MSME Policy, Regulatory, Legal and Compliance Framework 2
2.1 POLICY FRAMEWORK FOR MSME IN INDIA
The approach to economic development since Independence has been historically driven by the premise that the launching of large investment projects would inevitably result in the growth of small industrial establishments to service the requirements of the “mother” industry.
It was only during the 1950-70 period that the growth of the small industry sector occurred and several policy measures were initiated.
Industries (Development and Regulation) Act of 1951: This Act provided the basic framework for the post-independence industrialization strategy. Regulatory policies were laid down for the regulation of licensing, location, production, pricing, imports, exports, foreign exchange controls, inter-state movement of commodities and several other areas of industrial operation. For small-scale industries, there were regulations regarding definition which was in terms of ownership - i.e. a small-scale unit had to be an entrepreneur-directed concern and not a subsidiary to another industrial undertaking.
Karve Committee Report (1955): This was one of the earliest of the exercises which recommended a protective environment for the growth of small industries in India. Supportive policies through the 1960s, 70s and 80s took the form of reservation of products exclusively for the SSI sector (at one point, 836 products were reserved exclusively for SSIs), grant of fiscal concession and government procurement of supplies from the sector.
Expert Committee on Small Enterprises: This stated that “Small enterprises will continue to need exceptional support in terms of financial resources, technological development and infrastructure.” (Expert Committee on Small Enterprises; 1997: 21). The evolution of the policy framework and support measures of the Government can be broadly grouped into the following three periods:
1948-1991 :
u In all the Policy Resolutions from 1948 to 1991, recognition was given to the micro and small enterprises, termed as an effective tool to expand employment opportunities, help ensure equitable distribution of the national income and facilitate effective mobilization of private sector resources of capital and skills.
u Micro, Small and Medium Enterprises Development Organization [earlier known as Small Industries Development Organization (SIDO)]: This was set up in 1954 as an apex body for sustained and organized growth of micro, small and medium enterprises.
u National Small Industries Corporation , the Khadi and Village Industries Commission and the Coir Board: These were also set within next two years. The era provided the supportive measures that were required to nurture MSEs, in the form of reservation of items for their exclusive manufacture, access to bank credit on priority through the Priority Sector Lending Programme of commercial banks, excise exemption, reservation under the Government Purchase Programme and 15% price preference in purchases, infrastructure development and establishment of institutes for entrepreneurial and skill development.
u MSME-Development Institutes [earlier known as Small Industries Service Institute (SISI)]: These were set up all over India to train youth in skills/ entrepreneurship. Tool Rooms were established with German and Danish assistance for providing technical services essential to MSEs as also for skilltraining. At the State level, District Industries Centres were set up all over the country.
1991-1999 :
u The new Policy for Small, Tiny and Village Enterprises of August 1991 laid the framework for government support in the context of liberalization, which sought to replace protection with competitiveness to infuse more vitality and growth to MSEs in the face of foreign competition and open market. Supportive measures concentrated on improving infrastructure, technology and quality.
u Testing Centres were set up for quality certification and new Tool Rooms as well as Sub-contracting Exchanges were established.
u Small Industries Development Bank of India (SIDBI) and Technology Development and Modernization Fund: These were created to accelerate finance and technical services to the sector. A Delayed Payment Act was enacted to facilitate prompt payment of dues to MSEs, and an Industrial Infrastructure Development (IID) scheme was launched to set mini-industrial estates for small industries.
u The Ministry of MSME [earlier known as Ministry of Small-Scale Industries and Agro & Rural Industries (SSI & ARI)] came into being from 1999 to provide focused attention to the development and promotion of the sector.
2000-2019 :
u The new Policy Package announced in August 2000 sought to address the persisting problems relating to credit, infrastructure, technology and marketing more effectively. A Credit Linked Capital Subsidy Scheme was launched to encourage technology upgradation in the MSE sector and a Credit Guarantee Scheme was started to provide collateral-free loans to micro and small entrepreneurs, particularly the first generation entrepreneurs.
u Technology Upgradation and Competitiveness Scheme in the MSE sector: Credit Linked Capital Subsidy Scheme (CLCSS) launched on 1st October 2000.
n The purpose of the CLCSS has been to aid the MSMEs for adopting modern technology. Eligible MSMEs receive a subsidy of up to 15% on eligible capital investment in technology upgrades, with a maximum cap per unit of Rs. 15 lacs.
n Intent has been to enhance productivity, reduce production costs, and foster a competitive environment for Indian MSMEs by supporting the adoption of advanced, more efficient technologies, such as advanced machinery, IT tools, energy-efficient equipment and production automation.
