Overview of MSMED Act – The Micro, Small and Medium Enterprises

There are two types of industries: Manufacturing and service industries, and they further get classified as micro, small, and medium.

Micro enterprises have capital requirements of less than one crore rupees and annual revenue of less than five crore rupees in the manufacturing and service sectors. Small enterprises must invest no more than ten crores and have annual revenue of no more than 50 crores, whereas medium industries must invest 50 crores and have a yearly turnover limit of no more than 250 crores.

The Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) was passed by the Indian Parliament. According to the MSME act, “Any buyer who fails to pay MSMEs within agreed-upon terms or within a maximum of 45 days will be charged monthly compounded interest at three times the Reserve Bank of India’s authorised rate.”

What are micro, small and medium enterprises?

The Government of India adopted the MSMED Act, 2006, which defines micro, small, and medium enterprises as follows:

  • A microenterprise is one with a plant and machinery investment of less than Rs. 25 lakh.;
  • A small enterprise gets defined as one with a plant and machinery investment of more than Rs. 25 lakh but not more than Rs. 5 crores; and
  • A medium enterprise gets defined as a plant and machinery investment of more than Rs. 5 crores but not more than Rs.10 crores.

Advantages of Micro, Small and Medium Enterprises

  • They are more environmentally friendly.
  • They primarily get based on locally available resources.
  • They allow a lot of room for exploration and innovation.
  • They make income and wealth distribution more egalitarian.
  • MSME receives government assistance and patronage.
  • It contributes to a well-balanced regional growth.
  • It is feasible to make essential adjustments as needed.
  • These aid in price reduction.
  • Customers and staff have frequent and direct personal interaction.
  • They increase the number of job openings.
  • They provide a lot of room for self-employment.
  • They merely necessitate a little investment.
  • MSME may accommodate individual preferences and provide tailored service to customers on its own.

Disadvantages of Micro, Small and Medium Enterprises

  • MSMEs get hampered by a lack of capital.
  • They are lacking in management and other skills.
  • They are unable to hire high-paid officials.
  • Large corporations are always a strong competitor for SMEs.
  • They are ill-equipped to take advantage of the latest technology and processes.
  • There isn’t much room for specialisation and division of labour.
  • MSMEs can’t afford to invest a lot in research and development.
  • They are unable to persevere in the face of adversity.
  • They are unable to obtain low-cost credit.

Establishment of MSMED Act

In 2006, the MSMED Act got enacted to address legislative issues impacting MSMEs and the sector’s scope and investment ceiling. The Act aims to help these businesses grow and compete by making it easier for them to do so.

It creates the first legal framework for recognising the idea of “enterprise,” which encompasses both manufacturing and service enterprises. It is the first time that medium enterprises get defined, and it tries to bring together the micro, small, and medium tiers of these businesses.

The Act also establishes a legislative consultation process at the national level, with a balanced representation of all stakeholders, particularly the three types of enterprises, and a broad range of advisory tasks.

MSMED Act Features

Some features of the MSMED act are:

  • Establishment of specific funds for the promotion.
  • Development and enhancement of competitiveness of MSME.
  • Notification of schemes and programmes for development and enhancement.
  • Progressive credit policies and practices.
  • Preference in government procurements of micro industries and small industries.
  • More effective mechanisms for the delayed payments of micro and small enterprises.
  • Guarantee of a plan to make it easier for the closure of businesses.

Establishment of MSMED Board

The MSMED Act 2006, Chapter II, Sections 3 to 6, establishes the National Board for Micro, Small, and Medium Enterprises (NBMSME)
and its functions. To give effect to the formation of NBMSME, Rules were notified on September 26, 2006, detailing:

  • the procedure for establishing the Board,
  • the term of members other than ex-officio members being limited to two years,
  • the process for filling vacancies,
  • the procedure for convening meetings and
  • the discharge of functions by members of the Board, and so on.

According to the MSMED Act of 2006 and the National Board for Micro, Small and Medium Enterprises Rules of 2006, the National Board for Micro, Small and Medium Enterprises (NBMSME) was established for the first time on May 15, 2007, with 47 members, including the Chairman, Vice Chairman, and Member Secretary.

Functions of MSMED Board

The following are the functions of the National Board for Micro, Small and medium enterprises:

  • Examine the variables affecting the promotion and development of Micro, Small, and Medium Enterprises and the impact of the Central Government’s policies and programmes on facilitating the rise and growth of such enterprises and boosting their competitiveness.
  • Make recommendations on issues and any other topic presented by the Central Government that, in its opinion, is essential for facilitating the promotion and development of MSME and boosting their competitiveness.
  • Provide advice to the Central Government on utilising the Fund or Funds established under section 12.

Functions of the Member – Secretary of Board

The following are the functions of the member-secretary of the National Board for Micro, Small and Medium enterprises:

  • Examine the issues raised by the NBMSME regarding the MSME sector’s promotion and development and its competitiveness.
  • To provide advice to the Central Government on issues such as credit facilities, preference procurement policy, fund constitution and administration, and other matters relating to the promotion, development, and enhancement of competitiveness of micro, small, and medium enterprises, as defined in Sections 9 to 12 and 14 of the MSMED Act 2006.
  • To provide advice to state governments on problems relevant to announcing any regulation adopted to carry out the provisions of the MSMED Act 2006, including the composition of Micro, Small Enterprises Facilitation Councils and other matters as stipulated in section 30.
  • Recommend or advise the Central Government, State Governments, or the Board, as appropriate, in connection with the classification of enterprises, taking into account:
    • the level of employment, investments,
    • the need for higher investment in plant and machinery or equipment for technology up-gradation,
    • employment generation, and
    • enhanced competitiveness,
    • international standards for small and medium enterprise classification.

