The small scale industries or micro, small and medium enterprises (MSMEs) constitute a huge portion of manufacturing and services sectors.

By L. Badri Narayanan and Gunmeher Juneja

The Indian economy is heavily dependent on manufacturing and services sector. Small scale industries or micro, small and medium enterprises (MSMEs) constitute a huge portion of these sectors. MSMEs have emerged as a dynamic backbone of the Indian economy in the last few decades. Owing to such significance of MSMEs, the Government has extended certain benefits to entities falling with the MSME bracket to strengthen and incentivize them. Specifically, the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) was enacted as a welfare legislation to facilitate the promotion and development, and to enhance the competitiveness, of MSMEs.

MSME businesses are required to get themselves registered under the MSMED Act by inter alia submitting a memorandum to avail the myriad of benefits in store for them such as: (i) easier access to loans from banks facilitated by the Government with lower interest rates; (ii) collateral free loans to MSMEs through schemes such as Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE); (iii) various tax rebates offered specifically to MSMEs; (iv) certain government tenders which are reserved for industries in the MSME category; and (v) setting out of statutory timelines within which buyers of MSME’s are required to make payments. Such benefits appear to be in place to not only ensure cash liquidity for MSMEs but also to facilitate them in an atmosphere of competition where larger industries otherwise have it easier.

The Prime Minister, in his address to the nation on May 12, announced an economic relief package of Rs 21 lakh crore titled Atmanirbhar Bharat Abhiyan. The details of this economic package were announced by the Finance Minister in a staggered manner over a course of five days, staring May 13. On the first day, various reliefs and benefits for MSMEs were announced such as: (i) setting up of a Fund of Funds of INR 10,000 crore which will provide equity funding support for MSMEs; (ii) provision of Rs 20,000 crore of subordinate debt for 2 lakh MSMEs which are stressed or have become non-performing assets; and (iii) setting up of Rs 3 lakh crore emergency working capital facility for businesses through collateral free term loans at concessional rates.

Along with the announcement of reliefs for MSMEs, the thresholds for classification of entities as MSME were also revised. Up until now, entities falling with the MSME sector were classified only on the basis of the investment made. The revision of thresholds is upward and these are now based on investment and turnover of entities. Also, the distinction between manufacturing and services sector has been done away with. Per the revised thresholds, entities with investment of less than Rs 1 crore and turnover of less
than Rs 5 crore are classified as micro; investment of less than Rs 10 crore and turnover of less than Rs 50 crore are classified as small; and investment of less than Rs 20 crore and turnover of less than Rs 100 crore are classified as medium.

The need for an upward revision of these thresholds was long due since many entities apprehended taking in more investment due to fear of missing out on MSME benefits and consequently blocked their path to growth and increasing their revenues. Further, due to inflation, various entities would fall out of the threshold thus losing out on the benefits which were initially available to them.

More start-up companies are likely to find themselves within the revised thresholds and can thus register themselves under the MSMED Act to avail these benefits. Registration does not include any fees and can be done online. Basic details such as number of activities being performed by the entity, PAN, details of proprietor or managing partner in case of a partnership firm, aadhaar number of the authorized signatory are required for filing the memorandum. Once the memorandum is submitted, a registration certificate is generated and sent to the email address provided in the memorandum.

As the process for registration as MSME is fairly simple, it is likely that more startups in the manufacturing and service sector will follow through with this process. Once such registration in place, all benefits accorded to MSMEs, which include the newly added reliefs under the Atmanirbhar Bharat Abhiyan can be accessed by start-up companies and will help them stay afloat in these uncertain times. The reliefs announced will act as a re-starter package for those MSMEs that have stumped to a zero or low cash situation during the national lockdown. Additionally, banks are likely to be more comfortable giving out loans to MSMEs for their working capital needs, which, even though collateral free for MSMEs, will be guaranteed by the Central Government. With increasing the scope of MSMEs and additional reliefs announced, the Government has attempted to buffer the hit that the MSME sector is experiencing during the COVID-19 crisis.

This step appears to be in line with the principle of ensuring maximum benefit being delivered to India Inc along with the message that growth must not stop.

L. Badri Narayanan is Partner, and Gunmeher Juneja is Principal Associate, Lakshmikumaran & Sridharan Attorneys. Views expressed are the authors’ own.