All about MSME Act 2006 & Opportunities

CS DHANAPAL 
on 15 November 2012


INTRODUCTION

The conceptual and legal framework for small scale and ancillary industrial undertakings is derived from the Industries Development and Regulation Act, 1951. The Act provided the necessary powers to the Central Government to amend the provisions of this act from time to time so as to encourage small scale and ancillary undertakings. The Small and Medium Enterprises Development Bill 2005 which was enacted in June 2006 was renamed as “Micro, Small & Medium Enterprises Development Act, 2006” aims at facilitating the promotion and development of small and medium enterprises. Various notifications issued by the Central Government from time to time relating to increase in slap rate of investments in plant & Machinery for manufacturing enterprises and equipments in service enterprises provides a clear cut proof that the economy of our country is striving towards achieving the economies of scale by increasing the volume of production of goods. The Micro, Small and Medium Enterprise Development Act, 2006 (MSMEDA) extends the scope to accomplishes many long -standing goals of the government and stakeholders in the MSME sector including the service sector.

DEFINITION OF MICRO SMALL AND MEDIUM ENTERPRISES (MSME)

Ministry of Agro and Rural Industries and Ministry of Small Scale Industries have been merged into a single Ministry, namely, “MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES”

Definition of Micro, Small and Medium Enterprises is given by MSME Act, 2006

 

TYPES OF ENTERPRISES ELIGIBLE TO BE REGISTERED UNDER MSME ACT, 2006

All classes of enterprises, whether Proprietorship, Hindu undivided family, Association of persons, Cooperative society, Partnership firm, Company or Undertaking, by whatever name called can apply for the registration and get qualified for the benefits provided under the Act.

REGISTRATION OF MSME

Registration of MSME:

1. Voluntary and not Compulsory with respect to Micro and Small Enterprises

2. DIC is the primary registering centre

3. Two types:

• Provisional Registration

• Permanent/Final Registration

REGISTRATION PROCEDURE

CONTINOUS DISCLOSURE

a. Change in the investment in plant and machinery or in equipment, the enterprises who have already filed Entrepreneurs Memorandum should inform the District Industries Centre of the same in writing within three month of the change in investment.

b. Change of products and that of services or addition in products or services, the enterprises which have already filed Entrepreneurs Memorandum shall inform the District Industries Centre of the same in writing within three months of the change

NOTE: EM PART – II to be filed within 2 years or else the EM PART – I filed by a person will become invalid

ON-LINE REGISTRATION OF MSME

The online service is introduced mainly to help the entrepreneurs to obtain acknowledgement to EM Part I readily without contacting the General Managers of District Industries Centres (DIC) and Regional Joint Director.

ON-LINE PROCEDURE FILING:

Online Entrepreneur Memorandum Acknowledgement is valid only when it is self certified by the applicant and the same has been submitted with four copies within 30 days from the date of filing of online application to the DIC/Regional Joint Director of Industries and Commerce.

DE-REGISTRATION OF MSME

De-Registration of MSME is required in following cases:

• Investment limits more than the limit specified under this Act from time to time.

• When an registered enterprises starts manufacturing any new item or items that require an industrial license or other kind of statutory license.

BENEFITS OF REGISTERING MSME UNDER MSME ACT 2006

a.  If a micro or small enterprise has filed a memorandum with DIC of its area, then it stands to gain as to timely payment in respect of supply of goods or rendering of services to any buyer.

b. With the enactment of MSMED Act, 2006, the Interest on delayed payments to small scale and ancillary industrial undertakings act, 1993 is repealed w.e.f. 2nd October, 2006.

c. Any Buyer who purchased any goods or availed any services from Micro or Small enterprises which has filed a memorandum with the authority, then the buyer shall make the payment on or before the date agreed upon between him and the supplier in writing or within a period of 15 days from the day the goods are delivered or services are rendered. However the period of credit can not exceed more than 45 days from the date of delivering product or services.

Other Benefits of Registration

1. Eligible for availing exemption under

• Excise Scheme

• Direct Tax Laws.

2. Credit prescription (Priority sector lending), differential rates of interest etc.

3. Statutory support such as condition and the Interest on Delayed Payments Act.

CONSEQUENCE OF NON - REGISTRATION

Since filing is optional, no penalty is attracted. However, filing the memorandum is pre-requisite to qualify as a ‘supplier’ for Chapter V purposes and non-filing will make the supplier ineligible to benefits under Chapter V relating to right to receive timely payment and right to receive interest under Sec 16 for delayed payment.

