INRODUCTION :
The Micro Small and Medium Enterprises (MSMEs) sector is a major contributor to the socioeconomic development of the country. In India, the sector has gained significant importance due
to its contribution to Gross Domestic Product (GDP) of the country and exports. With the advent
of Government schemes such as Make In India and Startup India, this particular sector has also
contributed immensely with respect to entrepreneurship development especially in semi-urban
and rural areas of India. Hence, these two schemes are complementary to each other wherein the
MSME Act can be called as one of it’s catalyst acting as a statutory regulatory body.
According to the provisions of Micro, Small & Medium Enterprises Development (MSMED)
Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two classes i.e.,
Manufacturing Enterprises and Service Enterprises. The enterprises are further categorized based
on investment in equipment and annual turnover. 1
CRITERIA
MANUFACTURING
Turnover
Rs. 5 crore
MICRO
(US$ 0.6 million)
Rs. 50 crore
SMALL
(US$ 6.8 million)
Rs. 250 crore (US$
34 million)
MEDIUM
1
https://www.ibef.org/industry/msme
SERVICE
Investment
Less than Rs.
25 lakh (US$
0.03 million)
Turnover
Rs. 5 crore
(US$ 0.6
million)
More than Rs.
25 lakh (US$
0.03 million)
but less than
Rs. 5 crore
(US$ 0.6
million)
Rs. 50 crore
More than Rs. 5
crore (US$ 0.6
million), but
less than Rs. 10
Rs. 250 crore
(US$ 34
million)
(US$ 6.8
million)
Investment
Less than Rs. 10 lakh
(US$ 0.01 million)
More than Rs. 10 lakh
(US$ 0.01 million) but
less than Rs. 2 crore
(US$ 0.3 million)
More than Rs. 2 crore
(US$ 0.3 million) but
does not exceed Rs. 5
crore (US$ 0.6 million)
crore (US$ 1.4
million)
GOVERNMENT POLICIES2
The Government of India has designed various policies for the growth of MSMEs in the country.
2
1.
As on July 8, 2022 the number of loans sanctioned under the Pradhan Mantri MUDRA
Yojana (PMMY) scheme was 10.03 million and the amount disbursed was Rs. 73,199.89
crore (US$ 9.15 billion).
2.
In the Union Budget of 2022-23 MSMEs sector was allocated an Emergency Credit Line
Guarantee Scheme (ECLGS) of Rs. 50,000 crore (US$ 6.55 billion).
3.
On March 30 2022, the Indian government allocated Rs. 6,062.45 crore (US$ 808
million) for the scheme Raising and Accelerating MSME Performance (RAMP). The
programme aims to improve market and credit access, strengthen institutions and
governance at the centre and state levels, improve centre-state connections and
partnerships, resolve late payment difficulties, and green MSMEs.
4.
In November 2021, the Indian government launched the Special Credit Linked Capital
Subsidy Scheme (SCLCSS) for the services sector. This scheme will help enterprises in
the services sector meet various technology requirements.
5.
In November 2021, the Ministry of Micro, Small and Medium Enterprises launched
SAMBHAV, a national-level awareness programme to push economic growth by
promoting entrepreneurship and domestic manufacturing.
6.
In September 2021, Union Minister for MSMEs, Mr. Narayan Rane introduced ‘India
Export Initiative’ and ‘IndiaXports 2021 Portal’. This initiative will help exports reach its
Rs. 2,928,000 crore (US$ 400 billion) target by the end of FY22 and further push it to Rs.
7,320,000 crore (US$ 1 trillion) by FY27.
7.
In September 2021, Khadi and Village Industries Commission (KVIC) established the
first ‘Silk Yarn Production Centre’ in Odisha to boost the local silk industry and generate
employment.
8.
In September 2021, Union Minister for MSMEs, Mr. Narayan Rane inaugurated Rohtak
Technology Centre, which is expected to train >8,400 trainees annually.
https://www.ibef.org/industry/msme , Government of India’s notifications in their Official Gazzete
9.
In September 2021, Khadi and Village Industries Commission (KVIC) launched SPIN
(Strengthening the Potential of India) scheme and built a pottery cluster under SFURTI
Scheme in Varanasi to support >1,100 individuals of the marginalised potters’
community.
10.
In July 2021, Lok Sabha passed a bill on ‘Factoring Regulation (Amendment)’ to
expedite the payments ecosystem for MSMEs.
11.
Budget allocation for MSMEs in FY22 more than doubled to Rs. 15,700 crore (US$ 2.14
billion) vis-à-vis Rs. 7,572 crore (US$ 1.03 billion) in FY21.
