India’s micro, small, and medium enterprises (MSMEs) could soon receive a significant boost as the Union government explores decriminalizing minor offenses under the Micro, Small, and Medium Enterprises Development (MSMED) Act. This proactive measure, currently under consideration, is part of a broader initiative to improve the ease of doing business in India and alleviate the financial pressures faced by these crucial businesses.
The MSME ministry has formally recommended to the law ministry that several acts currently classified as criminal offenses be decriminalized. These include providing inaccurate self-declarations, failing to meet disclosure requirements, and the failure of buyers to disclose outstanding MSME dues in their annual accounts. This move is particularly relevant given the recent focus on the ‘Vivaad Se Vishwas’ scheme, which prioritizes amicable dispute resolution for MSMEs.
Currently, Section 27 of the MSMED Act imposes penalties, ranging from ₹1,000 to ₹10,000, on MSMEs for infractions such as not disclosing their registration as micro, small, or medium enterprises with the designated government body or failing to provide mandated disclosures. The consequences of these penalties extend far beyond the financial burden. MSMEs often find themselves embroiled in lengthy and costly court battles, diverting valuable resources and capital away from core business operations. This is particularly problematic given the already challenging financial landscape for many MSMEs, which frequently experience payment delays.
The sheer scale of the impact underscores the urgency of this reform. As of December 2024, over 5.58 crore MSMEs are registered on the government’s Udyam portal, employing over 230 million individuals—a workforce representing more than 15% of India’s population. These businesses, operating on relatively low capital, heavily rely on government schemes, bank loans, and non-banking financial companies (NBFCs) for funding. Access to credit remains a significant hurdle to their growth and stability.
The proposed decriminalization isn’t an isolated measure; it aligns with the government’s broader commitment to streamlining business regulations. The 2023 amendment to the Jan Vishwas Bill, aimed at decriminalizing minor offenses that clog the legal system, sets the precedent for this action. This initiative is designed to reduce the substantial financial and administrative burden currently placed upon MSMEs by minor legal transgressions.
Anil Bhardwaj, secretary-general of the Federation of Indian Micro, Small and Micro Enterprises (FISME), highlights the need for comprehensive reform. While he supports decriminalization, he also emphasizes the need to address other crucial challenges facing MSMEs, including delayed payments, which are a significant obstacle to their financial health. FISME has also suggested additional improvements to the MSMED Act, such as establishing more Micro and Small Enterprises Facilitation Councils (MSEFCs) and providing training to officers to minimize challenges to arbitral awards. These MSEFCs play a vital role in resolving disputes regarding delayed payments, underscoring the interconnectedness of these issues.
The current situation paints a stark picture: Data from MSEFCs reveals that big businesses owe MSMEs over ₹27,000 crore in delayed payments, with approximately one-third recovered as of December. The complexities and delays inherent in the legal process for recovering these dues – involving mediation, arbitration, and enforcement of arbitral awards – place an immense strain on MSMEs, impacting their financial stability and growth potential. The decriminalization of minor offenses under the MSMED Act promises to be a significant step towards addressing these challenges, fostering a more conducive environment for the growth and prosperity of MSMEs in India.
