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Corporate Obligations under MSMED Act

-By Sushant Arora, Partner, Mumbai Office

After the enactment of the Micro, Small and Medium Enterprises Development Act, 2006 (herein after referred to as MSMED Act), fresh and onerous obligations have been imposed upon every Company for making timely payment to its Suppliers, especially the Suppliers who fall in the category of “Micro” and “Small” Enterprises.  While payment to the usual Suppliers can be made as per the usual Contracts executed by them, the payment to the Suppliers that are a “Micro” / “Small” Enterprise, must however be made within 45 days of acceptance of their goods / services.  Huge penalties are levied against corporates that violate these statutory norms as are explained herein below.  

Section 2(n) of the said MSMED Act defines a “Supplier” as a Micro or a Small Enterprise which has filed a “Memorandum” with the relevant authorities under Section 8 of the Act. Section 8 provides a detailed process of filing this Memorandum before the concerned District Industries Centre (DIC) of the area where the Enterprise is registered.  If any such Micro / Small Enterprise files this “Memorandum” it is then to be treated as a “Supplier” under the Act whose payments must be made with 45 days of acceptance of his goods / services.  Thus, the payment obligation to such a Supplier cannot be delayed under said MSMED Act.

Delayed Payments

The MSMED Act provides for payment of Interest to the Supplier @ thrice the Bank Rate (notified by RBI) compounded monthly.  This interest liability is roughly in the range of 25% compounded at monthly rests and shall override all other prevailing laws and also all other agreements that a body corporate may have with the Supplier in this regard.  It is further submitted that any such “Interest” component, even if paid by a body corporate, cannot be allowed to be deducted as an ‘Expense’ under the Income Tax Act.  This mandates that a strict and timely process be followed in making payments to these Micro and Small Suppliers / Vendors.

Golden Rule: No payment of the Micro & Small Suppliers should be delayed beyond 45 days, after acceptance of their Goods / Services.

Exceptions to the Golden Rule

  1. The above Rule is NOT meant for Suppliers who constitute a “Large” Enterprise in so far as they have an investment of 10 Crores or more in Plant & Machinery or 5 Crores or more in equipment.  These Large Enterprises are out of the purview of MSMED Act.


  1. The “Medium” scale Enterprises are also not entitled to seek any such ‘Interest’ / “Delayed Payment” related benefits under this MSMED Act, as they have been specifically excluded/ barred from availing benefits provided to Micro and Small Enterprises.
  2. The Micro & Small Enterprises who fail to file the required “Memorandum” with the concerned DIC of their area.      

Filing of Memorandum with DIC
This Memorandum with DIC is to be filed either in Part-I (for start-up enterprises) or in Part-II (within 6 months after commencement of production / activity).  While the filing of this “Memorandum” per se is optional.  It is, nonetheless, mandatory for those Micro and Small Enterprises who wish to avail benefits under the MSMED Act, especially in relation to payment purposes, for only upon filing of this Memorandum can they be treated as a “Supplier” under the Act.
Micro / Small / Medium Enterprises

The MSMED Act defines a Micro and Small Enterprise as under:





For delivery of Goods

Where Investment in Plant & Machinery is below Rs. 25 Lacs.

Where Investment in Plant & Machinery is more than Rs. 25 Lacs but below Rs. 5 Crores.

Where Investment in Plant & Machinery is more than Rs. 5 Crores but less than Rs. 10 Crores.

For rendering of Services

Investment in Equipment is below Rs. 10 Lacs.

Investment in Equipment is more than Rs. 10 Lacs but below Rs. 2 Crores.

Investment in Equipment is more than Rs. 2 Crores but below Rs. 5 Crores.

An Enterprise that crosses the thresholds of a Medium Enterprise, shall be treated as a Large Enterprise. 

It is clarified that the Act provides special “payment process” only to those Suppliers who are either “Micro” or “Small” Enterprises as explained above. 

Defect in the Goods delivered / Services rendered

The Act envisages that if the Goods delivered / Services rendered by a Micro / Small Enterprise are defective, a Notice of such defect (objection) should be issued by the body corporate within 15 days from the delivery thereof. The law here presumes that the goods delivered / services rendered are “acceptable”, unless objections thereto are raised within 15 days of their delivery.

Where any such notice is delayed / not issued within the required 15-day period, the payment liability of the said body corporate would not extend beyond the 45th day of delivery of said goods/ services. And if this payment is delayed beyond the 45-day period, the corporate shall be liable towards interest at 3 times the Bank Rate as mentioned above. 

It is therefore imperative that the body corporates understand their obligations vis-à-vis their Suppliers, especially the obligations to the Micro and Small Suppliers for the usual contractual provisions now stand superseded by a statutory mandate under the said MSMED Act.

The said MSMED Act repeals the erstwhile Act called the “The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.”

Sushant D. Arora