Micro, Small and Medium Enterprises [MSME]

Micro, Small and Medium Enterprises [MSME] are generally defined in terms of the investment
in the plant, machinery and/or equipment, the number of people employed and annual turnover.
MSMEs are an integral part of the economy as they serve as a medium to provide employment
opportunities to the weaker section of the society, giving them a way out of the perpetual poverty
that they seem to.
MSMEs serve as a backbone to the Indian economy since they are an effective tool to expand
employment opportunities, help ensure equitable distribution of the national income and
facilitate effective mobilization of private sector resources of capital and skills. Acting as an
employment generator MSMEs are currently making up for the largest workforce just after the
agricultural sector. They are responsible for production of more than 6000 different products and
services inducing a large band of customers by producing from traditional to high-tech products.
Among all the industries in the MSME sector, the Retail trade is the leading industry followed by
manufacture of wearing apparel and manufacture of food products and beverages.
In India, MSME are defined according to the amount of investment ceiling for Plant, Machinery
or Equipment (excluding land & buildings). In addition, the enterprises have been classified
broadly into:
 Enterprises engaged in the Manufacture / production of Goods pertaining to any industry;

● Micro Enterprises - investment up to Rs.25 lakh.

● Small Enterprises - investment above Rs.25 lakh & up to Rs. 5 crore.
● Medium Enterprises - investment above Rs. 5 crore & up to Rs.10 crore.
● Enterprises engaged in providing / rendering of services.
● Micro Enterprises – investment up to Rs.10 lakh.
● Small Enterprises – investment above Rs.10 lakh & up to Rs.2 crore.
● Medium Enterprises–investment above Rs. 2 crore & up to Rs. 10 crore.
However, it is not necessary to engage in manufacturing activity for self-empoyment. A small-
scale industry prima facie an industry with investments in fixed assets in plant & machinery not
exceedingno exceeding Rs. 1 Crore, can also be consideredalso considered as a self-employment.
Therefore, as pera per the Guidelines for Prospective Entrepreneur laid by Govt. of India, one
can simply set up service enterprises widely known to be as Small Scale Service & Business
Enterprises (SSSBEs).

Ambit of MSMEs
Sub Section 1 of Section 7 of Micro Small or Medium Enterprises Development Act 2006
provides for classification of enterprises engaged in manufacturing or production of goods as
well aswell' as enterprises engaged in providing or rendering of services as micro, small and
medium based on investment in plant and machinery and equipment respectively.
Sub Section 1 of Section 8 provides that any person who intends to establish a micro or small or
medium enterprise engaged in manufacture or production of goods or providing or rendering of
services may at his discretion shall file a memorandum of micro, small or medium enterprises in
accordance with the provisions of Act.
Subsequently, Ministry of Micro Small or Medium Enterprise notified vide notification number
S.O. 2576 (E) dated 18.9.2015 and subsequent notification No. S.O. 85(E) dated 10.1.2017 for
registration of Udyog Aadhaar Memorandum for Micro, Small or Medium Enterprises.
In this context it is further clarified that the activities in Table.1 below would not be included in
the manufacture or production of goods or providing or rendering of services in accordance with
Section 7 of the Micro, Small and Medium Enterprise Development Act,_2006:-
Table.1
NIC ACTIVITY
CODE
02 Forestry and logging
03 Fishing and aquaculture

45 Wholesale and retail trade and repair of motor vehicle and motorcycles

46 Wholesale trade except of motor vehicles and motor cycles 47

47 Retail Trade Except of Motor Vehicles and motor cycles

97 Activities of households as employees for domestic personnel

98 Undifferentiated goods and services producing activities of private households for

own use
99 Activities of extraterritorial organization and bodies

The NIC 2-digit activity 01- crop, animal production, hunting and related activities would also
not be included as per Section 7 of the Act except for the sub-classes of activities at 5-digit level
given in Table 2.
Table. 2
NIC ACTIVITY
CODE
01462 Production of eggs

01463 Operation of poultry hatcheries

01492 Bee- keeping and production of honey and beeswax

01493 Raising of silk worms, production of silk worm cocoons

01612 Operation of agricultural irrigation equipment

 01620 Support activities for animal production ,

01631 Preparation of crops of primary markets i.e. cleaning, trimming, grading

disinfecting
01632 Cotton ginning, cleaning and bailing

01639 Preparation of tobacco leaves

01640 Other post-harvest crop activities, n.e.c

Role of MSMEs in Indian Economy

MSMEs provide a number of items of daily use at an affordable cost, which has led to the spread
out of MSMEs across Indiaacross the India touching 123.4 million lives directly, or indirectly
which is roughly 10% of Indian population. They lead to addition in the output of goods and
services providing a platform for low capital investment and facilitating fast decision making due
to less number of staff and more control of an entrepreneur. They also provide innovative
products tailored by the needs of the entire and even a particular region. Furthermore, they
promote entrepreneurship providing reduction in income disparities.

