Query: Micro, small and Medium Enterprises.

1. Regulated by whom?
2. Benefits available to an enterprise that falls within the definition of MSME
3. Procedure available for classification for micro, small or medium enterprise.
4. Limits prescribed for the classification.
5. Sectors specifically reserved for these enterprises.

Answer: Micro, Small and Medium Enterprises (MSME) contribute nearly 8 percent of
the countrys GDP, 45 percent of the manufacturing output and 40 percent of the
exports. They provide the largest share of employment after agriculture. They are the
nurseries for entrepreneurship and innovation. They are widely dispersed across the
country and produce a diverse range of products and services to meet the needs of the
local markets, the global market and the national and international value chains.
1

Under the Micro, Small and Medium Enterprises Development Act, 2005 (MSMED
Act), the meaning of the terms Micro, Small and Medium enterprise is understood with
respect to the investment made in the plant and machinery/equipment. The investment
limit for each enterprise is as follows:

Investment Limit (in INR)
Plant and Machinery
(if manufacturing or
producing goods)
Equipment
(if providing or rendering
services)
Micro Enterprise Not more than 25,00,000 Not more than10,00,000

1
Recommendations of the Inter-Ministerial Committee for Accelerating Manufacturing in Micro, Small &
Medium Enterprises Sector, 2013 available at: msme.gov.in
(Rupees Twenty Five Lakhs
only).
(Rupees Ten Lakhs only).
Small Enterprise
Between 25,00,000 (Rupees
Twenty-Five Lakhs only)
to 5,00,00,000 (Rupees Five
Crores only).
Between 10, 00, 000 (Rupees
Ten Lakhs only) and
2,00,00,000 (Rupees Two
Crores only).
Medium Enterprise
Between
5,00,00,000 (Rupees Five
Crores only) to 10,00,00,000
(Rupees Ten Crores only).
Between 2,00,00,000
(Rupees Two Crores only)
and Rs. 5,00, 00,000 (Rupees
Five Crores only).
In case of the manufacturing enterprises, investment in plant and machinery is the
original cost excluding land and building and the items specified by the Ministry of
Small Scale Industries, vide its notification.
2

The major benefit for MSMEs is the reservation policy, which reserves certain items, for
exclusive manufacture by these enterprises, thus, protecting their interests, as well as
providing impetus to the society by generating employment opportunities. The
Government has put in place policies and has reserved three hundred fifty (350) items
for purchase from MSMEs, under the Government Stores Purchase Programme. To
encourage the small-scale units, the SEZs are required to allocate 10 per cent space for
the small-scale units. Under the MSMED Act, protections are offered in relation to
timely payment for goods and services by buyers to MSMEs. Furthermore, the
Government has been encouraging and supporting the sector through policies for

