MSME, Governance Initiative and Key points for Finance Professionals

MSME Registration is an optional Registration under the MSMED Act that provides Micro, Small and Medium sized enterprises with a host of benefits and access to subsidies and schemes.

Definitions of Micro, Small & Medium Enterprises In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes:

Manufacturing Enterprises-enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951) or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use. The Manufacturing Enterprise are defined in terms of investment in Plant & Machinery.

Service Enterprises:-The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment..

The limit for investment in plant and machinery / equipment for manufacturing / service enterprises, as notified,vide S.O. 1642(E) dtd.29-09-2006 are as under

Nature of Activity: 1- Manufacturing,

2 – Services

Category:  1- Micro, 

2 – Small,

3 – Medium

MSME registration is replaced with Udyog Aadhar registration since any small and medium small industries want to start any business; they need to do the registration with MSME. This facility is called Udyog Aadhar. This Aadhaar is a 12 digit number. Ministry of Micro, Small and Medium Enterprises (MSME) has notified the Udyog Aadhaar Memorandum (UAM) under the MSMED Act, 2006 vide gazette notification [SO No. 2576(E)] dated 18-09-2015 in order to promote ease of doing business for MSMEs.

Type of enterprise classification :

Further,

Central Government vide notification number S.O.5622 (E), dated the 2nd November, 2018 has directed that all companies, who get supplies of goods or services from micro and small enterprises and whose payments to micro and small enterprise suppliers exceed forty five days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of section 9 of the Micro, Small and Medium Enterprises Development Act,20OG (27 of 2006) (hereafter referred to as “Specified Companies”), shall submit a half yearly return to the Ministry of Corporate Affairs stating the following:

(a) the amount of payment due; and

(b) the reasons of the delay;

And whereas, in exercise of power under section 405 of the Companies Act, 2013, (18 of 2013) the Central Government, considers it necessary to require “specified Companies” to furnish above information under said section of the Act.

The above initiative is a good indicator of governance towards protecting the MSMEs and strengthen the corporate governance framework. Consecutively to contribute to this initiative and in compliance of the referred notification, the companies will need to ensure that they follow and adhere to the new requirement.

KEY TAKEAWAYS

• Applicability : Applicable to all companies – i.e Private and Public Companies ;

• Payments to : Micro and Small Enterprises (Medium enterprise excluded) ;

• Initial Return : MSME Form I required to be filed within 30 days of the date of the notification i.e 22^nd January,2019 details of all outstanding payments as on the date of notification  to Micro and Small Enterprise  beyond 45 days  ;

• Key date is the Date of Acceptance of goods/services: Companies should ensure the payment to Micro and small enterprises within 45 days of the date of acceptance of goods/services as distinguished from the Invoice date. This envisages practical internal control check to monitor the correct date of receipt of material /service.
• Regular half yearly Return :for the period 1^st April to 30^th September, due by 31^st October and 1^st October to 31^st March, due by 30^th April;
•  Basic Data update required to be maintained by the specified Company

The Company should establish an internal control checklist to monitor the payments within the prescribed timeline;

•  Payments terms with the Parties may be reconsidered: As per the notification the company is under the obligation to report payments within 45 days dues to Micro and small enterprise, even if the payments terms as per the agreement/contract may be different. Accordingly, the reporting requirement will arise even in cases of delay beyond 45days although within the terms of the contract, this requires re-considering the terms with the parties;
• Penalty Provision : If any company fails to comply with an order made under sub-section (1) or subsection (3), or knowingly furnishes any information or statistics which is incorrect or incomplete in any material respect, the company shall be punishable with fine which may extend to twenty-five thousand rupees and every officer of the company who is in default, shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to three lakh rupees, or with both.

CONCLUSION

In view of the increase in the corporate governance standards and in a journey for the development of the MSME sector which forms an important component of the industry and to provide them with financial security , all companies are encouraged to take correct initiative measures, develop and comply proper systems and create awareness for the sectoral growth .

Disclaimer: The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. No part of this article should be distributed or copied without express written permission of the author.