THE INTERPLAY OF MSMES AND GOVT. OF INDIA

In India, MSMEs are regulated under two-fold legislation:
1. The Micro, Small and Medium Enterprises Development Act, 2006, provides for facilitating
the promotion and development and enhancing the competitiveness of micro, small and
medium enterprises and for matters connected therewith or incidental thereto.
2. The Industries (Development and Regulation) Act, 1951
Indian Policies
The Government realises the importance of MSMEs as the seedbeds of latent entrepreneurial
talent, its significance in employment generation and its contribution in the inclusive growth of
the country. Therefore, there are various policies, support measures and institutions established
for promotion and development of MSMEs. Some of them have been listed below (EXIM Bank
of India, 2012).
● Technological support
● Entrepreneurship Development Support
● Marketing Support
● Financial Support
● Protection policies
Role of Ministry of MSME
Ministry of Micro, Small & Medium Enterprises envisions a vibrant MSME sector by promoting
growth and development of the MSME Sector, including Khadi, Village and Coir Industries, in
cooperation with concerned Ministries/Departments, State Governments and other Stakeholders,
through providing support to existing enterprises and encouraging creation of new enterprises.
The primary responsibility of promotion and development of MSMEs is of the State
Governments. However, the Government of India, supplements the efforts of the State
Governments through various initiatives.
The schemes undertaken by the Ministry to facilitate MSME:
● Adequate flow of credit from financial institutions/banks
● Support for technology upgradationup gradation and modernization
● Integrated infrastructural facilities
● Modern testing facilities and quality certification
● Access to modern management practices
● Entrepreneurship development and skill up gradation through appropriate training facilities
● Support for product development, design intervention and packaging
● Welfare of artisans and workers
● Assistance for better access to domestic and export markets
● Cluster-wise measures to promote capacity-building and empowerment of the units and their
collectives.
Major schemes for MSME
● Performance and credit rating scheme
● Marketing assistance scheme
● International cooperation scheme
● Assistance to training institutions scheme
● Prime Minister’s Employment Generation Programme (PMEGP)
● Scheme of fund for Regeneration of Traditional Industries (SFURTI)
● ASPIRE: A Scheme for Promoting Innovation and Rural Entrepreneurship
STEPS TO SET UP MSME IN INDIA:
Following major steps are included in the formation of MSMEs in India
● Project Selection
● Technology and Machinery
● Arranging Finance
● Unit Development
● Udyog Aadhaar Memorandum
● Clearances
● Quality Certification
Requirements
In order to set up an MSME in India one should follow some major pre-requisites:
● A preliminary market study of product(s) or service(s) needs to be undertaken to analyse
consumption and availability pattern. If there is a gap in demand and supply, the activity is
consideredactivity considered ideal for selection.
● Market information is available with MSME Development Institutes (MSMEDIs) and DIC's
of respective states/areas. Market Survey reports on various items and Industrial potential
surveys of particular areas provide the information about the market potential of items.
Industry and Trade associations, specialized institutions like PPDC can also provide such
information.
● The following major inputs are required for setting up an enterprise:
● Land, building or shed
● Machinery and equipment
● Raw Materials
● Power and Water
● Skilled manpower
● Capital
● Financial Assistance

