Arbitration, Mediation and Conciliation · Introduction to Conciliation and its Importance for MSMEs

MSMED Act 2006: Classification and Delayed Payment Context

Updated 11 October 2026 · Fact-checked

The MSMED Act, 2006 promotes and develops micro, small and medium enterprises. Section 7 lets the Central Government classify them by investment, with separate limits for manufacturing and services. Section 18 lets any party to a dispute over amounts due refer it to the Facilitation Council, which first conciliates and then arbitrates if conciliation fails.

Understand MSME Act 2006: Definitions and Delayed Payment Context

The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) came into force on 2 October 2006. It replaced the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, which section 32 repeals. Actions taken under the old Act are deemed taken under the corresponding provisions of the new one.

The Act sorts enterprises into micro, small and medium under section 7. The test in the section is investment. For manufacturing enterprises (goods of an industry in the First Schedule to the Industries (Development and Regulation) Act, 1951), the test is investment in plant and machinery. For service enterprises, it is investment in equipment. The section applies to proprietorships, HUFs, associations of persons, co-operative societies, partnership firms, companies and undertakings.

The Central Government classifies by notification, but only after getting recommendations from the Advisory Committee. Section 7(9) also lets it vary the investment criterion from time to time and consider employment or turnover criteria. So the rupee limits in the section text are the original statutory limits. Current limits can differ by notification, so in the exam quote the section and state that the Government can revise the criteria.

Why does this matter for dispute resolution? Small suppliers depend on prompt payment from large buyers. A delayed payment can choke their cash flow, and a long court case is often unaffordable for them. Section 18 gives them a quick route. Any party to a dispute about an amount due under section 17 can make a reference to the Micro and Small Enterprises Facilitation Council. The Council conciliates first, using sections 65 to 81 of the Arbitration and Conciliation Act, 1996. If conciliation fails, the Council arbitrates itself or refers the matter to an ADR institution. The 1996 Act then applies as if there were an arbitration agreement under section 7 of that Act.

The Council has jurisdiction where the supplier is located within its jurisdiction, and the buyer can be anywhere in India. Every reference must be decided within ninety days from the date of making it.

Key rules to remember

Manufacturing classification (section 7(1)(a)): Micro: plant and machinery ≤ ₹25 lakh | Small: > ₹25 lakh to ₹5 crore | Medium: > ₹5 crore to ₹10 crore; Applies to enterprises making goods of an industry in the First Schedule to the IDR Act, 1951. Test is investment in plant and machinery. Limits are those in the Act's text and can be varied by notification.
Service classification (section 7(1)(b)): Micro: equipment ≤ ₹10 lakh | Small: > ₹10 lakh to ₹2 crore | Medium: > ₹2 crore to ₹5 crore; Test is investment in equipment, not plant and machinery.
Exclusions from investment (Explanation 1): Plant and machinery investment excludes cost of pollution control, R&D, industrial safety devices and other notified items; Explanation 1 speaks of plant and machinery only.
Section 18 route: Reference to Council → conciliation (ss. 65–81 of 1996 Act) → if unsuccessful, arbitration by Council or ADR institution; Any party may refer a dispute about an amount due under section 17, notwithstanding any other law.
Time limit and jurisdiction: Decide within 90 days of reference; supplier within Council's jurisdiction, buyer anywhere in India; Sections 18(5) and 18(4).
Memorandum (section 8): Micro or small: at discretion. Medium services: at discretion. Medium manufacturing (First Schedule industry): mandatory filing; Filed with the authority specified by the State Government (micro or small) or Central Government (medium).

How to solve MSME Act 2006: Definitions and Delayed Payment Context questions

Use this method for any question on classification, the Act's purpose or delayed payment disputes.

1Read the facts and decide whether the enterprise makes goods or provides services.
2Pick the right test: plant and machinery for manufacturing, equipment for services.
3Exclude the items Explanation 1 removes from plant and machinery, then compare the investment with the limits to place it in micro, small or medium.
4Note that the Central Government may revise criteria by notification after Advisory Committee recommendations. Mention this briefly.
5If the facts involve unpaid amounts, state that a party may refer the dispute to the Facilitation Council under section 18.
6Set out the sequence: conciliation first, then arbitration if conciliation fails, with the 1996 Act applying.
7Check jurisdiction (supplier's location) and the 90-day period.
8Close with a clear conclusion tied to the facts.

Quickest way: Two-question shortcut

When to use it: For short classification or section 18 questions with limited time.

Ask: goods or services? Choose plant and machinery or equipment.
Compare with the three bands and write the class in one line with the section.
For disputes, write the chain: reference → conciliation → arbitration → 90 days.
Add the jurisdiction point: supplier's location decides the Council.