n Credit-linked assistance is provided through banks and financial institutions. Online Application and Tracking System has been introduced w.e.f. 01.10.2013.
u Market Development Assistance Scheme: The exemption limit for relief from payment of Central Excise duty was raised to Rs. 1 crore ($0.25 million) and a Market Development Assistance Scheme for MSEs was introduced. At the same time, consultations were held with stakeholders and the list of products reserved for production in the MSE sector was gradually reduced each year.
u MSME Act, 2006: In 2006, the long-awaited enactment for this sector finally became a reality with the passage of the Micro, Small and Medium Enterprises Act 2006. In March 2007, a third Package for the Promotion of Micro and Small Enterprises was announced which comprises the proposals/schemes having direct impact on the promotion and development of the micro and small enterprises, particularly in view of the fast-changing economic environment, wherein to be competitive is the key of success.
u Zero Defect Zero Effect (ZED): Ministry of MSME launched in 2016, Zero Defect Zero Effect (ZED) for the MSMEs aimed at ensuring that MSMEs produce goods that meet international quality standards, achieving “Zero Defect” and promote environmentally friendly production processes, leading to “Zero Effect” on the environment. MSMEs are incentivized for ZED Certification and encourage them to become MSME Champions. The scheme has been revamped in 2022.
2020-onwards :
u Aatmanirbhar Bharat Abhiyan and MSME Schemes : Introduced in 2020 to support MSMEs during the COVID-19 pandemic:
n Emergency Credit Line Guarantee Scheme (ECLGS): Rs. 3 lakh crores (later enhanced to Rs. 4.5 lakh crores) Collateral-free Automatic Loans for Businesses, including MSMEs, wherein Emergency Credit Line to Businesses/MSMEs from Banks and NBFCs up to 20% of entire outstanding credit as on cut-off date 29.2.2020 (later changed to change in to 31.03.2021). Loans to have 4-year tenor with moratorium of 12 months on Principal repayment and with Interest rate capped.
n Subordinate Debt for Stressed MSMEs : Rs. 20,000 crores Subordinate Debt for Stressed MSMEs. Functioning MSMEs which are NPA or are stressed eligible for this. A Government provision of Rs. 4,000 Cr. to CGTMSE, and the latter’s partial Credit Guarantee support to Banks. Promoters of the MSME to be given debt by banks, which will then be infused by promoter as equity in the Unit.
n Fund of Funds (FOF) scheme: Rs. 50,000 cr. Equity infusion for MSMEs through Fund of Funds. Provision for FoF with Corpus of Rs. 10,000 crores to provide equity funding for MSMEs with growth potential and viability. FoF will be operated through a Mother Fund and few daughter funds. This will help to expand MSME size as well as capacity and encourage MSMEs to get listed on the main board of Stock Exchanges.
n New Definition of MSMEs: Both in terms of investment in Plant & Machinery and Turnover with upward revision in investment ceilings.
2.2 KEY LAWS AND REGULATIONS GOVERNING MSME IN INDIA
The relevance of Labour Laws for MSMEs can hardly be over emphasized, as these impact the MSME productivity, labour management and business costs. The importance of labour laws lies in protecting the workers’ rights and promoting fair working conditions.
2.2.1 The Code on Wages, 2019
Objectives & Purpose:
u In previous labour laws such as Minimum Wages Act, 1948, Payment of Wages Act, 1936, Payment of Bonus Act, 1965, and Equal Remuneration Act, 1976, there was inconsistency across states, lack of clarity and inefficiencies in wage calculation and enforcement.
u Consolidation of four separate laws into one unified Code aims to reduce complexities and make wage compliance easier. Advantages of a single code approach for businesses, especially for MSMEs, which previously faced challenges in understanding and implementing multiple wage-related laws.
u Ensures regular and timely wage payments to workers, especially in the unorganized sector, where delayed payments are common. Benefits for seasonal workers, casual labourers and migrant workers.
u The Code on Wages 2019 aims to streamline wage-related provisions for organized and unorganized sectors.
u Ensure fair wages, standardize wage definitions, reduce wage disparities and make wage compliance simpler.
Key Provisions of the Code on Wages, 2019:
u Uniform Wage Definition: The Code provides a clear definition of wages, which includes basic salary, dearness allowance and retaining allowance, while excluding certain allowances such as house rent allowance, overtime and conveyance. Impact on payroll structure across different sectors.
u Minimum Wages: The Code establishes a national floor wage and mandates that states set their minimum wages above this threshold. Implications for industries in states with historically low minimum wages.
u Payment of Wages: Expansion of the scope for wage payment requirements, including electronic payments.
u Stipulates timelines for wage payments: Wages must be paid either daily, weekly, bi-weekly or monthly depending on the worker’s classification.
u Equal Remuneration: Reinforces the principle of equal pay for equal work, irrespective of gender. Implications for gender wage equality in sectors with substantial gender disparities, such as manufacturing.
u Reducing Wage Disparities: Seeks to reduce wage disparities across states by introducing a national floor wage. Potential implications for labour mobility and wage standardization across India.
u Bonus Provisions: Continuation of bonus provisions, covering employees earning up to a specified threshold. Implications for firms in terms of profitability and incentive structures for workers.