FINANCIAL ASSISTANCE
In India, finance act as a major backbone to establish MSME. However, with the availability of a
number of financial institutions offering help it has been very convenient and feasible to avail
finance assistance. It is available from institutions such as Nationalised Banks, Small Industries
Development Bank of India, Regional Rural Banks, National Small Industries Corporation, State
Financial Corporations etc. depending upon the project requirement and promoters background.
Moreover, any of the financial institutions can be approached to get funds keeping in view their
specific schemes. Therefore, it is vital for an entrepreneur to evaluate and compare thecompare
of the terms and conditions, including rate of interest and repayment period of loan offered by
the different financial institutions. Select the financial institution, which offers funds at minimum
interest rate as per your repayment plan to suit your project. In addition, choose the institution
that is in close proximity to the project site if other terms and conditions are similar.
Rules and Procedures for Acquiring Loan
In India, one can easily arrange for loan for margin money under the scheme being operated by
the State Commissioner/Directorate of Industries or State Bank of India. However, this scheme is
generally offered to professionally qualified entrepreneurs. Alternately, one may have to prune
down the size of their project in tune with available margin money. The financial institutions will
prefer to support only an entrepreneur willing to put his/her own stake to some extent.
Criterion and Requirements
The major eligibility criteria is return on the investment and profitability of the project proposed
to be set up. Any financial institution will support the project if repayment is assured. Besides
there are a few for requisites as follows:
● An entrepreneur should approach the concerned financial institution viz. State Financial
Corporation, NSIC, Bank branches etc. Application in prescribed preformat has to be
submitted along with project report including proof of ownership/availability of
land/building, proof of residence, collateral securities (wherever applicable) etc. The
institution gives the loan if the application meets the norms.
● The amount of loan can be used to cover all types of investment required in the project, such
as machinery & equipment, and working capital, land and building. The lending agency for
each component of loan may be same or different.

Check List (To Be Given To The New Customers By Branch) Of Data To Be Kept Ready
By The Customer
● Proof of identity – Voter’s ID Card / Passport /driving licence / PAN Card / signature
identification from present bankers of proprietor, partner or Director (if a company).
● Proof of residence – Recent telephone bills, electricity bill, property tax receipt / passport /
voter’s ID Card of proprietor, partner or Director (if a company).
● Proof of business address
● Proof of Minority
● Last three years balance sheets of the units alongwith income tax /sales tax returns etc.
(Applicable for all cases from Rs.2 lakhs and above). However, for cases below fund based
limits of Rs.25 lakhs if audited balance sheets are not available, then unaudited balance
sheets are also acceptable as per extant instructions of the bank. For cases of Rs.25 lacs and
above, the audited balance sheets are necessary.
● Memorandum and articles of association of the Company/Partnership Deed of partners etc.
● Assets and liabilities statement of promoters and guarantors alongwith latest income tax
returns.
● Rent Agreement (if business premises on rent) and clearance from pollution control board if
applicable.
● SSI registration if applicable.
● Projected balance sheets for the next two years in case of working capital limits and for the
period of the loan in case of term loan. (For all cases of Rs.2 lakhs and above)
● In case of takeover of advances, sanction letters of facilities being availed from existing
bankers/Financial Institutions alongwith detailed terms and conditions.
● Profile of the unit (includes names of promoters, other directors in the company, the activity
being undertaken,addresses of all offices and plants, shareholding pattren etc.
(APPLICABLE FOR CASES WITH EXPOSURE ABOVE Rs.25 LAKHS).
● Last three years balance sheets of the Associate/Group Companies (If any). (APPLICABLE
FOR CASES WITH EXPOSURE ABOVE Rs.25 LAKHS).
● Project report (for the proposed project if term funding is required) containing details of the
machinery to be acquired, from whom to be acquired, price, names of suppliers, financial
details like capacity of machines, capacity utilisation assumed, production, sales, projected
profit and loss and balance sheets for the next 7to 8 years till the proposed loan is to be paid,
the details of labour, staff to be hired, basis of assumption of such financial details etc.
(APPLICABLE FOR CASES WITH EXPOSURE ABOVE Rs.25 LAKHS).
● Position of accounts from the existing bankers and confirmation about the asset being
Standard with them (In case of takeover).
● Manufacturing process if applicable, major profile of executives in the company, any tie-ups,
and details about raw material used and their suppliers, details about the buyers, details about
major competitors and the company's strength and weaknesses as compared to their
competitors etc. (APPLICABLE FOR CASES WITH EXPOSURE ABOVE Rs.25
LAKHS).
Banks Checklist For Compliance Of Various Aspects Of Proposals
● Whether the prescribed application form is obtained duly filled in and schedule of fees made
available to the borrower.
● Date of presanction inspections of the unit and collateral securities and by whom.
● Whether documents like PAN Card, Passport, IT returns, Balance sheet is are verified with
the originals. (If IT return is filed on line, the same to be got self authenticated.)
● Whether the Balance sheet of the entity is duly authenticated by director, partner or
proprietor.
● Whether documents / information like CMA Data, Project report, correspondce, statement of
account, etc are duly signed by the director / partner / proprietor / authorized person.
● Whether credit reports on borrowers / associates accounts obtained.
● If not obtained reports mention at Sr. No. 4, whether the statement of accounts is obtained
and conduct of the account is verified.
● Whether TCRs / Search reports / non encumbrance certificate in respect of immoveable
properties obtained as security is received and kept on record.
● Whether valuation report is obtained in respect properties obtained as securities afresh and /
or where the earlier valuation reports are older than three years.
● Whether project / promoters profile is obtained along with project financials for financing
new / expansion project.

