Govt plans to decriminalise MSMEs’ minor defaults
The government is reviewing the decriminalisation of minor offenses under the MSMED Act, aimed at easing the burdens on MSMEs. This move comes as part of broader efforts to enhance the business environment for small enterprises facing capital and credit challenges.
The Union government is considering decriminalisation of minor defaults under the Micro, Small, and Medium Enterprises Development (MSMED) Act. Ahead of the Union budget; the Micro, Small & Medium Enterprises (MSME) ministry, as part of the consultation process, has recommended that the law ministry decriminalise acts such as furnishing incorrect self-declaration memorandum, failure in disclosures, said two people in the know of the development.
The law also includes the failure of buyers to disclose MSME dues in their annual accounts.
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This plan of helping improve ease of doing business for MSMEs comes in the backdrop of these small businesses having low capital, with the Centre prioritising Vivaad Se Vishwas scheme for settlement of disputes for such businesses.
The decriminalisation will aid MSMEs, which lose out valuable capital on minor penalties under Section 27 of the MSMED Act.
Currently, Section 27 of the Act indicates penalties for multiple circumstances. It penalises MSMEs for not disclosing their registrations as micro, small, or medium enterprises with the designated government body. These registrations are in the form of a memorandum between the enterprise and the government.
Disclosures a must
MSMEs are bound to furnish such disclosures, including the disclosures of the above-mentioned memorandum, to officers designated by the state or Union governments. If they fail to do so, MSMEs are penalized a sum in the range of ₹1,000 - 10,000, as per the law.
If penalised under this provision of the Act, MSMEs often have to fight the case in court, leading to added costs beyond the penalty, in an ecosystem where they already face payment delays.
As of December 2024, India has over 5.58 crore registered MSMEs on the Union government's Udyam portal, employing over 230 million individuals—more than 15% of the country's population.
Such businesses operate on low capital as they cannot raise funds from markets. Indian MSMEs have to rely on government schemes and funding from banks and non-banking financial companies (NBFCs), and raising credit is a major issue for the sector.
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“Of all the problems faced by the MSMEs, non-availability of timely and adequate credit at reasonable interest rate is one of the most important," he MSME ministry said in its introduction of the Credit Guarantee Fund Scheme for micro and small enterprises. “One of the major causes for low availability of bank finance to this sector is the high risk perception of the banks in lending to MSMEs and consequent insistence on collaterals which are not easily available with these enterprises. The problem is more serious for micro enterprises requiring small loans and the first generation entrepreneurs."
Mint reported earlier that the ministry was likely to consider amendments to the definition of "supplier" under the MSMED Act to include medium enterprises as well.
A few issues need sorting
"MSMED Act is largely aimed at promoting MSMEs, rather than regulating the sector. So, only a few issues need to be dealt with under the Act. Apart from decriminalization of provisions, the issue of delayed payments also needs to be addressed," said Anil Bhardwaj, secretary general, Federation of Indian Micro, Small and Micro Enterprises (FISME). The federation has also suggested changes to the MSMED Act, including the opening of more Micro and Small Enterprises Facilitation Councils (MSEFC) and the training of officers to reduce the probability of arbitral awards being challenged.
MSEFCs are the institutions where micro and small businesses have their delayed payments disputes resolved.
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The decriminalisation is an integral part of the government's drive to increase the ease of doing business in the country. In 2023, the Union government passed an amendment to the Jan Vishwas Bill, aiming to decriminalise trivial offences which clog the legal system.
The decriminalisation of Section 27 in the MSMED Act is a part of the same initiative, aiming to reduce the burden on MSMEs to battle their disputes in courts of law.
MSMEs have long faced the brunt of the legal system in one of the most ubiquitous issues that plagues the ecosystem—delayed payments from big businesses. Big businesses have owed MSMEs over ₹27,000 crore, as per data from Micro and Small Enterprise Facilitation Councils (MSEFCs). As of December, about a third of this amount has been returned to MSMEs.
These businesses face multiple issues in the legal process to recover dues. The process involves a mandatory mediation between the parties, followed by an arbitration, and ultimately leading to the enforcement of the arbitral award. MSMEs face difficulties in all these stages, from access of MSEFCs to challenges to arbitral awards, said FISME's Bhardwaj.
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