What entrepreneurs should know about MSME incorporation, key benefits and schemes
The Micro, Small and Medium Enterprises (MSME) sector is a major contributor to India’s economy by way of the value it creates through manufacturing, services, exports, innovations, and employment generation. Various economic turbulences and regulatory changes have adversely affected the MSME sector, making it difficult for them to stay competitive in the domestic and global marketplace. But because of India’s strong entrepreneurial roots, this sector has sustained its growth momentum.
MSMEs contribute a whopping 30 percent to the country’s GDP and approximately 45 percent of the country’s exports. The contribution of manufacturing MSMEs in the country’s total Manufacturing Gross Value of Output has also remained constant at one-third of the total. The MSMEs and small businesses are forecasted to give employment to 16 crore Indians by 2023. The government aims to increase the MSME sector's share in the GDP to 40 percent to benefit the rural poor, Union Minister Nitin Gadkari said, reported Business Today.
The Ministry of MSMEs is the apex executive body for the formulation, regulation and administration of rules, regulations, laws, and schemes relating to micro, small and medium enterprises in India. These enterprises need assistance and protection from large enterprises and the government as they lack resources and technology. To accomplish this, the government provides some schemes, rebates, and financial support.
The Ministry of MSMEs, by its notification that came into effect from July 1, 2020, removed any distinction between manufacturing and service sectors under the MSME definition. The following is the revised MSME classification, where the investment amount and annual turnover are similar for enterprises engaged in both sectors, aimed at bringing more SMB units under the MSME net:
- Micro Enterprise: Investment less than Rs 1 crore and turnover less than Rs 5 crore
- Small Enterprise: Investment less than Rs 10 crore and turnover up to Rs 50 crore
- Medium Enterprise: Investment less than Rs 50 crore and turnover up to Rs 250 crore
MSME registration procedures
There are no separate statutes, rules and procedures for incorporating or forming MSME companies. The companies formed or incorporated under the Companies Act or other relevant Acts are eligible for registration as MSME companies, subject to certain threshold criteria as depicted above.
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The registration of an MSME meeting any of the above criteria can be done through an online portal. Besides, more information on the various schemes like credit and loan schemes, subsidy schemes, etc available for MSMEs in India, can be availed here, which is the official website of the Ministry of Micro, Small and Medium Enterprises. The MSME registration process is entirely free of cost.
An Aadhaar card is mandatory for initiating the MSME registration process, along with the registered phone number.
The other documents which are required for MSME registration:
- Rent agreement or ownership documents of the premises
- For rented premises, NOC from the owner, rent receipts, utility bills etc
- For self-owned premises, documents such as lease deed, property tax receipt
- Cancelled cheque of the company
- PAN Card of the company
- Company registration documents
- Partnership deed (if exists)
- Memorandum of Association (MoA)
- Articles of Association (AoA)
- Copy of the Licenses and Bills of Machinery Purchased
This Guide from the MSME Ministry provides excellent information and guidelines regarding all the legal necessities and documents required for MSME registration.
To facilitate the enterprises to benefit from the various schemes, the Office of Development Commissioner (MSME) has launched a web-based application module, namely, MyMSME. This can also be accessed through a mobile app. Entrepreneurs can apply as well as track their applications on their mobiles.
Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength (CHAMPIONS) portal is a technology system for making the smaller units big by helping and hand-holding them. The portal not only helps MSMEs in the present situation but also guides them to grab new business opportunities in their growth trajectory.
Benefits of registering as MSME
Many benefits are made available by the government to the companies registered as MSME. Some of the most important and relevant benefits and schemes are discussed in the rest of this article:
1. Collateral-free bank loans under Credit Guarantee Scheme
The Government of India has facilitated the availability of collateral-free credit to all MSMEs. This initiative guarantees funds to micro and small sector enterprises without collateral. A trust named The Credit Guarantee Trust Fund Scheme was introduced by the Government of India, SIDBI (Small Industries Development Bank of India) and the Ministry of MSMEs to make the Credit Guarantee Scheme for old and new MSMEs to avail loans. The trust guarantees credit to MSMEs in place of collateral.
