Centre begins talks for easing MSME compliance burden, financing woes

In a relief to the micro, small and medium business ecosystem in the country, the Centre began talks on reforms to reduce the compliance burden and provide regulatory relaxations for MSMEs in registration, mergers and acquisitions, as well as closures of business, along with a focus on addressing financing difficulties in the sector.

MSME refers to micro, small, and medium enterprises.

Inter-ministerial consultations involving the ministries of MSME, corporate affairs, and law and justice have begun on the issue, with the talks also revolving around potential amendments to the Companies Act, 2013, to include MSMEs as defined under the MSME Development Act, 2006; decriminalize independent directors’ conduct in MSMEs and ease financial results filing compliances, according to three people with direct knowledge of the development.

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The development assumes importance as the MSME sector includes over 50 million businesses which contribute to about a third of the country’s annual gross value added (GVA) and employ over 216 million individuals.

The ministry of corporate affairs initiated the conversation regarding MSMEs to ease business operations for the sector, said a senior government official.

The MSME industry associations made certain suggestions with respect to the Companies Act about more offences to be decriminalized, rationalization of e-forms, relaxations from filing or additional fees in certain cases, among other things, said Balamurugan D., joint secretary in the ministry of corporate affairs. These suggestions were discussed by representatives of the respective ministries and departments for further consultation, he added.

Email queries sent to the ministries of MSME, and law and justice did not elicit a response till press time.

The initial discussion, held in a stakeholder consultation on 10 January, included the industry’s demand to define MSMEs under the Companies Act, 2013, as there is no distinction in the way MSMEs and larger corporations are currently defined under this law.

While the Companies Act already defines ‘small companies’ based on the paid-up capital and the turnover of each business, the MSME Development Act, 2006, defines MSMEs based on the investment in plant and machinery, and the turnover of the enterprise.

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Currently, the Companies Act defines ‘small companies’ as companies with a paid-up capital up to ₹4 crore and a turnover of up to ₹40 crore. The government, however, can raise these limits up to ₹10 crore paid-up capital and ₹100 crore turnover in further rules and regulations, as per the Companies Act, 2013.

The demands to ease business operations for MSMEs included proposals that would reduce the compliance costs of smaller businesses. High costs of regulatory compliance have been a long-standing issue among MSMEs, which function on limited capital and infrastructure compared to large corporations.

One of the demands made by the industry was the decriminalization of independent directors’ conduct in MSMEs, which would attract more individuals to take up the position in MSMEs, the people aware of the matter said.

Another proposal was the waiver up to a certain threshold of audit requirements for micro enterprises under the Companies Act to reduce filing compliance. Currently, businesses which have an investment up to ₹1 crore and a turnover of up to ₹5 crore are eligible as micro enterprises, after registering with the government.

To be clear, the regulatory compliance for smaller businesses under the Companies Act is lower than that for larger corporations. For instance, small companies under the Companies Act must conduct only two board meetings every year, while larger companies must conduct four.

Also, the law has partially relaxed the conditions that small companies’ board reports must meet, along with a lower penalty for small companies compared to other companies for certain violations under the Companies Act.

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To address the funding challenge among MSMEs, discussions on the MSMEs’ access to corporate bonds and debentures under the Companies Act also took place, the people aware of the development said. Section 71 of the Companies Act allows companies to issue debentures with an option to convert these debt instruments into shares.

Additionally, discussions about simplifying MSME operations by reducing regulatory compliance in mergers and acquisitions as well as simplifying the exit mechanism took place, the people aware of the matter said.

The consultations also included a discussion on the most crucial issue plaguing MSMEs—delayed payments.

There was discussion about potential amendments to the Arbitration and Conciliation Act to facilitate the needs of MSMEs, with respect to the delayed payments issue, said an official with direct knowledge of the development, requesting anonymity. The government will further deliberate whether such amendments are feasible, or if alternate amendments to the MSME Development Act can be made, the official said.

The Arbitration and Conciliation Act, initially passed in 1996, has undergone amendments three times, in 2015, 2019 and 2021. Currently, the Union law and justice ministry is having consultations for overall reforms in the Act for another amendment.

To be clear, the government has tried to reduce the cost of dispute resolution for MSMEs in the past. The India Internal Arbitration Centre (IIAC), the only arbitration centre directly funded by the Union government, modified its rules in June 2024 to provide discounts and make dispute resolution cheaper for MSMEs.

“The discussion also focused on the delays in enforcement of arbitral awards that MSMEs receive in their favour, which has been a consistent problem due to constant appeals,” said the official mentioned above.

The Union government has previously undertaken several initiatives to reduce compliance burdens on MSMEs and increase their global competitiveness.

For instance, the ministry of commerce and industry launched a pilot project of setting up e-commerce export hubs, making it easier for MSMEs to participate in international markets, according to a press statement in September.

Additionally, enhanced insurance coverage has been introduced, offering MSME exporters access to ₹20,000 crore in credit at reduced costs to boost their export potential, along with a reduction in transaction costs on the Government e-Marketplace (GeM) portal.

“Depriving MSMEs of their rightful dues has widespread repercussions that transcend the MSMEs facing it,” said Krunal Modi, founding member and manager of strategy and innovation, Presolv360, which provides online dispute resolution services to MSMEs. The effects trickle down the chain, and consequently all stakeholders, including raw material suppliers, manufacturers, sellers, buyers, banks, investors, government and the economy at large, face the brunt, either directly or indirectly, he said.