INTRODUCTION
Micro, Small, and Medium Enterprises (MSMEs) are the backbone of India’s economy and the foundation of industrial and employment growth. They contribute nearly 30% to India’s GDP, account for 45% of total exports, and employ more than 110 million people. But beyond numbers, MSMEs reflect the principle of economic decentralization enabling local entrepreneurship, innovation, and equitable growth across rural and urban India.
To support and protect these enterprises, India enacted a robust legal framework the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) ensuring fair treatment, prompt payments, and access to institutional support. This article explains the legal foundation, classification, registration, rights, and dispute resolution mechanisms available to MSMEs in India.
LEGAL DEFINITION AND CLASSIFICATION UNDER MSMED ACT, 2006
The MSMED Act, 2006, notified on June 16, 2006, provides the statutory basis for identifying and regulating MSMEs. The classification was redefined by a Government Notification (S.O. 2119(E)) effective July 1, 2020, removing the separate distinction between manufacturing and service sectors and introducing combined investment and turnover thresholds.
Revised MSME Classification
| Enterprise Type | Investment in Plant & Machinery/Equipment | Annual Turnover |
| Micro Enterprise | Up to ₹1 crore | Up to ₹5 crore |
| Small Enterprise | Up to ₹10 crore | Up to ₹50 crore |
| Medium Enterprise | Up to ₹50 crore | Up to ₹250 crore |
An enterprise must satisfy both conditions (investment and turnover) to qualify.
The Central Government retains authority under Section 7(9) of the MSMED Act to modify these limits to reflect economic realities.
LEGAL CONTEXT AND ADMINISTRATIVE FRAMEWORK
The Ministry of Micro, Small and Medium Enterprises (MoMSME) is the nodal authority responsible for MSME policy formulation and execution. The MSMED Act, 2006 serves as the umbrella legislation, but several other statutes interact with MSME operations, such as:
- Companies Act, 2013 – for corporate compliances
- Income Tax Act, 1961 – for tax exemptions (Sections 80-IAC, 80GGB, etc.)
- GST Act, 2017 – for indirect tax relief and composition schemes
- Labour Codes – for employment and social security regulations
LEGAL PROTECTIONS FOR MSMES
- Protection Against Delayed Payments (Sections 15–24 of the MSMED Act)
- Section 15: Buyers must make payment to MSMEs within 45 days from the date of acceptance of goods or services.
- Section 16: If the buyer fails to pay within that period, they are liable to pay compound interest at three times the RBI’s bank rate.
- Section 17: MSMEs are entitled to recover both the principal amount and interest.
- Section 18: Disputes relating to delayed payments are referred to the Micro and Small Enterprises Facilitation Council (MSEFC).
- Section 19: No appeal can be filed by the buyer unless 75% of the award amount is first deposited.
These sections together form one of the strongest statutory protections available to small businesses in India.
- Public Procurement Mandate
Under the Public Procurement Policy Order, 2012, all Central Ministries, Departments, and PSUs must procure at least 25% of their total annual goods and services from MSMEs.
Within this quota:
- 4% is reserved for SC/ST entrepreneurs, and
- 3% for women-owned enterprises.
This ensures inclusivity in government contracts and promotes equitable participation of marginalized business owners.
- Udyam Registration: Legal Recognition of MSMEs
The Udyam Registration system, effective from 1 July 2020, replaced the old Udyog Aadhaar Memorandum (UAM). It is a mandatory digital registration for enterprises seeking MSME benefits under the law.
Procedure for Udyam Registration
- Visit https://udyamregistration.gov.in
- Select “For New Entrepreneurs who are not Registered yet as MSME”
- Enter Aadhaar Number of the business owner → verify with OTP
- Enter PAN & GST Details
- Fill Business Information – Name, Type, Address, Employee Count, Investment, Turnover
- Submit Declaration and receive a Udyam Registration Certificate
No fee, no documents only self-declaration required.
The certificate acts as the legal identity proof for an enterprise under the MSMED Act.
GOVERNMENT SCHEMES SUPPORTING MSMES
Credit and Finance
- CGTMSE (Credit Guarantee Fund): Collateral-Free Loans Up To ₹2 Crore.
- ECLGS (Emergency Credit Line): COVID-19 Relief Funding For Operational Continuity.
- PM MUDRA Yojana: Micro-Loans Up To ₹10 Lakh Under Shishu, Kishor, Tarun categories.
Technology and Skill Development
- ZED Certification Scheme: Promotes Zero Defect – Zero Effect manufacturing.
- Lean Manufacturing Competitiveness Scheme: Enhances efficiency and productivity.
- Technology Centres: Offer training, testing, and prototype facilities for MSMEs.
Market and Export Support
- International Cooperation Scheme: Promotes global trade exposure.
- Procurement and Marketing Support Scheme: Facilitates participation in exhibitions and trade fairs.