12.
The government also announced Rs. 3 lakh crore (US$ 40.85 billion) collateral-free
automatic loans for businesses.
13.
In Union Budget 2021, the government announced funds worth Rs. 10,000 crore (US$
1.36 billion) for ‘Guarantee Emergency Credit Line’ (GECL) facility to eligible MSME
borrowers, giving a major boost to the sector.
RECENT DEVELOPMENTS3
Major Recent Developments in the MSMEs include:
3
1.
In June 2022, the central government announced a new initiative called "Promotion of
MSMEs in North Eastern Region and Sikkim." The main purpose of this project was to
stimulate MSMEs in the North East by establishing mini-technological centres,
developing new and existing industrial estates, and promoting tourism.
2.
In November 2021, the Small Industries Development Bank of India (SIDBI) inked a
pact with Google to pilot social impact lending with financial assistance up to Rs. 1 crore
(US$ 133,939.60) at subsidised interest rates to micro enterprises. To reinvigorate the
Indian MSME sector, Google India Pvt. Ltd. GIPL, will bring a corpus of US$ 15 million
(~Rs. 110 crore) for micro enterprises as a crisis response related to COVID-19.
3.
In November 2021, digital freight forwarder Freightwalla, launched a shipment tracking
service for MSME exporters and importers based on predictive analytics to help
businesses tackle risks associated with shipment delays and improve supply chain
efficiency.
4.
In November 2021, Cashinvoice, a supply chain financing (SCF) platform, announced
that it will aid MSMEs with over Rs. 10,000 crore (US$ 1.33 billion) worth of financing
in the year ahead, as it has raised Pre-Series A funding of US$ 1 million from Accion
Venture Lab.
https://www.ibef.org/industry/msme
5.
In October 2021, Sundaram Finance and the MSME Development Institute (Chennai),
provided marketing assistance to MSMEs. Entrepreneurial and managerial development
of MSMEs will be done through an incubator scheme, that will give innovators
opportunities to develop and nurture ideas for the production of new products.
6.
In September 2021, Aerospace Engineers Private Limited, a Tamil Nadu-based MSME,
secured a contract from Boeing to produce and supply critical aviation components.
7.
In September 2021, Walmart and Flipkart announced the completion of the first phase of
training of >2,500 MSMEs under Vriddhi, the supplier development programme.
8.
In September 2021, Flipkart introduced 'Flipkart Boost’ to help digital-first consumer
brands and empower MSMEs.
9.
In September 2021, HDFC Bank collaborated with the National Small Industries
Corporation (NSIC) to offer credit support to the micro, small and medium enterprise
(MSME) sector.
10.
In August 2021, the US Agency for International Development (USAID) and the US
International Development Finance Corporation (DFC) collaborated with Kotak
Mahindra Bank to support MSMEs.
11.
In August 2021, Facebook India, in collaboration with Indifi, announced ‘Small Business
Loans Initiative’, a new programme to support small and medium businesses (SMBs) get
quick access to credit via independent lending partners.
12.
In August 2021, Indian Bank introduced 'MSME Prerana', an online business-mentoring
programme for MSMEs in Odisha. In FY21, the state (Odisha) accounted for ~5% of the
total MSME credit exposure of Indian Bank and recorded an increase of 39% YoY.
13.
In July 2021, Amazon India announced to expand its existing nine fulfilment centres and
launch additional 11 new centres. This expansion plan is expected to create direct and
indirect job opportunities in India and further strengthen Amazon’s foothold in the
country.
14.
In July 2021, Razorpay acquired TERA Finlabs, a provider of embedded financing
solutions, to strengthen capabilities in data-driven risk management, capital solutions and
credit underwriting to financially support MSMEs.
15.
In July 2021, Amazon India introduced Digital Kendra in Surat—its first brick and
mortar resource centre to assist ‘kiranas’ and small businesses to go digital.
16.
In July 2021, the Federation of Indian Export Organisations (FIEO) signed a
memorandum of understanding (MoU) with Aramex India, logistics services provider, to
support MSME exporters in India.
17.
In June 2021, Tide, a UK-based business financial platform, announced to invest >Rs.
1,000 crore (US$ 134.21 million) in India over the next five years to tap the rising SME
(small and medium-sized enterprises) market.
Interest rates applicable
Section 16 of the Act provides that 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. Additionally, Section 23 provides that the
interest payable under Section 16 would not be allowed as a deduction while computing income
under the provisions of the Income Tax Act, 1961.
