New MSME Rules, Filing Obligations, “Quick Payment of Invoice vis a vis No Recovery issues”

The term “MSME” stands for Micro, Small, and Medium Enterprises and is governed under the provisions of Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006. Vide Notification Dated 26.06.2020, the Ministry of MICRO, SMALL AND MEDIUM ENTERPRISES have published the revised definition about MSME which is as under:

Enterprise Category = Turnover
  • Micro Enterprises = < or + Rs. 5 Crore
  • Small Enterprises  = > Rs. 5 Crore, < Rs. 75 Crore
  • Medium Enterprises = > Rs. 75 Crore, < Rs. 250 Crore

Quick Review of Revised MSME Rules:

a) Any person who intends to establish a Micro, Small or Medium Enterprise may file for MSME Registration Certificate online in the MSME Portal purely based on self-declaration with no requirement to upload any documents

b) Upon Registration, such person/ enterprise will be assigned a permanent identity number to be known as “Udyam Registration Number” and Udyam Registration Certificate will be issued

A] New Rules of MSME states clearly that the composite criteria of investment and turnover for classification of enterprise will be taken into account and is as under:

a) Rules have cleared that a composite criterion of investment and turnover will be made applicable for classification of an enterprise as Micro, Small or Medium

b) If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category but no enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover
c) All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise

B] Calculation of Investment in Plant and Machinery or Equipment

It is relevant to note that now for Calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years filed under the Income Tax Act, 1961 and where in case of new enterprise no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise but this shall not be allowed after 31st March of the financial year as this makes duty bound on such new enterprise to file ITR which in any case is mandatory as per Income Tax Laws and also Companies Act if enterprise falls under Companies Act or LLP. Further if the enterprise is a new one without any ITR, the purchase (invoice) value of a plant and machinery or equipment irrespective of new or second hand shall be taken into account excluding Goods and Services Tax (GST) on self-disclosure basis. It is interesting to note that the term “plant and machinery or equipment” of the enterprise will have the meaning as meant under Income Tax Rules, 1962 and calculation be done subject to exclusion as stated under the Act and Rules of MSME

C] Calculation of Turnover:

Exports of Goods or Services or Both shall be excluded while calculating the turnover of any enterprise whether micro, small or medium. This is to avoid any wrong entries of turnover and to avoid any kind of misinformation, the information which is being given to MSME office will be linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN. Please note that from 01.04.2021, PAN and GSTIN will be mandatory for calculation of Turnover.

D] Penal Provisions for Incorrect Information

Any information given by Enterprise either to get Certificate or raising the investment in Plant and Machinery or Equipment and or lowering the investment in Plant and Machinery or Equipment and or increase in turnover or decreasing and any false statement made shall be liable to such penalty as specified under section 27 of the MSMED Act.

Here, the Retailers shall be vigilant that they might have taken the MSME Certificate but now it will be easy for the Government to find out the incorrect information and if found so, action can be taken by the Government

E] Registration of Existing Enterprises

Since there has been changed in the definition of MSME and also rules have been revised, the Rules makes it mandatory for existing enterprises to get register again on MSME Portal on or after the 1 st day of July, 2020 or last by March 2021 with all correct information and if not, then they will be not taken as MSME and have to get new MSME Certificate

New Rules have made it mandatory for filing/updating your information and or transition period from one classes to another classes (classes here mean from small to medium, medium to micro, micro to medium, etc etc).

MSME Certificate Holder now mandatory has to update its information online in MSME Portal including the details of ITR and GST Return for the previous financial year and such other additional information as may be required, on self-declaration basis and it assumed that filing is done on correct information basis as any failure to update the relevant information within the period specified in the online MSME Portal will render the enterprise liable for suspension of its status and this will badly affect all your bill discounting facility and or recovery cases being filed at MSME Samadhan.

As informed that all and any information submitted with MSME office shall be correct as based on the information furnished or gathered from Government’s sources including ITR or GST return, the classification of the enterprise will be updated and whether the status is being upgraded or downgraded it will have its effect after one year or fresh financial year

F] Benefit of MSME

Registration of an MSME is not legally mandatory but registering it will help you reap several benefits from the government including credit at low interest rate, incentives on products for exports, excise exemption, statutory aid such as reservations, and the interest on the payments delayed due to unavoidable

G] Fees for MSME registration:

There is no fee being charged for MSME Registration or popularly called as Udyog Aadhar Registration

H] MSME Bill Discounting Facility

Micro, Small and Medium Enterprises (MSMEs), despite the important role played by them in the economic fabric of the country, continue to face constraints in obtaining adequate finance, particularly in terms of their ability to convert their trade receivables into liquid funds. In order to address this pan-India issue through setting up of an institutional mechanism for financing trade receivables, the Reserve Bank of India had published a concept paper on “Micro, Small & Medium Enterprises (MSME) Factoring-Trade Receivables Exchange” in March 2014.

The Reserve Bank of India (RBI) in 2017 instituted an online bill-discounting platform called The Trade Receivable Discounting System (TReDS) to give routinely cash-strapped MSMEs a way of raising funds by selling trade receivables from corporates. Three TReDS exchanges are licensed currently: Receivables Exchange of India (RXIL), a joint venture of the National Stock Exchange and SIDBI; Mynd Solution’s M1xchange; and A.TREDS, a joint venture of Axis Bank and mjunction services.

What exactly is TReDS?

The scheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs), through multiple financiers is known as Trade Receivables Discounting System (TReDS).

