MSME(Micro,Small and Medium Enterprises)
The MSME became operational on October 02, 2006. It was established to promote, facilitate and
develop the competitiveness of the micro, small and medium enterprises.
In accordance with the Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006,
the enterprises are classified into two divisions:-
1) Manufacturing enterprises – engaged in the manufacturing or production of goods in any
industry
2) Service enterprises – engaged in providing or rendering services
The classification of Enterprises into Micro, Small and Medium was previously done as per investment
in Plant and Machinery. The classification was as below:-
In October 2019, The Union Cabinet had approved the amendment to change the criteria to classify
MSMEs from “investment in plant and machinery” to “annual turnover.”. Union Minister Nitin
Gadkari said that the revised definition of micro, small, and medium enterprises may grant a unified
description for all things related to taxation, investment, and more.
On 13th May,2020, Finance Minister Nirmala Sitharaman added principle of Turnover along with the
investment in the definition of MSME during the declaration of 20 lac crore Stimulus Economic
Package “Atmanirbhar Bharat”.
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The Definition is as below:-
So, As per Finance Minister, Now Enterprises can be categorised basis investment in Plant and
Machinery and Turnover. Any one criteria out of the 2 to be satisfied to get the classification.
Again the definition was changed by union cabinet on 1st June/2020.
New Definition states any manufacturing or service industries will be classified as:-
Micro units - If Investment in Plant and Machinery is upto ₹1 crore and turnover of less than 5
crore.
Small Units – If investment in Plant and Machinery is upto 10 crore and Turnover of less than 50
crore.
Medium Units – If Investment in Plant and machinery is upto 50 crore with Turnover of less than 250
crore.
What Value to consider in “Investment in Plant and Machinery”
As per Notification issued by Ministry of MSME, while calculating the investment in plant and
machinery, the original price thereof, shall be taken into account, irrespective of whether the plant
and machinery are new or second hand.
Ministry of MSME have clarified that for ascertaining the investment in plant and machinery for
classification of an enterprises as Micro, Small and Medium, the following documents could be relied
upon:
I. A copy of the invoice of the purchase of plant and machinery
II. Gross block for investment in plant and machinery as shown in the audited accounts, Or
III. A certificate issued by a Chartered Accountant regarding purchase price of plant and
machinery.
Further, the Ministry has clarified that for the investment in plant and machinery for the purpose of
classification of an enterprise as Micro, Small or Medium, the purchase value of the plant and
machinery is to be reckoned and not the book value (purchase value minus depreciation).
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In Case of Imported Machinery, Following should be included:-
1) Import duty (excluding miscellaneous expenses such as transportation from the port to the
site of the factory, demurrage paid at the port);.
2) Shipping charges;
3) Customs clearance charges; and
4) Sales tax or value added tax.
Further, as per the said notification, the following are excluded while calculating the investment in
Plant and Machinery:-
1) Equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and the cost of
consumables stores;
2) Installation of plant and machinery;
3) Research and development equipment and pollution controlled equipment
4) Power generation set and extra transformer installed by the enterprise as per regulations of
the State Electricity Board;
5) Bank charges and service charges paid to the National Small Industries Corporation or the
State Small Industries Corporation;
6) Procurement or installation of cables, wiring, bus bars, electrical control panels (not mounded
on individual machines), oil circuit breakers or miniature circuit breakers which are necessarily
to be used for providing electrical power to the plant and machinery or for safety measures;
7) Gas producers plants;
8) Transportation charges (excluding sales-tax or value added tax and excise duty) for
indigenous machinery from the place of the manufacture to the site of the enterprise;
9) Charges paid for technical know-how for erection of plant and machinery;
10) Such storage tanks which store raw material and finished produces and are not linked with the
manufacturing process; and
11) Fire fighting equipment.
Further, investment in Land, Building, Vehicles, Furniture and fixtures, Office Equipment etc shall
not be considered in determining the threshold limit of plant and machinery or Equipment as the case
may be.
FAQ
Can trading companies register under MSME?
No. MSME covers only manufacturing and service industries. Trading companies are not covered by the scheme.
MSME is to support startups with subsidies and benefits, trading companies are just like middlemen, a link
between manufacturer and customer. Hence not covered under the scheme.
Ministry of MSME has clarified following activities that would be specifically not included in the
manufacturing or production of commodities or rendering of services as per Section 7 of the said
Act:-
1) Forest and Logging
2) Fishing and aquaculture
3) Wholesale, retail trade and repair of motor vehicle and motorcycles
4) Wholesale trade except for motor vehicles and motorcycles.
5) Retail Trade Except of Motor Vehicles and motor cycles
6) Activities of households as employees for domestic personnel
7) Undifferentiated goods and services producing activities of private households for own
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8) Activities of extraterritorial organisations and bodies
Benefits of MSME Registration
1) Due to the MSME registration, the bank loans become cheaper as the interest rate is very low
around 1 to 1.5%. Much lower than interest on regular loans.
2) There are various tax rebates offered to MSME
3) It also allowed credit for minimum alternate tax (MAT) to be carried forward for up to 15
years instead of 10 years
4) There are many government tenders which are only open to the MSME Industries.