2. Subsidy on patent registration
MSMEs registered with the MSME ministry can avail a 50 percent subsidy on their patent registration fees. This encourages small businesses and firms to keep innovating and working on new projects and technologies, and registering patents. MSMEs and startups need to register their innovations under the Patent Act.
3. Overdraft Interest Rate Rebate
Enterprises registered as MSMEs can avail a benefit of 1 percent on the overdraft in this scheme that differs from bank to bank. This helps small businesses secure loans at lower cost and enhance their profitability.
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4. Protection against delayed payments
MSMEs face the risk of delayed payments from their customers which, in turn, disturbs their entire business. Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions to deal with cases of delayed payment to micro and small enterprises. As per the provisions of the Act, the buyer is liable to pay compound interest with monthly rests to the MSME supplier on the amount at three times the bank rate notified by Reserve Bank in case they do not make payment to the supplier for the supplies of goods or services within 45 days of the day of acceptance of the goods/service or the deemed day of acceptance.
State governments are to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on delayed payments. Every reference made to MSEFC shall be decided within ninety days from the date of making such a reference as per provisions laid in the Act.
However, there is a pitfall in this excellent rule implemented for the benefit of MSMEs in their cash flow management. The author has first-hand knowledge that many non-MSME companies hesitate to buy goods and services from MSME registered companies for the fear of enforcing the above provisions in case they delay payments.
5. Rebate on electricity bills
Another benefit the MSMEs are entitled to are concessions on their electric bill. This enables businesses to boost production and take in more orders without worrying about expenditure on costs like electricity and maintenance. They can avail of the concession by providing an application to the department of electricity along with the certificate of registration.
6. ISO certification charges reimbursement
Any registered micro, small and medium enterprise can claim reimbursement of the expenses that were made to obtain an ISO certification. This motivates entrepreneurs to get their respective businesses ISO certified which helps them to do business abroad in terms of high-quality exports.
7. Public Procurement Policy - SAMBANDH
The Ministry of MSME came with the Public Procurement Policy for Micro and Small Enterprises (MSE) with an order in 2012, later amended in 2018, which has mandated that every central ministry/department / Public Sector Units (PSU) shall set an annual goal for procurement from the MSME sector of minimum 25 percent of the total annual purchases from the products or services produced or rendered by MSEs.
- A sub-target of 4 percent out of 25 percent target of annual procurement earmarked for procurement from MSEs owned by SC/ST entrepreneurs.
- Special provision for micro and small enterprises owned by women. Out of the 25 percent, 3 percent shall be earmarked for procurement from MSEs owned by women.
- Tender sets free of cost and exemption from payment of earnest money (EMD) to registered MSEs.
- MSEs quoting price within price band L-1 + 15 percent, when L1 is from someone other than MSE, shall be allowed to supply at least 25 percent of the tendered value at L-1 subject to lowering of price by MSEs to L-1.
The implementation of Public Procurement from MSMEs is monitored through the MSME SAMBATH portal.
8. Government e-Marketplace (GeM)
GeM is a one-stop portal to facilitate online procurement of common use goods and services required by various government departments/organisations/PSUs. GeM aims to enhance transparency, efficiency, and speed in public procurement.
It provides the tools of e-bidding, reverse e-auction, and demand aggregation to facilitate the government users to achieve the best value for their money. The purchases through GeM by government users have been authorised and made mandatory by the Ministry of Finance.
9. Receivables e-Discounting System (TReDS)
Trade Receivables Discounting System (TReDS) is an electronic platform for facilitating the financing / discounting of trade receivables of MSMEs through multiple financiers. These receivables can be due from corporates and other buyers, including government departments and PSUs. It is also a cheaper alternative to banks and factoring companies.
This process involves three stakeholders; the corporate buyer, the SME supplier, and the investor/financier. The open system ensures transparency to all stakeholders and is entirely automated. It is an RBI regulated trading platform meant to buy and sell receivables on a bidding model under the payments and settlement system. An FAQ on TReds can be accessed here.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)