COVID-19 and Future of MSMEs

New Definition and Revised MSME Classification
In light of the circumstances prevailing due the Covid-19, the government has taken the initiative
to redefine and revise MSME for numerousfor a numerous benefits. Under the Atmanirbhar
Bharat Abhiyan (ABA), the government has inculcated following measures to revise the
classification of MSMEs in India:
● Increased Investment Limit
● Introduced additional criteria of turnover
● Eliminated difference between Manufacturing & Service sector
● Amendments to law will be made
The revised classification is as follows:
Criteria Micro Enterprises Small Enterprises Medium Enterprise

Investment & Annual < Rs. 1 Crore & < < Rs. 10 Crore & < < Rs. 50 Crore & < Rs.
Turnover Rs. 5 Crore Rs. 50 Crore 250 Crore

Relief Measures for MSMES

● Credit and Finance for MSMEs:
 ● Rs. 3 lakh crore collateral-free loans - Banks and NBFCs will offer up to 20 percent of
entire outstanding credit as on February 29, 2020, to MSMEs. Units with upto Rs 25
crore remarkable credit and Rs 100 crore turnover are qualified for taking these advances
that will have four-year tenor with a moratorium of an year on principal payment. The
scheme can be benefited until October 31, 2020. The government will give total credit
insurance cover to lenders on principal and interest amount.
● Rs. 20,000 crore subordinate debt - MSMEs announced NPAs or those focused would be
qualified for equity support, as the administration will encourage the arrangement of Rs
20,000 crore as subordinate debt. The administration will likewise give Rs 4,000 crore to
CGTMSE that will offer partial credit guarantee to banks for lending to MSMEs.
● Rs. 50,000 crore equity infusion - The government will mix Rs 50,000 in equity in
MSMEs through a Fund of Funds that will be worked through a Mother fund and a
couple of daughter funds. The Fund of Funds will be set-up with a corpus of Rs 10,000
crore to give equity based financing to MSMEs having development potential and
suitability. It will likewise encourage MSMEs to list on stock trades.
● Global tenders disallowed
● Addressing MSMEs’ issue of unfair competition from foreign companies in government
acquisition tenders because of the size and quality contrast, the government said it won't
permit global tenders in such plans upto Rs 200 crore.

COVID-19 special relief announced in first tranche of economic package on May 13, 2020:
Measures that will help MSMEs

As the finance minister, Nirmala Sitharaman, is expected to announce other aspects of the
economic package this week, foreign investors should track announcements released on the
websites of the corporate affairs ministry, MSME ministry, and the finance ministry to stay
updated. Consult with our India offices so we can help your business navigate the new changes
and avail of incentive schemes and regulatory relaxations.

 Collateral free loan of INR 3 trillion (US$39.84 billion) for MSMEs with a turnover up to
INR 1 billion (US$13.24 million). This will benefit 4.5 million units so that they can
resume work and save jobs. This scheme can be availed till October 31, 2020.

 For stressed MSMEs, subordinate debt provision of INR 200 billion has been announced
for 200,000 MSMEs.

 Equity infusion worth INR 500 billion through special fund for MSMES that have viable
operations but need handholding due to COVID-19.

 A fund of funds with corpus of INR 100 billion will be set aside to assist the capacity
expansion of these units, including enabling them to get listed on the market should they
choose that.
 What are the opportunity areas for MSMEs in India?

Telecommunications

 Domestic manufacturing of low-cost mobile phones, handsets, and devices;

 Manufacturing of telecom networking equipment, including routers and switches;

 Manufacture of base transceiver station equipment;

 Mobile customer data analytics – services oriented toward analytical solutions; and

 Development of value-added services

Healthcare

 Manufacturing of personal protective equipment (PPE) and face masks, as the COVID-19
pandemic has fundamentally changed social behavior, public health and hospital needs,
and created new demand;

 Manufacturing of low-cost medical devices, and medical accessories such as surgical

gloves, scrubs, and syringes;

 Low-cost surgical procedures to reduce the cost of healthcare;

 Telemedicine; and

 Diagnostic labs.