According to Sec 28(1), whoever intentionally contravenes or attempts to contravene or abets the contravention of any of the provisions contained in sub-section (1) of Sec8 shall be punishable:

a) First conviction: Fine < 1000

b) Second or subsequent conviction: 1000 < Fine >10,000

OBLIGATION FOR BUYERS INCASE OF ENTERING INTO CONTRACT WITH REGISTERED MSME

1. The Buyers have to confirm the registration of the suppliers under the MSMED Act, 2006

2. Date of Credit Period:

• Date as agreed between the Supplier and Buyer as per agreement.

• 45 days from the date of Delivery/ deemed date of Delivery, whichever is earlier

Note: 15 days from the date of acceptance or the day of deemed acceptance of any goods or services from a supplier would be treated as the credit period if nothing is agreed between the Buyer and Supplier.

MICRO AND SMALL ENTERPRISES FACILITATION COUNCIL (MSEFC)

Application to Micro and Small Enterprises Facilitation Council (MSEFC) can be made in case of dispute for starting the arbitration process. Once the application is done under MSEFC, there is no provision to withdraw the proceedings.

CLASSIFICATION OF MSME

Classification of the Micro and Small Enterprises (manufacturing and service) shall be under Priority Sector which includes Small Road and Water Transport Operator, Small Business, Professional and Selfemployed Persons and all other service enterprises. Retail Trade will not be classified under Micro and Small enterprises (service sector).

FINANCE

DIRECT FINANCE:

1. All loans granted to Small Enterprises including Micro Enterprises (both Manufacturing and Services) will be classified under Direct Finance to Micro and Small Enterprises Sector.

2. All advances granted to units in the KVI sector, irrespective of Sector their size of operation, location and amount of original investment in Plant and Machinery, will be eligible for consideration under the Sub Target (60 percent) of the Small Enterprises segment within the Priority Sector.

INDIRECT FINANCE:

1. Credit to persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

Advances to cooperatives of producers in the decentralized sector viz., artisans, village and cottage industries.

2. Loans granted by banks to NBFCs for on lending to Small and Micro enterprises

3. Existing investments as on 31st March, 2007, made by banks in special bonds issued by NABARD with the objective of financing exclusively non-farm sector may be classified as Indirect fiancé to Small Enterprise sector till the date of maturity of such bonds of March 31, 2010, whichever is earlier. Investment in such special bonds made subsequent to March 31, 2007 will, however, not be eligible for such classification.

CREDIT FACILITIES

FUNDED AND NON FUNDED

- Term Loan

- Cash Credit

- Letter of Credit

- Bank guarantee, etc.

COMPOSITE LOAN

- Maximum limit upto Rs.1.00 crore

COMMON MSME AND POLICY

COMMON MSME:

a. Small road & Water transport operators

b. Small business

c. Retail trade

d. Professional

e. Self - employed persons and

f. Other service enterprises

POLICY OF MSME:

Policy support for MSME

a. Legislation

b. Credit support

c. Fiscal support

d. Small Industry Cluster Based Programme

e. Technology & Quality Upgradation

f. Marketing Support Programmes

g. Empowerment of Women-owned Enterprises

h. Statistical Data for decision making

i. Training & Exposure

SCHEMES FOR MSME:

a. Credit guarantee fund scheme for MSME

b. Credit linked capital subsidy scheme

c. Scheme for registration for bar coding

d. Lean manufacturing competitiveness schemes

e. Scheme for technology and quality upgradation

f. Design clinic scheme

g. Scheme for upgradation of information technology and communication

h. Scheme for technology upgradation & marketing

i. Scheme of international co operation

j. Scheme for capacity building

MECHANISM FOR PROMOTION & DEVELOPMENT

FEDERAL GOVERNMENT: - responsible for policy, credit flow, centrally sponsored schemes

STATE GOVERNMENT: - responsible for implementation, infrastructure development and monitoring

FEDERAL GOVERNMENT & STATE GOVERNMENT: Capacity building, training, consultancy support, technology demonstration & transfer, data compilation & maintenance and marketing supported by Federal Government as well as State Governments

OPPORTUNITIES TO PROFESSIONALS

MSME

a. 90% of MSME in India are unregistered (out of which nearly 80% are Sole Proprietor Firms)

b. 40% of exports in India are through MSME channel

c. 40% of Employment Opportunity in India is provided by MSME Sector

d. 40% of GDP of India in International Market is contributed by MSME Sector

e. MSME provides opportunities to the buddy entrepreneurs by providing various channel of Investment opportunity according to their class of Investments.

f. Provides a good market for an foreign companies to start venture capital business in India

Therefore professional fraternity shall take lead to advice those entrepreneurs who are still running their business in sole proprietorship mode or partnership format to get themselves converted into either a Company or Limiter Liability Partnership in order to reduce their risk exposure in their business and get into business expansion without worrying the concept of unlimited liability.

