Summary of MSMED Act, 2006

Chapter I:

This chapter deals with the preliminary aspects like Definition of Act, Date of Commencement, terms like Days of acceptance, Day of deemed acceptance, buyer, enterprise, goods.

Chapter II:

Deals with the setting up of National Board for Micro, Small & Medium Enterprises. The head office of the board shall be at Delhi.

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A Minister and Dy. Minister at the Centre, Six Ministers of the State Governments, five Members of the Parliament, one Administrator of Union territory, Secretaries of the Indian Govt., representatives of Industry, Finance, Food Processing, Labour and Planning, Chairman of the Board of Directors of the National Bank; Chairman & MD of SIDBI, Chairman IBA, 20 persons to represent micro, small and medium enterprises, 3 persons of eminence from the fields of economics, industry and science & technology; 2 representatives of Central Trade Unions; one Member-Secretary Ex-officio of the Board will be from the Central Government having administrative control of the small & medium enterprises; Powers of the Board; Functions of the Board, Powers and Functions of the Member Secretary of the Board are spelt out in the detailed Act.

Chapter III:

Classification of enterprises, Advisory Committee and Memorandum of Micro, Small & Medium Enterprises.

The Act has made clear distinction between the enterprises engaged in the manufacture or production of goods pertaining to –

(a) Any industry specified in the first schedule to the industries (Development & Regulation Act, 1951): size of enterprise is defined in terms of manufacturing and services separately as follows:

A. Manufacturing:

(i) A micro enterprise where the investment in Plant & Machinery does not exceed Rs. 25.00 lakhs.

(ii) A small enterprise where the investment in Plant & Machinery is more than twenty five lakh rupees, but does not exceed five crore rupees.

(iii) A medium enterprise where the investment in Plant & Machinery is more than five crore rupees but does not exceed ten crore rupees.

B. Services:

(i) A micro enterprise where the investment in equipment does not exceed Rs. 10 lakhs

(ii) A small enterprise where the investment in equipment is more than Rs. 10 lakhs but does not exceed Rs. 200 lakhs.

(iii) A medium enterprise where the investment in equipment is more than Rs. 200 lakhs but does not exceed Rs. 500 lakhs.

Advisory committees are also contemplated to be constituted to render advice on level of employment, level of investment, nature of investment, promotion and diffusion of entrepreneurship etc.

Chapter IV:

Section 8 contains information about methodology and procedure to be followed in respect of a person who intends to establish a Micro, Small or Medium Enterprise. This section also deals with the procedure to be followed by any person who has already established Micro, Small and Medium enterprise before commencement of the Act.

Chapter V:

Deals with measure for promotion, development enhancement of competitiveness of Micro, Small and Medium enterprises. The envisaged 5 steps include: provision of market facilities; procurement preference policy; funds/grants by the Central Government, administration and utilization of fund or funds.

Chapter VI:

Deals with supportive measures to prevent delayed payments to micro, and small enterprises in respect of supplies made by them. This Chapter deals with provisions like, liability of buyer to make payment, date from which and rate at which interest is payable, reference to Micro and Small entrepreneurs Facilitation Council.

Application for setting aside decree, award or order and establishment of Micro and Small Enterprises Facilitation Council, interest on delayed payment not to be allowed as deduction from income, overriding effect and lastly scheme for closure of business of Micro and Small enterprises and the procedure thereon.

Chapter VII:

Deals with Miscellaneous Provisions like the appointment of Officers and other employees, levy of penalties, jurisdiction of Courts, power to make rules by the Central Government, and the State Government, powers to remove difficulties in implementing Act and lastly Repeal of Act 32 of 1993.

Concept of the Limited Liability Partnership Act (LLP Act): In order that the small enterprises have a new form of business organization combining the advantages of a partnership without the hassles of a private limited liability company, on the lines of similar form of enterprise existing in the UK, a Limited Liability Partnership was contemplated and expert opinions were sought from various quarters before a draft bill was placed before the Parliament. The essential features of the entity are as under:

(1) Creation of a new legal entity, combining in itself the organization flexibility and tax status of partnership with limited liability for its partners.

(2) The concept emerged on the report of Naresh Chawla and Expert Committee on Company Law, Dr. J J Irani.

(3) The unlimited liability of the partners in general partnership (Partnership Act, 1932) is a cause for concern and created a risk for partners on their personal assets when a claim exceeds the assets of the partnership.

(4) An alternative business vehicle (LLP) will be a suitable platform to SME’s to suitably form their organization and grow in an unrestricted environment.

(5) Applicability/incorporation/Partnership/Extent of Liability: It shall have at least 2 partners but there is no limit on the maximum to form an LLP The members should subscribe to what is known as an incorporation document, which should be delivered to the Registrar in the proper form, based on which the Registrar will issue a Certificate of Incorporation.

The LLP should have a name, registered office, place, nature of business, etc., mentioned in the document. Even if an additional person can be admitted or can retire subsequent to incorporation, the founder/former partner shall continue to be liable for the acts done in his tenure.

The extent of liability of a partner in a LLP and not of other partner (2) each person is liable for any wrongful acts on his side. Arising out of this, various other provisions are contemplated.

(6) Duties, contributions and financial disclosures: While the provisions regarding the duties, contributions and financial disclosures are by and large the same like any other business organization, the major changes are in an organiza­tional structure, taxation, assessments and transport, investigation, conversion to LLR foreign limited liability, partnership amalgamation, merger and demerger, winding up.

Provisions pertaining to above matters are as under:

(1) Profits for purpose of tax are treated as that of a partnership despite the fact that LLP is a body corporate. The assets of the LLP are treated as assets of partners for capital gains tax.

(2) These profit/assessment provisions are as per the provisions of the LLP agree­ment. All such transfers are not valid as specified by the LLP agreement.

(3) There are provisions contemplated for conversion from private company and unlimited company to a limited liability partnership and from LLP to limited company and private limited company to LLP.

(4) In respect of Foreign Limited liability partnership, amalgamation, merger, demerger resolutions have to make suitable provisions. The winding up of an LLP may be voluntary or by the Tribunal. Resolutions shall be made with pro­visions regarding winding up and dissolution.

The experts looking into the aspect of finalizing a concept paper are looking into the following miscellaneous items:

(1) Business transaction of partner with (LLP)

(2) Application of Company Law

(3) Penalties

(4) Power to make regulations

(5) Power to remove difficulties

(6) Power of Registrar to strike off deferred LLPs

(7) Offences by working partners

(8) Jurisdiction of the Tribunal and general penalties

The above are the salient features of the concept papers and formal draft bill to be placed before the Parliament which will elaborate further on all these provisions.

Apart from this general regulatory framework, readers are advised to look to industry specific regulations: Pharmaceuticals and chemicals, biotechnology, electronics, industries with hazardous applications, food and beverages, etc., are governed by either separate legal framework or specifically applicable rules. Those who would be financing such industries would do well to familiarize themselves with them to avoid normally unforeseen risks.

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