Micro, Small and Medium Enterprises: formula sheet

Key formulas

Manufacturing: micro enterprise (s. 7(1)(a)(i))

Investment in plant and machinery ≤ ₹25 lakh

Applies to enterprises making goods of an industry in the First Schedule to the IDR Act, 1951.

Manufacturing: small enterprise (s. 7(1)(a)(ii))

₹25 lakh < Investment in plant and machinery ≤ ₹5 crore

More than ₹25 lakh, but not more than ₹5 crore.

Manufacturing: medium enterprise (s. 7(1)(a)(iii))

₹5 crore < Investment in plant and machinery ≤ ₹10 crore

More than ₹5 crore, but not more than ₹10 crore.

Service: micro enterprise (s. 7(1)(b)(i))

Investment in equipment ≤ ₹10 lakh

Applies to enterprises providing or rendering services.

Service: small enterprise (s. 7(1)(b)(ii))

₹10 lakh < Investment in equipment ≤ ₹2 crore

More than ₹10 lakh, but not more than ₹2 crore.

Service: medium enterprise (s. 7(1)(b)(iii))

₹2 crore < Investment in equipment ≤ ₹5 crore

More than ₹2 crore, but not more than ₹5 crore.

Power to vary criteria (s. 7(9))

Central Government may vary investment limits and consider employment or turnover criteria

This is the basis for later notified investment and turnover limits. Quote current figures only from your latest study material.

Exclusion from plant and machinery cost (s. 7(1), Explanation 1)

Exclude pollution control, R&D, industrial safety devices and other notified items

Applies to calculating investment in plant and machinery.

Establishment of the Board

National Board for MSMEs = established under section 3 (section 2(c))

Section 2(c) defines the Board by this reference. For the detailed composition of the Board, follow your ICSI study material. Do not guess numbers of members.

Functions of the Board (section 5)

(a) examine factors and review policies and programmes; (b) recommend; (c) advise on the Fund or Funds under section 12

All functions are performed subject to the general directions of the Central Government.

Constitution of the Advisory Committee (section 7(2))

Chairperson: Secretary, Ministry or Department in charge of small and medium enterprises + up to 5 Central Government officers + up to 3 State Government representatives + 1 representative each of MSME associations

All are ex officio. Remember the limits: 'not more than five' and 'not more than three'.

Member-Secretary (section 7(3))

Member-Secretary of the Board = ex officio Member-Secretary of the Advisory Committee

This is the link between the two bodies.

Prior recommendation before classification (section 7(4))

Central Government must obtain the Advisory Committee's recommendations before classifying any class of enterprises under section 7(1)

This is a mandatory step, not an option.

Other roles of the Committee (section 7(5) to (7))

Examines matters referred by the Board (subjects in section 5); advises the Central Government on sections 9, 10, 11, 12, 14; advises the State Government on matters in rules under section 30

The Central Government 'may seek' advice here, so it is optional, unlike section 7(4).

Matters to consider (section 7(8))

Employment level; investment level; need for higher investment; promoting entrepreneurship; international standards

Five factors. Learn them as a list.

Section 8(1)(a): micro or small enterprise

Person intending to establish a micro or small enterprise MAY file the memorandum, at his discretion

Filing is optional, though needed in practice to claim benefits.

Section 8(1)(b): medium enterprise (services)

Medium enterprise providing or rendering services MAY file, at his discretion

Services medium enterprises are not compelled to file.

Section 8(1)(c): medium enterprise (manufacturing)

Medium enterprise making goods of an industry in the First Schedule to the IDR Act, 1951 SHALL file the memorandum

Only this category is mandatory.

Authority for filing

Medium: authority notified by Central Government (S. 8(3)). Micro or small: authority notified by State Government (S. 8(4))

Both follow the procedure notified by the Centre (S. 8(5)).

Form and procedure

Notified by Central Government after recommendations of the Advisory Committee (S. 8(2))

Udyam portal details come from such notifications.

Transitional filing

Within 180 days from commencement of the Act (proviso to S. 8(1))

Applies to pre-Act small scale industries and certain Industrial Entrepreneur's Memorandum holders (investment above ₹1 crore up to ₹10 crore).

Commencement

2nd October, 2006 (S. 1, notification S.O. 1154(E))

Date from which the Act came into force.

Section 9 - promotion and development measures

Central Government notifies programmes for: skill development + technological upgradation + marketing assistance + infrastructure + cluster development

Aim is promotion, development and competitiveness of MSMEs, particularly micro and small enterprises, strengthening backward and forward linkages.