2
No. S.O. 1722(E) dated October 5, 2006.

preferential access to credit, preferential purchase policy, etc. It has been offering
packages of schemes and incentives through its specialized institutions in the form of
assistance in obtaining finance; help in marketing; technical guidance; training and
technology up gradation, etc. Further, an enterprise, whose post-issue face value does
not exceed INR 25,00,00,000 (Rupees Twenty Five Crores only), is entitled to certain
exemptions from the eligibility requirements under the ICDR Regulation.
For the purposes of registration, the two part Entrepreneurs Memorandum has to be
submitted to the concerned District Industries Centre. Filing of an Entrepreneurs
Memorandum is optional for a micro or small enterprise, or a medium enterprise
engaged in providing services. However, a medium enterprise engaged in the
manufacture or production of goods has to mandatorily file Part I of the Entrepreneurs
Memorandum. There is no processing fee for processing the memorandum. Thereafter,
on the commencement of production/activity, Part II of the Entrepreneurs
Memorandum has to be filled up and submitted to the District Industries Centre.
However, it must be filed within two (2) years of the filing of Part I.
If a Micro or a small Enterprise crosses the permissible investment limits, they would
have to re-file part II of the Entrepreneurs Memorandum. If the investment limit in a
Medium enterprise exceeds the permissible limit, it will become liable for de-
registration and would not be eligible for preferred treatment reserved for the MSMEs.
The list of items exclusively reserved for production by MSEs is limited to twenty (20)
items. Some examples of reserved items are pickles and chutneys, bread, mustard oil,
ground nut oil, exercise books and registers, wooden furniture and fixtures, candles,
laundry soap, safety matches, fireworks, agarbattis, glass bangles, steel almirahs and
stainless steel and aluminum utensils. Though reserved exclusively for MSMEs, these
items can also be manufactured by Large/Medium units provided they undertake to
export a minimum of 50 per cent of the new or additional annual production of the MSE
reserved items within a maximum period of three years from the date of
commencement of commercial production of such reserved items.
MSE sector now has greater access to credit as a result of its classification as a priority
lending sector. The banks are required to compulsorily ensure that specified percentage
(currently 40 per cent and 32 per cent of adjusted net bank credit or credit equivalent
amount of off-balance sheet exposure, whichever is higher, for domestic commercial
banks and foreign banks, respectively) of their overall lending is made to priority
sectors as classified by Government, thus ensuring credit to these sectors.
The priority sectors include agriculture, small enterprises, retail trade, etc. While for
domestic commercial bank, advances to small enterprises sector is reckoned for its
overall priority sector target, for foreign banks, such lending would be counted towards
10 per cent of adjusted net bank credit or credit equivalent amount of off-balance sheet
exposure, whichever is higher, irrespective of whether the finance is for export or
domestic activities.
Out of the total advances to small enterprise sector, 60 per cent is reserved for micro
enterprises and the balance 40 per cent for the small enterprises. Out of this 60 per cent
quota,
1. 40 per cent of the total advances to MSE sector is reserved for micro
(manufacturing) enterprises having investment in plant and machinery up to
INR 5,00,000 (Rupees Five Lakhs only) and micro (service) enterprises having
investment in equipment up to INR 2,00,000 (Rupees Two Lakhs only); and
2. 20 per cent of the total advances to MSE sector should go to micro
(manufacturing) enterprises with investment in plant and machinery above INR
5,00,000 (Rupees Five Lakhs only) and up to INR 25,00,000 (Rupees Twenty Five
Lakhs only), and micro (service) enterprises with investment in equipment above
INR 2, 00,000 (Rupees Two Lakhs only) and up to INR 10, 00,000 (Rupees Ten
Lakhs only).
Lending to medium enterprises is not considered to be a priority sector lending. Micro
and small enterprises are also entitled to collateral free loan up to INR 10, 00,000
(Rupees Ten Lakhs only), which may go up to INR 25, 00,000 (Rupees Twenty Five
Lakhs only), with the approval of the appropriate authority.
NOTE: As per the query raised, Section 18 of the MSME act 2006 provides that
"Notwithstanding anything contained in any other law for the time being in force, any party to a
dispute may, with regard to any amount due under section 17, make a reference to the Micro and
Small Enterprises Facilitation Council."
Section 18 empowers the Council, upon receipt of a reference, to conduct conciliation in
terms of the provisions of sections 65 to 81 of the Arbitration and Conciliation Act,
1996. Where the conciliation is not successful and is terminated without there being any
settlement between the parties, the Council is empowered to itself take up the dispute
for arbitration or refer it to any institution or centre providing alternate dispute
resolution services. Section 18(4) begins with a non-obstante clause which operates
irrespective of what is contained in any other law for the time being in force. The
Council providing alternative dispute resolution services has jurisdiction to act as an
Arbitrator or Conciliator in a dispute between the supplier located within its
jurisdiction and a buyer located anywhere in India.
It was held that though there may be an arbitration agreement between the parties, the
provisions of Section 18(4) specifically contains a non obstante clause empowering the
Facilitation Council to act as an Arbitrator and further as per Section 24 of the Act,
Sections 15 to 23 of the Act shall have effect notwithstanding anything inconsistent
therewith contained in any other law for the time being in force.- M/s Bharat Heavy
Electricals Limited v. State Of U.P. & 2 Others