5) They get easy access to credit.
6) Once registered the cost getting a patent done, or the cost of setting up the industry reduces
as many rebates and concessions are available.
7) Business registered under MSME are given higher preference for government license and
certification.
8) There is a One Time Settlement Fee for non-paid amounts of MSME.
Some of the MSME Scheme Launched by Government are
Udyog Aadhar memorandum - In this, the Aadhaar card is a mandatory requirement. The benefit of
registering in this scheme is ease in availing credit, loans, and subsidies from the government.
Registration can be done both ways in the online mode or the offline mode.
Zero Defect Zero Effect- goods that are manufactured for export have to adhere to a certain
standard so that they are not rejected or sent back to India. To achieve this the government has
launched this scheme. In this, if the goods are exported these are eligible for some rebates and
concessions.
Quality Management Standards & Quality Technology tools: Registering in this scheme will help the
micro, small and medium enterprises to understand and implement the quality standards that are
required to be maintained along with the new technology. In this scheme, activities are conducted to
sensitize the businesses about the new technology available through various seminars, campaigns,
activities etc.
Grievance Monitoring System: Registering under this scheme is beneficial in terms of getting the
complaints of the business owners addressed. In this, the business owners can check the status of
their complaints, open them if they are not satisfied with the outcome.
Incubation: This scheme helps innovators with the implementation of their new design, ideas or
products. Under this from 75% to 80% of the project cost can be financed by the government. This
scheme promotes new ideas, designs, products etc.
Cedit Linked Capital Subsidy Scheme: Under this scheme, new technology is provided to the business
owners to replace their old and obsolete technology. A capital subsidy is given to the business to
upgrade and have better means to do their business. These small, micro and medium enterprises can
directly approach the banks for these subsidies.
Finance Minister announced some Economic Package in view of COVID-19 for MSME, Lets Highlight
and understand the Packages.
1) Rs. 3 Lakhs Crore Collateral Free Automatic loan for Business, Including MSME
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Business and MSME has been badly hit due to COVID 19 and need additional funding to meet
operational liabilities built up, buy raw material and restart business, Hence Government announced
Emergency credit line to Business/MSME from Banks and NBFC’s up to 20% of entire outstanding
credit as on 29.02.2020.
Here, Borrower with outstanding upto 25 crore and T/o upto 100 crore will be eligible.
Loan to be for the period of 4 years with Moratorium of 12 Months on Principal repayment.
Interest to be paid during Moratorium.
This will be backed by 100% credit guarantee cover to bank and NBFC by government on
Principal and Interest.
This scheme is available till 31.10.2020.
This will be Collateral Free Loan and No Guarantee fee.
Additionally, Here, MSME Borrowr accounts should be less than or equal to 60 days past due date i.e
Regular, SMA 0 or SMA 1 account.
Interest rate capped at 9.25% for Banks and 12% for NBFC’s.
Venture Debt funding or shareholder loans will not be covered under this.
Businesses who have taken loans after February 29th, 2020 or who don’t have any credit
facilities as of February 29th, 2020 will not be covered.
2) Rs.20,000 Crore Subordinate debt for Stressed MSME’s
First let us understand what is Subordinate debt, It is debt owed to unsecured creditor that in the
event of Liquidation can only be paid after the claims of secured creditors have been met.
Government has announced Rs.20000 crore package of subordinate debt for stressed MSME.
This is Applicable to Operational MSMEs that are either declared as NPA or are stressed.
Government will Provide Rs.4000 cr. to CGTMSE(Credit Guarantee Fund Trust for Micro and
Small Enterprises)
CGTMSE will provide partial credit guarantee support to Banks.
This is Not a fresh Loan but credit guarantee by CGTMSE.
Loans will be given by the bankers to the Promoters of the MSMEs, who will then invest it as
equity into the business.
Discretion of disbursement left up to the individual banks.
3) Rs.50000 cr Equity Infusion for MSMEs through Fund of Fund.
First Lets understand what is Fund of Fund
Fund of Fund is an Investment strategy of holding a portfolio of other investment fund rather than
investing directly in stock, bonds and other securities.
FOF with Corpus of Rs.10000 cr will be set up.
Equity funding for MSME with growth potential and viability will be provided.
This will be operated via Mother Fund and various daughter fund.
Fund Structure will help leverage Rs.50000 cr fund at daughter’s fund level.
This will encourage MSME to get listed on main board of stock exchange.
As per news in April,2020, Government was to approve ₹10000 crore “Fund of Fund” to buy up 15%
equity In MSME with high credit rating that want to list on stock exchange and raise money from the
capital market. This was for MSME having AAA credit rating.
15% of the amount an AAA rated MSME raises from the capital market will be contributed by the
government through the fund as equity.
Here, we have to know the launch date and Fund Manager and also Criteria for Daughter Funds and
types of investments said Daughter Funds can make.
4) Global Tender disallowed for upto Rs.200 crores
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For Tenders of upto Rs.200 crores, foreign completion is now cut off and tender to be provided to
only Indian companies. This move was taken due to unfair competition from foreign companies in
government procurement tenders due to the size and strength differ.