Section 10 - credit

Credit policy = progressive, as per Reserve Bank guidelines or instructions

Aims: timely and smooth flow of credit, minimise sickness, enhance competitiveness. The RBI issues the guidelines, not the Central Government.

Section 11 - procurement preference

Central or State Government may notify preference policies for goods and services of micro and small enterprises

Applies to its Ministries or departments, aided institutions and public sector enterprises. It is by notification and uses the word 'may'.

Sections 13 and 14 - Fund

Grants after Parliament appropriation → Fund; Fund used exclusively for section 9(1) measures

Central Government administers the Fund as prescribed and coordinates timely utilisation and release of sums.

Section 5(c) - Board's advisory role

Board advises Central Government on use of the Fund under section 12

The Board acts subject to the general directions of the Central Government.

Appointed day

Appointed day = day after 15 days from the day of acceptance or deemed acceptance

Applies when there is no written agreement on the payment date (Section 2(b)).

Maximum agreed credit period

Written agreed period ≤ 45 days from the day of acceptance or deemed acceptance

Proviso to Section 15. Without a written agreement, the appointed day governs.

Interest start date

From the appointed day, or from the day immediately following the agreed date

Section 16.

Rate of interest

Rate = 3 × bank rate notified by RBI, compounded with monthly rests

Section 16. It applies despite any agreement or other law.

Disposal of reference

Reference to the Council to be decided within 90 days of making it

Section 18(5).

Annual accounts disclosure

Buyer with audited accounts must show unpaid principal and interest separately

Section 22. Interest is not allowed as a deduction under Section 23.

Establishment of Council (section 20)

State Government, by notification, establishes one or more Councils; places, jurisdiction and areas are specified in the notification

The Council is a State-level body.

Composition (section 21(1))

Not less than 3 and not more than 5 members, from the four listed categories

Categories: (i) Director of Industries or officer not below that rank in the State department; (ii) office-bearers or representatives of micro or small enterprise associations in the State; (iii) representatives of banks and financial institutions lending to micro or small enterprises; (iv) persons with special knowledge in industry, finance, law, trade or commerce.

Chairperson (section 21(2))

Person appointed under clause (i) = Chairperson

The Director of Industries (or officer not below that rank) chairs the Council.

Prescribed matters (sections 21(3) and 30)

Composition details, filling of vacancies and procedure of members = as prescribed by the State Government

The State Government makes rules by notification; rules are laid before the State Legislature.

Reference (section 18(1))

Any party to a dispute may refer any amount due under section 17 to the Council

Applies notwithstanding any other law. Either supplier or buyer may refer.

Conciliation (section 18(2))

Council conciliates itself or refers to an ADR institution or centre; Arbitration and Conciliation Act, 1996, sections 65 to 81 apply

Treated as if initiated under Part III of that Act.

Arbitration (section 18(3))

If conciliation fails and terminates without settlement, Council arbitrates itself or refers to an ADR institution or centre

The 1996 Act applies as if there were an arbitration agreement under section 7(1) of that Act.

Jurisdiction (section 18(4))

Supplier located within the Council's jurisdiction; buyer located anywhere in India

Jurisdiction is decided by the supplier's location.

Time limit (section 18(5))

Decide every reference within 90 days from the date of making the reference

The period runs from the reference.

Pre-deposit (section 19)

Appellant (not being a supplier) must deposit 75% of the amount in the decree, award or order before the court entertains a setting-aside application

Proviso: pending disposal, the court orders a reasonable part of the deposit to be paid to the supplier, on such conditions as it deems necessary.

Who may notify the scheme

Central Government (Section 25)

Not the State Government and not the Advisory Committee.

Purpose

Facilitating closure of business by a micro, small or medium enterprise

Applies to all three classes of enterprise.

Exclusion

Not a company registered under the Companies Act, 1956

Such a company cannot use this scheme.

Time limit for notifying

Within one year from the date of commencement of the Act

The Act commenced on 2nd October, 2006 (Section 1).

Overriding effect

"Notwithstanding anything contained in any law for the time being in force"

The scheme prevails over other laws that conflict.

Commencement (Section 1)

Date appointed by the Central Government by notification; different dates may be appointed for different provisions

Notified date: 2nd October, 2006, vide S.O. 1154(E) dated 18th July, 2006.