Common mistakes in MSME Act 2006: Definitions and Delayed Payment Context

Using plant and machinery limits for a service enterprise.
The two sets of limits look alike and students memorise only one.
Fix: Link goods to plant and machinery and services to equipment. Write the test first, then the limit.
Treating the lower limit as inclusive, for example calling ₹25 lakh investment small.
The words 'does not exceed' are overlooked.
Fix: Micro includes the upper limit. Small begins only when investment is more than the micro limit.
Saying a dispute goes straight to arbitration under section 18.
Students focus on the Council's arbitration role.
Fix: Conciliation comes first. Arbitration follows only if conciliation is unsuccessful and terminates without settlement.
Believing the buyer's location decides the Council.
Students assume the defendant's place governs.
Fix: Section 18(4) looks at the supplier's location. The buyer can be anywhere in India.
Stating the limits as fixed forever.
The section text gives numbers, so students assume they are final.
Fix: Mention that the Central Government can vary criteria by notification under section 7, and that the limits quoted are those in the Act's text.
Saying registration of memorandum is compulsory for all enterprises.
Section 8 is read loosely.
Fix: Filing is at discretion for micro, small and medium service enterprises. It is mandatory only for medium manufacturing enterprises in First Schedule industries.

Worked examples

Example 1

Sharma Textiles, a partnership firm, manufactures goods of a First Schedule industry. Its investment in plant and machinery is ₹4 crore, of which ₹30 lakh is for pollution control equipment. Classify it under section 7 of the Act's text.

Show the solution

It makes goods, so the test is investment in plant and machinery.
Explanation 1 excludes the cost of pollution control. Investment counted = ₹4 crore − ₹30 lakh = ₹3.7 crore.
Micro limit is ₹25 lakh. ₹3.7 crore exceeds it.
Small is more than ₹25 lakh but not more than ₹5 crore. ₹3.7 crore falls here.

Answer: Sharma Textiles is a small enterprise under section 7(1)(a)(ii), on the limits in the Act's text. The Central Government may revise the criteria by notification.

Example 2

Kaveri Software Services, a supplier in Bengaluru, has not been paid by Delta Retail Ltd, a buyer in Delhi, for amounts due under section 17. Can Kaveri approach a Council in Bengaluru, and what happens next?

Show the solution

Section 18(1) allows any party to a dispute about an amount due under section 17 to refer it to the Facilitation Council, despite any other law.
Section 18(4) gives the Council jurisdiction where the supplier is located within its jurisdiction and the buyer is anywhere in India. Kaveri is in Bengaluru, so the Bengaluru Council can act even though Delta is in Delhi.
Under section 18(2), the Council conciliates itself or refers to an ADR institution, applying sections 65 to 81 of the 1996 Act.
If conciliation fails without settlement, section 18(3) lets the Council arbitrate or refer to an institution, with the 1996 Act applying as if under section 7 of that Act.
Section 18(5): the reference must be decided within ninety days of making it.

Answer: Yes. Kaveri can refer the dispute to the Council with jurisdiction over its location. Conciliation comes first, then arbitration if it fails, and the reference is to be decided within ninety days.

Exam tips

Learn the six limits in two small sets (manufacturing and service) and write the test word first.
In case questions, state the conclusion class and then add that criteria can be revised by notification.
Cite section 18 sub-sections for the sequence: (1) reference, (2) conciliation, (3) arbitration, (4) jurisdiction, (5) ninety days.
Link the topic to purpose: delayed payments hurt small suppliers, so a quick conciliation-first route matters.
Write in provision, analysis, conclusion format and keep each answer short and structured.

Practice questions from Introduction to Conciliation and its Importance for MSMEs

MSME Act 2006: Definitions and Delayed Payment Context in other exams

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

MSME Act 2006: Definitions and Delayed Payment Context: frequently asked questions

How does the MSMED Act, 2006 classify enterprises?

Section 7 classifies them by investment. Manufacturing enterprises use investment in plant and machinery, while service enterprises use investment in equipment. Each category has micro, small and medium bands, and the Central Government may vary the criteria by notification.

Why is conciliation important for MSMEs?

Small suppliers cannot afford long litigation when payments are delayed. Section 18 gives them a quicker route, where the Council first tries to settle the matter through conciliation. Arbitration follows only if conciliation fails.

Which Act did the MSMED Act, 2006 replace on delayed payments?

Section 32 repeals the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993. Anything done under that Act is deemed done under the corresponding provisions of the MSMED Act.

Is filing a memorandum compulsory under section 8?

Not for all. It is at the person's discretion for micro and small enterprises and for medium service enterprises. For medium enterprises making goods of a First Schedule industry, filing is required.