pri MSMED Act, 2006 overview MSMED Act, 2006 overview

Nilesh M Kharche, LLB, CS

Nilesh KharcheThe Micro, Small and Medium Enterprises Development (MSMED) Act was notified in 2006 to address policy issues affecting MSMEs as well as the coverage and investment ceiling of the sector. The Act seeks to facilitate the development of these enterprises and enhance their competitiveness.

The highlights of the Act are enumerated as follows:

The Act contains 32 Sections divided into VI Chapters

Chapter I (Sec 1 – 2)

  • It is the Preliminary part of the act and it contains the Short Title, Commencement & Definitions (Sec 1)
  • It is to be noted that different dates may be appointed for different provisions

Important Definitions

√ 2 (b) “appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.


“the day of acceptance” means-

(a) the day of the actual delivery of goods or the rendering of services;

(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;

the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;

Chapter II

  • National Board for micro, small and medium enterprises (Sections 3-6)

√ Constitution (Sec 3)

-Head Office at Delhi, 48 Members

-Containing Ministers, MPs, Persons representing Indian Bank Association, RBI, association of Micro, Small & Medium enterprises, Central Govt. etc.

-Term (2yrs) and Procedure would be as may be prescribed

-No act or proceeding on the ground of vacancy, defect , irregularity in procedure etc

-Meeting once in three months

-Board has the power to associate with any person, association for the compliance of the provisions of the Act.

√  Removal of members by Central Govt if he/she adjudged as insolvent, become unsound mind, refuses to act as member, convicted of offence involving moral turpitude, abused the position (Sec 4)

√  Board’s functions for subject to the Central govt directions (Sec 5):- Promotion and development of micro, small and medium enterprise and enhancing competitiveness of them, make recommendation and advise Central Govt

√  Such other powers as may be prescribed (Sec 6)

NBMSME, Rules were notified on 26th September 2006 (G.S.R. 596 (E).


Insolvency laws in India:-

  • Individual insolvency
    • Provincial Insolvency Act, 1920
    • Presidency Towns Insolvency Act, 1909
  • Corporate insolvency
    • Companies Act, 1956
    • Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)
    • Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), Securitisation Act
    • Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDB Act)

Moral turpitude is a conduct that is considered contrary to community standards of justice, honesty or good morals.

Chapter III

  • Classification of Enterprises, Advisory Committee and Memorandum of Micro, Small and Medium Enterprises (Sections 7-8)

√ Classification on the basis of investment in plant & machinery for manufacturing and equipments for service sector (Sec 7)

Two types of industries:-

1. Manufacturing/ production- goods pertaining to industry specified in the first schedule to the Industrial (Development & Regulation) Act, 1951

2. Enterprises engaged in Service

  • Micro Enterprise
    • Manufacturing:- Rs. 25 Lakh
    • Service:- Rs. 10 Lakh
  • Small Enterprise
    • Manufacturing:- above Rs. 25 lakh up to Rs. 5 Crore
    • Service:- above Rs. 10 Lakh up to Rs. 2 Crore
  • Medium Enterprise
    • Manufacturing:- above Rs. 5 Crore up to Rs. 10 Crore
    • Service:- above Rs. 2 Crore up to Rs. 5 Crore

Explanation 1:- cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded

Explanation 2:- Section 29B of the Industries (Development & Regulation) Act, 1951 shall be applicable to Micro and Small manufacturing enterprises

  • Advisory committee shall be formed containing the Secretary of Govt of India, not more than three members of the State govt, one representative of each Micro, Small and Medium enterprise, Member Secretary of the Board
  • Advisory committee may furnish its recommendation to the Central or State govt on the various matters as per the section of this act

√ Filing of Memorandum with authorities as may be prescribed (Section8)

  • Compulsory for Medium manufacturing enterprise
  • For other it is optional
  • Form, procedure may be prescribed by CG
  • Authority for filing of Memorandum for Medium will be prescribed by the CG and for Micro and Small by SG

Advisory Committee Notification:- S.O. 1622 (E) 27th September, 2006


Authority for filing Memorandum Notification:- S.O. 1909 (E) 7th November 2006


Link for Industrial (Development & Regulation) Act, 1951

Chapter IV

Measures for Promotion, Development and enhancement of competitiveness (Sec 9-13)

  • The by notification CG may programmes, guidelines or instructions as it may deem fit (Sec 9)
  • Policies and practices in respect of credit shall be progressive and as may be specified in the instructions or guidelines or instructions by RBI. (Sec 10)
  • CG/ SG may notify procurement preference policies (Sec 11)
  • There shall be constitution of funds and grants will be credited to it (Sec 12)
  • CG may credit funds by way of grants (Sec 13)
  • CG shall have power to administer and utilize the funds.