Classification of MSME

The following is the MSME classification system for both products and services organisations, which gets based on
MSME turnover limit:-

  1. Micro Enterprises: up to 5 crores
  2. Small Enterprises: 5 crores to 75 crores
  3. Medium Enterprises: 75 Crores to 250 crores

MSMEs were classified based on the amount of money invested in the company, and it was calculated as the entire
amount of money spent on plants, machinery, and equipment.

For the company manufacturing goods:

  1. Micro Enterprises: Upto 25 Lakhs
  2. Small Enterprises: 25 Lakhs to 5 Crores
  3. Medium Enterprises: 5 Crores to 10 Crores

For Service Organisation:

  1. Micro Enterprises: Upto 10 Lakhs
  2. Small Enterprises: 10 Lakhs to 2 Crores
  3. Medium Enterprises: 2 Crores to 5 Crores

As a result of this classification, the government had to spend money to verify the assets and track the investments physically.

The government has now passed a bill that categorises MSMEs based on yearly turnover rather than investment.

The improved approach for classifying MSMEs based on turnover has made it easier for both the government and the private sector to designate a company as an MSME.

Memorandum of MSME

A Micro, Small, and Medium Enterprise may file a memorandum under Section 8 of the MSMED Act. The form of the Memorandum, the procedure for filing it, and other ancillary issues shall be notified by the Central Government, according to sub-section (2) of section 8.

Procedure for filing the memorandum:

  • The Entrepreneurs Memorandum form can get downloaded on the Internet, and the address can get obtained from the State Government’s Directorate of MSME.
  • Any individual wishing to establish a micro or small enterprise, or a medium enterprise involved in the manufacture or production of goods, may, at his discretion, file the Memorandum of Micro, Small, or Medium Enterprise with the District Industries Centre in his or her region.
  • Within five days of receiving the form of Memorandum by post, or the same day if the form of Memorandum gets submitted in person or online, the District Industries Centre shall fill all of the codes in the form of Memorandum and issue an acknowledgement after allocating an EM number, date of issue, and unit category.
  • Before providing the recognition, the District Industries Centers must ensure that the form is complete in every way, including that it is signed and supported by an undertaking, which is part of the Entrepreneurs Memorandum form.
  • All Entrepreneurs Memorandums filed regarding the MSME involved in supplying and rendering services will be kept on file at the District Industries Centre. District Industries Centers must provide a copy of the Entrepreneurs Memorandum to their State Jurisdiction’s Industries Service Institutes, along with the EM number.
  • All Entrepreneurs Memorandums submitted in respect of medium enterprises involved in product production/manufacturing shall be kept on file by the District Industries Centre, and one copy of each Entrepreneurs Memorandum shall be sent to the District Industries Centre with EM number given to Small Industries Service Institutes in their State Jurisdiction and the Joint Development Commissioner.
  • The Memorandum gets divided into two parts. Anyone who wants to start a micro, small, or medium business that provides or renders services, or those who want to start a medium business that produces or manufactures products, should file Part 1 of the Entrepreneurs Memorandum with the District Industries Centre.
  • The foregoing businesses should register Part II of the Entrepreneurs Memorandum with the District Industries Centre once they begin producing, delivering, or rendering services.
  • The Memorandum (Part I) filed by the entrepreneur will become invalid if Part II of the Entrepreneurs Memorandum not get filed within two years of the filing of Part I.
  • Enterprises that have already submitted an Entrepreneurs Memorandum shall notify the District Industries Centre of any changes in investment in plant and machinery or equipment in writing within one month of the change in investment.
  • Suppose their products or services change or add new products or services. In that case, businesses that have already filed an Entrepreneurs Memorandum must notify the District Industries Centre in writing within one month of the change.
  • In addition to preserving a written record, the District Industries Centre must also retain electronic records on a computer.


The Indian economy’s core is the MSME sector. This sector has shown to be critical to the nation’s prosperity, leveraging exports and producing many job opportunities for the unskilled, recent graduates, and underemployed. It also provided banks with more outstanding options to credit MSME businesses.

On the strength of a competitive and high-quality product range, India’s MSME sector is now at the forefront of global growth. However, government assistance is essential to reduce the transaction costs of technology upgrades, market penetration, and infrastructure modernisation, among other things. MSMED Act, 2006 acts as an assistant for the following requirements.

Export promotion, reservation policy, tools & technology, personnel training, technology, and managerial skills all provided significant prospects for economic growth and improvement.

It gets stated that MSMEs in the Indian economy have exhibited enormous growth and excellent performance because of the government’s policy framework and effective initiatives made from time to time to promote MSMEs’ growth and development.

FAQs Relating to MSMED Act

What is the full form of the MSMED Act?

Micro, Small and Medium Enterprises Development Act.

What are the two types of industries?

Manufacturing and Service Industries.

When was the MSMED Act introduced, and why?

MSMED Act was introduced in 2006 to address legislative issues impacting MSMEs.

State any two features of the MSMED Act?

The two features are:

  • Development and enhancement of competitiveness of MSME.
  • Notification of schemes and programmes for development and enhancement.

State any two disadvantages of MSME?

The two disadvantages are:

  • There isn't much room for specialisation and division of labour.
  • MSMEs can't afford to invest a lot of money in research and development.

Related Posts