Dispute resolution mechanism
Section 18 of the Act establishes a Micro and Small Enterprises Facilitation Council (‘MSEFC’)
to aid the parties in deciding a dispute. If the buyer defaults on the payment or the interest, then
the supplier can register a complaint with the MSEFC. Every state government has to establish a
council in their own jurisdiction. The council consists of 3 to 5 members, including a director,
one or more office bearers of State MSMEs, one or more representatives from banks, and one or
more persons having expert knowledge in industry, finance, law, trade or commerce.4 To
simplify the process, the government also launched the MSME Samadhan portal on October 30,
2017. Services provided by the MSME Samadhan Portal are:5
MSMEs can file online applications to report defaults in payments by the buyer. In order
to do so, they require an Udyog Aadhaar Number that is validated with Aadhaar.
2) MSMEs are notified of case status and relevant updates on the portal.
3) The portal also provides the status of delayed payment of MSMEs with public sector
enterprises, central and state governments. The heads of these PSE and government
ministries can then monitor the cases and issue directions to resolve it.
1)
ARBITRATION AS A METHOD OF DISPUTE RESOLUTION FOR DISPUTES
PERTAINING TO MSMES
MSEFC being the single body to resolves disputes pertaining to MSMEs, can tend to be
overburdened with the number of diputes at hand to settle, ergo, the council can refer the dispute
to conciliation to any other recognized body for speedier resolution. The same has been
objectively stated in the Saryu Plastics Case.
The Division Bench of the Gujarat High Court while dealing with the same proposition in ‘Saryu
Plastics Pvt. Ltd. v. Gujarat Water Supply and Sewerage Board’ (“Saryu Plastics case”)6 held
Section 21 of the Micro, Small and Medium Enterprises Development Act, 2006.
Lalit Jain, Recovery of Debt under MSME; May 12, 2020; https://taxguru.in/corporate-law/recovery-debtmsme.html.
6
http://164.100.69.66/jupload/dhc/SAS/judgement/08-05-2020/SAS08052020CMM7692018_140320.pdf
4
5
that, upon a reading of Section 18 of MSME Act, the Facilitation Council is authorised to
conduct conciliation either itself or refer the same to any center providing alternate dispute
resolution services. Furthermore, the Council also thereby permits to arbitrate and render an
award. Moreover it was held that, Section 19 of the MSME Act has a much wider aspect
attached to and hence it is deemed to be applicable only in a situation where an award is passed
under Section 18 of MSME Act. Thus, it was held that, there cannot be a legally tenable situation
that Section 19 of MSME Act would apply only in case of an award being passed by the
Facilitation Council or any institute or center to which reference is made by the Council.
It was also held that if such an interpretation was to be accepted, then the term ‘decree’ as provided
in Section 19 of MSME Act would be rendered as redundant, as, neither the Facilitation Council
nor any institution or center is empowered to pass a decree. Importantly, this judgment of the
Gujarat High Court was appealed before the Supreme Court and was disposed with a slight
modification with extension of timeline to make the pre-deposit before the court concerned for
filing the appeal.7
Section 18 of the Act intends to form a dispute resolution mechanism wherein the non payment
of the amount is the core subject matter of the dispute then under Section 17 of the Act, a
reference is required to be made to the Micro and Small Enterprises Facilitation Council. Upon
such reference, the Council is empowered to conduct conciliation in the matter, either by itself or
through reference to an alternate dispute resolution centre. Sections 65 to 81 of the Arbitration
and Conciliation Act, 1996 (“Arbitration Act”) apply to such proceedings as if the conciliation
proceedings were initiated under Part III of the Arbitration Act.
If such conciliation proceedings fail, the Council is required to take up the dispute for arbitration
or refer it to an alternate dispute resolution centre. The provisions of the Arbitration Act are
applicable as if the arbitration were initiated pursuant to an arbitration agreement between the
parties, under Section 7(1) of the Arbitration Act.8
This article aims to simplify the understanding of MSMEs and amplify the scope of arbitrations
as a method of speedier dispute resolution conducted under Section 18 of the Act and its effect
on arbitration agreements that may already exist between the parties in addition to the nature of
claims which fall within the jurisdiction of the Council, in the context of a recent decision of the
Supreme Court of India (“Supreme Court”) in Silpi Industries vs. Kerala State Road Transport
Corporation & Anr. (“Silpi Industries”).9
7
https://www.scconline.com/blog/post/2020/06/19/arbitration-under-msme-act-whats-the-status/
8
https://www.nlsblr.com/post/arbitrations-under-the-msmed-act-supreme-court-clarifies-but-falls-short
https://main.sci.gov.in/supremecourt/2017/36008/36008_2017_35_1501_28105_Judgement_29-Jun-2021.pdf
9