Few of the schemes and incentives:-

  • Guidelines of Scheme for Assistance to Training Institutions
  • Marketing Assistance Scheme
  • National Manufacturing Competitiveness Programme (NMCP) Schemes Under XI Plan
  • Credit Linked Capital Subsidy Scheme for Technology Upgradation

Refer following links for various schemes & incentives:-

Chapter V

Delayed payments to Micro and Small enterprises

  • Liability of buyer to make payment within 45 days (Sec 15)
  • Payment of interest on delayed payment from appointed day/ agreed day at three times of the bank rate notified by the RBI (Sec16)
  • Buyer shall be liable to pay interest as specified in Sec 16 (Sec 17)
  • Any party may refer the dispute to Micro and Small enterprises Facilitation Council, Council shall either itself conduct conciliation or seek assistance of any institution Sec 65-81of Arbitration and Conciliation Act, 1996 shall apply, if conciliation not successful then reference to institution providing alternate dispute resolution system and such reference shall be decided within 90 days (Sec 18)
  • Application for setting aside decree, award or order can be made to a Court by the buyer after depositing 75% of the amount in terms of the decree in the manner directed by the Court (Sec 19)
  • State govt shall establishes such councils (Sec 20)
  • Council would consist of 3-5 members consisting of Director of industries, representative of association of MSM enterprises, banks, financial institutions lending MSMEs, person having special knowledge in the field of industry, finance, trade or commerce, procedures may be prescribed by CG (Sec 21)
  • Requirement to specify unpaid amount with interest in the annual statements of accounts (sec 22)

√ Buyer who require to get accounts audited under any law shall furnish the following additional information:-

– the Principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier at the end of each accounting year;

– the amount of interest paid by the buyer in terms of Section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;

– the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act;

– the amount of interest accrued and remaining unpaid at the end of each accounting year; and

– the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible under section 23.

  • Interest not to be allowed as deduction from income under IT Act, 1961 (Sec 23)
  • Overriding effect of Section 15-23 over any other law (sec 24)
  • CG may specify any scheme for closure of MSME not applicable to a Company (Sec 25)

Alternate dispute resolution is a process for the parties to come to an agreement without litigations through negotiation, mediation, conciliation, arbitration etc. Some of such associations are Internal Center for alternate Dispute resolution, India International ADR Association etc.


Chapter VI


  • CG/SG may appoint officers and other employees having powers to ask information (Sec 26)
  • Penalty for contravention of section 8, 26 (2) contravention- first conviction- Rs. 1,000/- second conviction- above Rs. 1,000/- to Rs. 10,000/- and where buyer contravene Sec 22 fine not less than Rs. 10,000/- (Sec 27)
  • Jurisdiction of courts- No court inferior to that of Metropolitan or Magistrate of first class (Sec 28)
  • CG may make rules to be placed before each house of parliament for a total of 30 days (Sec 29)
  • SG may make rules to be placed before each house of state legislature (Sec 30)
  • CG may remove any difficulty (Sec 31)
  • The Act- The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 is repealed. (Sec 32)


A annul Return needs to be filed with the DIC in ELP form by the Enterprises who has filed IEM and got the IEM No.


Following immediate benefits can be availed by the MSMEs on filing the IEM with the DIC:-

1. Payment from the buyer within 45 days for the goods or services supplied to the buyer as per section 15

2. Provision payment of interest by the buyer as per section 16

3. IEM no is necessary for applying other benefits envisaged in various schemes


Apart from various incentives, export promotion, marketing assistance, MSMEs can avail the benefits under various policies as under

1. National Manufacturing Competitiveness Programme (NMCP) Schemes under XI plan

2. Micro & Small Enterprises Cluster Development Programme Credit Guarantee Scheme

3. Credit Linked Capital Subsidy Scheme for technology up-gradation

4. Credit Guarantee Scheme

5. ISO 9000/14001 Certification Fee Reimbursement Scheme


7. Scheme of Micro Finance Programme

8. Scheme of National award

9. TREAD Scheme (

10. Other schemes- please refer the following link-


More Under Corporate Law


  1. eusuf says:

    Hi Sir,

    What does investment in Plant and Machinery mean?? is that Gross Cost or WDV?? If it is gross cost can we take deemed gross cost as per Ind As

  2. Roopal Gang says:

    Annul Return needs to be filed with the DIC in ELP form by the Enterprises who has filed IEM and got the IEM No.

    What is the full form of DIC, ELP and IEM?

  3. A C Mohanty says:

    MSME vendors are exempt to submit Earnest Money Deposit (EMD) in bid submission.
    The contract was awarded to MSME vendor but did not execute the work at all.

    Whether the amount of EMD, which was exempted for bid participation, can be forfeited/recovered for non-performance of the contract awarded to the MSME vendor.

    That means whether action for recovery can be taken against the MSME vendor as payable amount is available with other units of the company.
    May suggest with reasons, relevant act/clause

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