.O. 5622 (E) of 2nd November, 2018, the Government has specified that all companies who received goods or services from an MSME and whose payments for those goods and services exceeds the stipulated time frame of 45 days ( as per Section 9 of the MSME Act) shall be required to file a half-yearly return with the Ministry of Corporate Affairs, and mention the total amount of payment which is payable and the reason for the delay in payment. This is an effort by the government to make it even easier for MSMEs to recover the money that is due to them, and also to discourage any laxity or delay in respect to payment.
What is the order that has led to the latest notification by the Government
In keeping with the powers conferred on it by Section 405 of the Companies Act, the government passed an order called the Specified Companies (Furnishing of information about the payment to micro and small enterprise suppliers) Order, 2019.
All specified companies would be required to file Form 1 in order to make declarations about whether they owe any outstanding amounts to an MSME entity. These filing requirements would have to be carried out by entities within 30 days of passing of this notification. The time period has been prescribed in order to introduce a sense of urgency in the filing process and to ensure speedy settling of accounts.
Each company which is classifiable as a “specified company” being either a private or a public company, shall file form 1 and offer an explanation as to the following –
This would imply the date of notification of this order, within a period of thirty days from the date of publication of the notification of 22 January, 2019 (by end-February i.e.)The outstanding dues which are yet to be paid to small/micro suppliers or enterprises, for over 45 days from the date of actual acceptance or the deemed date of acceptance must be mentioned by the specified company. The reason for the delay must also be mentioned. Date of deemed acceptance would be the date of acceptance of that delivery if no objection is made by the party that is to make acceptance of the goods.
The Bi-annual reporting requirements have to be carried out by 31st October for the period of April to September, and by 30th April for the period October- March.
The details which need to be recorded within the form are as follows- Details of the company; Particulars relating to name of suppliers and the amount of payment due; the total amount that is outstanding as of date; Regular Return of Outstanding dues to Micro and Small enterprises; Reasons for delay in payment; Attachments if relevant; Declaration by CEO/ Director or Company Secretary.
What is the penalty that has been prescribed, for Non-Conformance
If a company is in contravention of the provisions of this notification, then every officer who is responsible for non-compliance will be liable to pay an amount of INR 25,000. Further, the officer who is found to be in default may also be imprisoned for a period of 6 months. The fine may be extended up to an amount of 3 lakhs.
Importance of the Notification
The government has taken it upon itself to ensure speedy and sure repayment to MSMEs who otherwise also enjoy statutory protections. This step by the government has been important because bigger establishments usually have more capital and resources unlike the smaller institutions, which would not survive if credit flows were negatively impacted.
Are there any risks which go beyond these provisions
The Insolvency and Bankruptcy Code, and the regime that it defines does pose a risk to the MSME entities. This is because the MSME is defined as an operational creditor, and therefore is at the bottom of the pyramid when it comes to repayment. If a company goes into liquidation under the Insolvency and Bankruptcy Code, then its dues might not be paid to an MSME supplier that it had transacted with. That is one great risk that the government still has to address.
Important Advice for Companies
Companies should go through their records and ascertain whether they have been recipients of goods and services by an MSME. Once they have established that there are unresolved payments, they should take care to complete the reporting duties and not be in contravention of the law. The ramifications of non-contravention could be financial and also result in jail-time where wilful negligence is found to exist. An oversight could, therefore, prove to result in heavy penalties.