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CS Executive · Setting Up of Business, Industrial and Labour Laws

Micro, Small and Medium Enterprises under the MSMED Act, 2006

This chapter covers the MSMED Act, 2006. It classifies enterprises as micro, small or medium, sets up filing of a memorandum, promotes credit and development, protects micro and small suppliers from delayed payment, and provides a Facilitation Council for disputes. Learn the definitions, authorities and time limits, then write answers as provision, facts, conclusion.

What this chapter covers

This chapter is built around one Act: the Micro, Small and Medium Enterprises Development Act, 2006. It tells you how an enterprise is classified, how the Advisory Committee advises the Central Government, the State Government and the Board, how an enterprise files its memorandum (Udyam registration in practice), what support and credit measures exist, and what happens when a buyer pays a micro or small supplier late.

The Act has two main halves. The first is promotional: classification, the Advisory Committee, memorandum, development measures and credit. The second is protective: delayed payment, the Micro and Small Enterprises Facilitation Council, and conciliation and arbitration. Questions often test whether you know which half a rule belongs to.

The closure scheme in section 25 fits neither half. It is a separate provision that lets the Central Government notify a scheme to facilitate closure of business by certain enterprises. It does not protect suppliers.

The chapter sits in Part I of Paper 3, Setting Up of Business. It connects to the choice of business form, because the Act applies to proprietorships, Hindu undivided families, associations of persons, co-operative societies, partnership firms, companies and undertakings. It also links to the Arbitration and Conciliation Act, 1996, which the Council applies, and to your Company Law paper, where payment to MSME creditors matters in compliance and reporting.

The chapter is short, factual and largely rule-based, so it rewards careful reading more than long practice. Section-wise questions on classification, the Facilitation Council and the time limits are easy to answer well if you know the exact wording. Since Paper 3 is a written paper where you must cite the provision, a student who can quote the right section and reach a clear conclusion usually gains marks here that others lose to vague answers.

Micro, Small and Medium Enterprises: topics in the order to study them

  1. 1MSMED Act 2006: Introduction and Classification of EnterprisesEvery other topic depends on knowing what micro, small and medium mean and which enterprises the Act covers.
  2. 2National Board and Advisory Committee for MSMEsClassification is notified only after the Advisory Committee's recommendations, so study the bodies right after the definitions. Note that the Committee advises the Central Government, the State Government and the Board.
  3. 3Memorandum and Registration of MSMEs (Udyam)Once you know the categories, learn how an enterprise files its memorandum and with which authority.
  4. 4Promotion, Development and Credit Facilities for MSMEsThis completes the promotional half of the Act, covering development measures and the credit policy guided by the Reserve Bank.
  5. 5Delayed Payments to Micro and Small EnterprisesThis starts the protective half and is needed before you can understand what a dispute under the Act is about.
  6. 6Micro and Small Enterprises Facilitation Council and Dispute ResolutionIt builds directly on delayed payment: it covers who decides the dispute, how conciliation and arbitration work, and the time limit.
  7. 7Scheme for Closure of Business of MSMEsIt is a short, self-contained provision, best kept for last and revised quickly.

How to prepare Micro, Small and Medium Enterprises

Treat this as a statute-reading chapter. Read each section once for meaning, then rebuild it in your own words from memory.

  1. Read the Act's provisions slowly and list each section's subject, the authority involved, and any time limit or number in it.
  2. Build a one-page map of the Act: classification and Advisory Committee, memorandum, promotion and credit, delayed payment, Council, closure.
  3. Learn the classification as a rule that the Central Government notifies after Advisory Committee recommendations. Check the current limits in your ICSI study material, because the Government can vary the criteria by notification.
  4. Learn the dispute path in order: reference to the Council, conciliation, then arbitration if conciliation fails, with the Arbitration and Conciliation Act, 1996 applying at each stage.
  5. Practise short answers in the ICSI pattern: state the provision, apply it to the facts, give a clear conclusion with the section.
  6. Write a short fact-based problem for yourself on each topic, such as a buyer in one State and a supplier in another, and answer it.
  7. Revise using the quick-revision points a day before the exam, and recheck the time limits and the authorities.

Common mistakes in Micro, Small and Medium Enterprises

  • Quoting fixed investment limits as the permanent definition of micro, small and medium enterprises.

    Fix: Write that classification is by Central Government notification on the Advisory Committee's advice, and that investment, employment or turnover criteria may be used. Give current limits only from your latest ICSI material.

  • Saying registration is compulsory for every enterprise.

    Fix: Remember that under section 8(1) a person intending to establish a micro or small enterprise, or a medium service enterprise, may file at his discretion. Only a person intending to establish a medium manufacturing enterprise in a First Schedule industry shall file under section 8(1)(c). Mention the transitional proviso for enterprises established before the Act if the question involves an existing enterprise.

  • Mixing up the authority for filing the memorandum.

    Fix: Medium enterprises file with the authority the Central Government notifies; micro and small enterprises file with the authority the State Government notifies.

  • Treating the Council's role as only arbitration.

    Fix: Always write the sequence: reference, conciliation, and arbitration only if conciliation fails and terminates without settlement.

  • Forgetting who can approach the Council and where.

    Fix: Any party to a dispute may make a reference under section 18(1). Under section 18(4), the Council or centre within the supplier's jurisdiction can act, even where the buyer is anywhere in India.

  • Writing the closure scheme as applying to all enterprises including companies.

    Fix: State that it applies to enterprises other than companies registered under the Companies Act, 1956, and that the Central Government notifies the scheme.

Last-day revision: Micro, Small and Medium Enterprises

  • 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.

Micro, Small and Medium Enterprises practice questions

Micro, Small and Medium Enterprises in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Micro, Small and Medium Enterprises: frequently asked questions

How should I study Micro, Small and Medium Enterprises for CS Executive?

Read the Act's provisions in order, make a one-page map, and practise short answers that state the provision, apply it and conclude. Focus on definitions, authorities and time limits, since these are the easiest marks.

Is registration of an MSME mandatory under the Act?

Not for all. 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. A transitional proviso separately covers enterprises established before the Act: a small scale industry with a registration certificate may file at its discretion, and a First Schedule manufacturer that filed an Industrial Entrepreneur's Memorandum (investment above one crore and up to ten crore rupees) files. Any filing under the proviso is to be made within 180 days from commencement of the Act.

Who decides a dispute about delayed payment to a micro or small supplier?

Under section 18(1), a party may refer a dispute about an amount due under section 17 to the Micro and Small Enterprises Facilitation Council. The Council conducts conciliation itself or through an ADR institution, and if that fails it takes up arbitration. Under section 18(4), the Council or centre within the supplier's jurisdiction can act even if the buyer is anywhere in India. Under section 18(5), every reference must be decided within ninety days from the date of making the reference.

Are the classification limits in the Act still the current ones?

Do not rely on the original figures alone. Under section 7, the Central Government classifies enterprises by notification and may vary the investment criterion and consider employment or turnover. Check the current limits in your ICSI study material before the exam.

Does the closure scheme apply to companies?

Section 25 allows the Central Government to notify a scheme to facilitate closure of business by a micro, small or medium enterprise that is not a company registered under the Companies Act, 1956.