MSME ACT AND ITS DISCLOSURES

MSMED Act specifies that it is the duty of buyers to make disclosures in the annual accounts but this does not mean that the Auditor has no duty to verify these disclosures. The auditor is required to ensure the compliance of various provisions:

a.  Interest under section 16

b. Disclosures required under section 22 of the MSMED Act.

This is evident from Auditing and Assurance Standard (AAS) 21, “Consideration of Laws and Regulations in an Audit of Financial Statements.” The salient features of this AAS are given below:

The auditor should recognise that the noncompliance by the entity with the laws and regulations may materiality affect the financial statements.

Note: ‘noncompliance’ as used in this AAS refers to acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws or regulations.

LIST OF ITEMS RESERVED FOR EXCLUSIVE MANUFACTURE BY MICRO AND SMALL ENTERPRISES SECTOR (AS ON 30th JULY 2010)

Privileges enjoyed by Micro Small Medium Enterprises Such units can manufacture any item including those notified as exclusively reserved for manufacture in the small scale sector. Medium units can manufacture reserved items if they have obtained a carry on business licence or accept an export obligation of 50% of their production

FOREIGN DIRECT INVESTMENT IN MICRO SMALL MEDIUM ENTERPRISES

GOVERNMENT OF INDIA, MINISTRY OF COMMERCE & INDUSTRY, DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION: CONSOLIDATED FDI POLICY (EFFECTIVE FROM APRIL 1, 2011)

Clause 5.2 of the above cited policy states that FDI up to the limit indicated against each sector/activity is allowed/ permitted subject to other conditions indicated & security conditions where applicable. In sectors/activities not listed in this Clause, FDI is permitted upto 100% on the automatic route, subject to applicable laws/sectoral rules/regulations/security conditions.

CLARIFICATION ON FOREIGN DIRECT INVESTMENT (FDI) INTO A SMALL SCALE INDUSTRIAL UNDERTAKING (SSI) /MICRO & SMALL ENTERPRISES (MSE) AND IN INDUSTRIAL UNDERTAKING MANUFACTURING ITEMS RESERVED FOR SSI/MSE -- PRESS NOTE NO. 6 (2009), DATED 4-9-2009 FDI into SSI/MSE

A Small Scale industrial undertaking (SSI) was defined in terms of: (i) investment in fixed assets in plant and machinery and (ii) equity participation (both domestic and foreign) in the SSI, by other industrial undertakings prior to 2006. Vide Press Note 18 (1997), it was further notified that, for cases of foreign collaborations, since the maximum equity participation allowed for in small scale units was 24%, proposals for induction of foreign equity more than 24% would be subject to the condition that: (i) the company would get itself de-registered as a small scale unit and (ii) obtain industrial licence or file Industrial Entrepreneur Memorandum with SIA, as per prescribed policy and procedure.

With the promulgation of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the ceiling for equity participation (both domestic and foreign) in the micro and small enterprises, by other enterprises, was removed and Micro and Small Enterprises (MSE) (earlier small scale industries) were defined solely on the basis of investment in plant & machinery (for micro and small enterprise engaged in manufacturing) and equipment (for micro and small enterprise engaged in providing or rendering of services). Accordingly, this change was notified by Notification No. S.O. 563(E) dated 27th February 2009 of Department of Industrial Policy & Promotion, Ministry of Commerce & Industry.

Thus the present policy on FDI in MSE permits FDI subject only to the sectoral equity caps, entry routes and other relevant sectoral regulations. Press Note 18 (1997 series) stands modified to the extent above. Therefore it is now clear Foreign Direct Investment in Micro Small Enterprise is subject only to the sectoral equity caps, entry routes and other relevant sectoral regulations. In sectors/activities not listed in above cited consolidated FDI Policy 2011, FDI is permitted up to 100% on the automatic route, subject to applicable laws/sectoral rules/regulations/security conditions. Hence, if the company is a micro or small enterprise, 100% FDI seems to have been permitted under automatic route subject to the sectoral caps.

CONCLUSION

Registration of an entity under the Act is a medium to enjoy the benefits available to SMEs in terms of easy finance availability from Banks, preference in procuring Government tenders, stamp duty,concession in electricity bills and timely receipt of payments from the buyers or debtors, reimbursement of ISO Certification expenses and so on. There is a growing recognition worldwide that small and medium enterprises (SMEs) have an important role to play in the present context given their greater resource-use efficiency, capacity for employment generation, technological innovation, promoting inter-sectoral linkages, raising exports and developing entrepreneurial skills. All sectors and classes of enterprises, whether Trading, Service or Manufacturing, Proprietorship, Hindu undivided family, Association of persons, Co-operative society, Partnership firm, Company or Undertaking, by whatever name called can apply for the registration and get qualified for the benefits provided under the Act.

DISCLAIMER

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice from their own source after a thorough examination of the particular situation.


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