Quick revision

• The MSMED Act, 2006 covers proprietorships, HUFs, associations of persons, co-operative societies, partnership firms, companies and undertakings.
• Enterprises are classified as micro, small or medium by Central Government notification, after recommendations of the Advisory Committee.
• Manufacturing enterprises are tested on investment in plant and machinery; service enterprises on investment in equipment. The Central Government may vary the criteria and consider employment or turnover.
• Cost of pollution control, research and development, industrial safety devices and other notified items is excluded when calculating investment in plant and machinery.
• Under section 8(1), a person who intends to establish a micro or small enterprise, or a medium service enterprise, may file the memorandum at his discretion. A person who intends to establish a medium enterprise manufacturing goods of a First Schedule industry shall file it under section 8(1)(c). The proviso is a transitional provision for enterprises established before the Act: a small scale industry that obtained a registration certificate may file at his discretion, and a First Schedule manufacturer with investment in plant and machinery of more than one crore but not more than ten crore rupees that filed an Industrial Entrepreneur's Memorandum files the memorandum. Any filing under the proviso is to be made within 180 days from the commencement of the Act.
• A medium enterprise files its memorandum with the authority notified by the Central Government; a micro or small enterprise files with the authority specified by the State Government.
• Credit policy for MSMEs is guided by Reserve Bank guidelines or instructions issued from time to time.
• The State Government establishes one or more Micro and Small Enterprises Facilitation Councils by notification.
• The Council has not less than three and not more than five members. The person appointed under section 21(1)(i), the Director of Industries or an officer not below that rank in the State department, is the Chairperson under section 21(2).
• Under section 18(1), any party to a dispute about an amount due under section 17 may refer it to the Council. The Council conducts conciliation itself or through an ADR institution.
• If conciliation fails, the Council takes up arbitration itself or refers it to an ADR institution. Under section 18(5), every reference must be decided within ninety days from the date of making the reference.
• Under section 18(4), the Council or ADR centre within the supplier's jurisdiction can act even if the buyer is located anywhere in India.
• The closure scheme is for micro, small or medium enterprises that are not companies registered under the Companies Act, 1956, and was to be notified within one year of the Act's commencement.

Common mistakes

• Using plant and machinery investment for a service enterprise. Fix: First decide whether the enterprise manufactures or provides services. Services use investment in equipment.
• Treating the upper limit as exclusive. Fix: Micro means does not exceed the limit, so an investment exactly at the limit stays in the lower class.
• Mixing up the Advisory Committee with the Micro and Small Enterprises Facilitation Council. Fix: Remember the split. The Advisory Committee (section 7) is a central policy-advice body. The Facilitation Council (section 21) is a State-level body with three to five members, chaired by the Director of Industries or an officer not below that rank.
• Saying the Advisory Committee classifies enterprises. Fix: Section 7(1) gives the power to classify to the Central Government by notification. The Committee only gives recommendations, which the Government must obtain first under section 7(4).
• Saying all MSMEs must file the memorandum. Fix: Remember the word may for micro, small and medium services; shall only for the manufacturing medium category in the First Schedule.
• Giving the same authority for all enterprises. Fix: Link S. 8(3) with medium (Central) and S. 8(4) with micro and small (State).
• Saying procurement preference covers medium enterprises Fix: Section 11 speaks of micro and small enterprises only. Section 9 also stresses micro and small. Check the wording each time.
• Saying the Central Government issues credit guidelines Fix: Section 10 says credit policies are as specified in guidelines or instructions issued by the Reserve Bank.
• Saying the appointed day is exactly 15 days after delivery. Fix: The appointed day is the day after the 15 days expire. Delivery on 1 March gives 16 March.
• Allowing a written agreement of 60 or 90 days. Fix: The proviso to Section 15 caps any written agreed period at 45 days from acceptance or deemed acceptance.

Exam tips

• Learn both ladders as pairs of numbers: 25 lakh, 5 crore, 10 crore for manufacturing and 10 lakh, 2 crore, 5 crore for services.
• In theory answers, write the definition, section 7(1) classes, then the section 7(9) power to vary criteria and add turnover. This shows you know the current position.
• In numerical questions, show the exclusion of pollution control, R&D and safety device costs as a separate line.
• Cite section numbers: 2(e) for enterprise, 7(1) for classification, 2(n) for supplier, 8 for memorandum.
• Learn section 5 (Board) and section 7(2) to (8) (Committee) with their numbers. ICSI answers earn marks for citing the section.
• If a question asks for the Advisory Committee's composition, give all four categories and the limits 'not more than five' and 'not more than three'. Say that members are ex officio.
• Use the word 'shall' for section 7(4) and 'may seek' for section 7(6) and (7). Case-study questions often test mandatory versus optional.
• Keep this topic separate from the Facilitation Council in section 21. If a question mentions delayed payment or disputes, it is likely about the Council, not the Board.