The government is exploring amendments to the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, which could extend its protective framework to medium enterprises. This move aims to address the challenges of delayed payments, a chronic issue for businesses in the MSME sector. Here’s an in-depth explanation of the situation:
Current Scope of the MSMED Act
The MSMED Act defines micro, small, and medium enterprises based on their investment and turnover, as revised in June 2020:
- Micro Enterprises:
- Investment: Up to ₹1 crore
- Turnover: Up to ₹5 crore
- Small Enterprises:
- Investment: Up to ₹10 crore
- Turnover: Up to ₹50 crore
- Medium Enterprises:
- Investment: Up to ₹50 crore
- Turnover: Up to ₹250 crore
While the Act defines all three categories, only micro and small enterprises qualify as “suppliers” under the current law. This means they are eligible to seek legal recourse under the Act for issues like delayed payments through dedicated mechanisms such as the Micro and Small Enterprises Facilitation Councils (MSEFCs).
Problem with Excluding Medium Enterprises
Despite being an essential part of the economy, medium enterprises lack access to the dispute resolution benefits offered by the MSMED Act. This exclusion leaves around 10,000–15,000 medium enterprises without recourse to protection against delayed payments from larger companies. The absence of such a framework exacerbates financial stress and hinders growth.
Medium enterprises often operate at a larger scale than micro and small enterprises, which means the amounts owed to them in delayed payments are typically more substantial. Without inclusion in the definition of “supplier,” they cannot approach MSEFCs for assistance.
Why Amend the MSMED Act?
The government is considering amendments to include medium enterprises in the definition of “supplier.” This change would:
- Allow Medium Enterprises to Access MSEFCs
They could raise payment disputes with MSEFCs, just like micro and small enterprises. - Strengthen Dispute Resolution Mechanisms
By including medium enterprises, the government could resolve a larger number of delayed payment issues, ensuring timely settlements. - Support Economic Growth
By addressing payment delays, medium enterprises can focus on growth and expansion, contributing to employment generation and economic development.
How the MSEFCs Work
The Micro and Small Enterprises Facilitation Councils (MSEFCs) are quasi-judicial bodies established under the MSMED Act to resolve delayed payment disputes. They use conciliation, mediation, and arbitration to help suppliers recover their dues from buyers.
- Suppliers (currently limited to micro and small enterprises) can register disputes with MSEFCs.
- The councils assist in out-of-court settlements to expedite the resolution process.
- However, the process faces challenges like delays in enforcement of arbitral awards and inefficiencies in addressing disputes promptly.
Statistics:
- 88,786 cases have been registered with MSEFCs, involving an amount of ₹27,578 crore.
- While over half of the cases have been resolved, only about a third of the amount owed has been paid to micro and small enterprises.
Industry’s Demand for Change
Organizations like the Federation of Indian Micro and Small & Medium Enterprises (FISME) have been vocal in demanding these amendments. They argue that excluding medium enterprises from the law creates an imbalance, as these businesses face similar challenges of delayed payments but lack access to the same legal protections.
Government’s Current Actions
- Consultations Underway:
Discussions are ongoing regarding changes to definitions and provisions in the MSMED Act. - Focus on Manufacturing Sector:
While most MSMEs operate in the services sector, the government aims to promote manufacturing MSMEs by enhancing legal and financial support mechanisms. - Draft Amendments Expected:
A draft proposal incorporating these changes could take about six months to finalize, according to stakeholders.
Challenges in Implementation
- Increased Burden on MSEFCs:
Including medium enterprises might lead to a significant rise in the number of disputes registered, potentially overburdening the existing system. - Systemic Inefficiencies:
The current framework already struggles with enforcement delays and unresolved cases, which need to be addressed for the changes to be effective. - Awareness and Accessibility:
Many MSMEs, especially in smaller towns, are unaware of the dispute resolution mechanisms. Extending protection to medium enterprises will require targeted awareness campaigns.
Conclusion
If medium enterprises are included in the MSMED Act, it could significantly improve the ecosystem for resolving payment disputes, fostering a healthier business environment. However, the government must simultaneously address existing inefficiencies in the dispute resolution system and ensure that MSEFCs are equipped to handle the increased caseload. Stakeholders remain optimistic, but the real impact will depend on how effectively the amendments are implemented and enforced.