Following are the Salient Features of TReDS:

  • Unified platform for Sellers, Buyers and Financiers
  • Eliminates Paper
  • Easy Access to Funds
  • Transact Online
  • Competitive Discount Rates
  • Seamless Data Flow
  • Standardised Practices

TReDS platform ensures that MSMEs have access to a regular flow of funds at attractive interest rates and also preserves the working capital limits of a company as those are not included in the balance sheet. Most importantly, it ensures that the buyer pays the MSME supplier within 45 days, in compliance with the MSME Act.

How It Works

  • Buyer sends purchase order to MSME seller
  • MSME seller delivers the goods along with an invoice. There may or may not be an accepted bill of exchange depending on the trade practice between the buyer and the seller.
  • Thereafter, on the basis of either an invoice or a bill of exchange, the MSME seller creates a ‘factoring unit’ on TReDS. Subsequently, the buyer also logs on to TReDS and flags this factoring unit as ‘accepted’.
  • The TReDS will standardize the time window available for corporate buyers to ‘accept’ the factoring units, which may vary based on the underlying document – an invoice or bill of exchange.
  • Supporting documents evidencing movement of goods etc. may also be hosted by the MSME seller on the TReDS.
  • The TReDS will have separate modules for transactions with invoices and transactions with Bills of Exchange.
  • Factoring units may be created in each module as required. Each such unit will have the same sanctity and enforceability as allowed for physical instruments under the “Factoring Regulation Act, 2011” or under the “Negotiable Instruments Act, 1881”
  • The standard format / features of the ‘factoring unit’ will be decided by the TReDS – it could be the entire bill/invoice amount or it could a pre-defined face value (say in multiples of 1,000 or 10,000 or 1,00,000). However, each factoring unit will represent a confirmed obligation of the buyer corporate, and will carry the following relevant details – details of the seller and the buyer, issue date (could be the date of acceptance), due date, tenor (due date – issue date), balance tenor (due date – current date), amount due, unique identification number generated by TReDS, account details of seller for financier’s reference (for credit at the time of financing), account details of buyer for financier’s reference (for debit on the due date), the underlying commodity (or service if enabled).
  • The TReDS should be able to facilitate filtering of factoring units (by financiers or respective MSMEs / corporate buyers) accordingly any of the above parameters. In view of the expected high volumes to be processed under TReDS, this would provide the necessary flexibility of operations to the stakeholders.
  • The buyer’s bank and account details form an integral feature of the factoring unit. The creation of a factoring unit on TReDS shall result in automatic generation of a notice / advice to the buyer’s bank informing them of such units. Similarly, financing by a financier should generate another notice / advice to the buyer’s bank to enable a Draft Guidelines for setting up and operating TReDS 7 direct debit to the buyer’s account on the due date in favour of the financier (based on the settlement obligations generated by the TReDS).
  • These factoring units will be available for financing by any of the financiers registered on the system. The all-in-cost quoted by the financier will be available on the TReDS. This price can only be viewed by the MSME seller and not available for other financiers.
  • There will be a window period provided for financiers to quote their bids against factoring units. Financiers will be free to determine the time-validity of their bid price. Once accepted by the MSME seller, there will be no option for financiers to revise their bids quoted online.
  • The MSME seller is free to accept any of the bids and the financier will receive the necessary intimation. Financiers will finance the balance tenor on the factoring unit.
  • Once a bid is accepted, the factoring unit will get tagged as “financed” and the funds will be credited to the seller’s account by the financier on T+2 basis (T being the date of bid acceptance). The actual settlement of such funds will be as outlined under the Settlement section.
  • On the due date, the financier will have to receive funds from the corporate buyer. The TReDS will send due notifications to corporate buyers and their banks advising them of payments due. The actual settlement of such funds will be as outlined under the Settlement section.
  • Non-payment by the buyer on the due date to their banker should tantamount to a default by the buyer and attract penal provisions and enable the banker to proceed against the corporate buyer. Any action initiated in this regard, will be strictly nonrecourse with respect to the MSME sellers.
  • Once financed, these instruments will be rated by the TReDS on the basis of an external rating of the buyer corporate, the nature of the underlying instrument (invoice or bill of exchange), previous instances of delays or defaults by the buyer corporate w.r.t. transactions on TReDS etc.
  • The rated instruments may then be further transacted / discounted amongst the financiers in the secondary segment.
  • Similar to primary segment, any successful trade in the secondary segment will also automatically result in a direct debit authority being enabled by the buyer’s bank in favour of the financier (based on the settlement obligations generated by the TReDS). In parallel, it will also generate a ‘notice of assignment’ intimating the buyer to make the payment to the new financier (though the payment itself will be taken care of by virtue of the direct debit authority and settlement process of TReDS).
  • In the event that a factoring unit remains unfinanced, the Buyer will pay the MSME seller outside of the TReDS

This TReDS will if used properly surely will resolve the Liquidity issues of Business Owners and this will only guide them towards more business, more orders, quick services, timely payment, good relations and after all no Court expenses.

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Qualification: LL.B / Advocate
Company: FIREFLIES LEGAL LLP
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I have been in Law Practice for more than 15 Years. My practice areas include: (a) Drafting of Commercial and Non-commercial Agreements/Contracts; (b) Recovery Matters before all Forums/Courts; (c) Arbitration and Conciliation; (d) Cross-Examination, Admission and Interim Stay; (d) Devising Strategy View Full Profile

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