2.2.2 The Industrial Relations Code, 2020 of India
Objectives & Purpose :
u Specifically addressing outdated provisions of the Industrial Disputes Act (1947), the Trade Unions Act (1926) and the Industrial Employment (Standing Orders) Act (1946).
u Unification into one cohesive code, simplification and modernization of labour laws to suit the evolving labour landscape in India.
u Simplify labour regulations, improve ease of doing business, encourage investments and balance the interests of employers and workers.
u Reduce industrial conflicts and strikes while safeguarding worker rights and simplifying the dispute resolution process.
Key Provisions of the Industrial Relations Code, 2020:
u Provisions on Industrial Disputes: Redefines industrial disputes and outlines procedures for dispute resolution. New provisions regarding strikes, lockouts and the resolution of grievances at the industry level.
u Standing Orders Applicability: Stipulates applicability of standing orders for organizations with 300 or more workers, providing flexibility for smaller establishments. Requirement for employers to frame clear standing orders for matters such as working hours, leave policies and disciplinary proceedings.
u Trade Unions Registration and Rights: Simplifies registration procedures for trade unions and grants them representative rights. Rules for central and state-level recognition of trade unions as well as membership requirements.
u Strikes and Lockouts: Conditions for legal strikes laid with mandatory 60-day notice before any strike or lockout. Regulations around strikes in public utility services, dispute redressal periods and strike exemptions for essential services.
2.2.3 The Occupational Safety, Health and Working Conditions Code, 2020
Objectives & Purpose :
u Modernize, streamline and simplify compliance requirements for industries while safeguarding workers’ health, safety, and working conditions.
u India’s OSH Code, 2020, replaces laws including the Factories Act (1948), Mines Act (1952) and Building and Other Construction Workers Act (1996), addressing gaps and complexities in earlier legislation.
u Create a uniform regulatory framework for worker safety and health, balancing productivity and welfare.
u Applies to establishments with 10 or more workers and covers multiple sectors: manufacturing, mining, construction and more.
u Enhanced Worker Safety and Health Standards: How improved safety standards contribute to worker well-being, reducing accident rates and work-related illnesses. Positive impacts on worker morale, retention and overall productivity due to a safe work environment.
u Ease of Doing Business and Regulatory Simplification: Unified compliance framework facilitates business operations and reduces the bureaucratic load on industries. Simpler regulations attract investment by creating a stable regulatory environment.
u Potential for Economic Growth: Encourages modernization in manufacturing, construction and other sectors by making worker safety an integral part of industrial growth. Contribution to India’s GDP growth and workforce productivity through reduced absenteeism and healthier work conditions.
Key Provisions of the OSH Code, 2020:
u Coverage and Applicability : Applies to establishments with 10 or more workers and all hazardous establishments, irrespective of the number of employees. Key sectors covered: factories, construction, mines, docks, plantations and motor transport undertakings.
u Health and Safety Standards: Defines safety guidelines, physical standards, and requirements for workplace conditions like lighting, ventilation, and sanitation. Special provisions for hazardous processes, such as mandatory safety training, medical checks and provisions for emergency exits.
u Work Hours and Leave: Sets standard work hours, overtime, and provisions for weekly rest. Special rules for night shifts and work breaks. Prescribes annual, casual and medical leave entitlements, with variations for different sectors.
u Welfare Provisions: Facilities like canteens, first-aid, restrooms, and crèches for establishments employing 50 or more female workers. Welfare officers in factories and mines with 250 or more employees.
2.2.4 The Social Security Code, 2020
Objective & Purpose:
u Aimed at consolidating multiple social security laws into a unified framework.
u Replaces nine laws, including the Employees’ Provident Fund Act (1952), Employees’ State Insurance Act (1948) and Maternity Benefit Act (1961), among others.
u To provide comprehensive social security for employees across organized, unorganized and gig sectors. Applicable to all sectors, including factories, plantations, mines, construction and the unorganized sector. Encompasses new categories such as gig and platform workers, recognizing their contributions to the economy.
u The Social Security Code, 2020, is part of India’s labour reforms.
Key Provisions of the Social Security Code, 2020:
u Coverage and Applicability: Applies to both organized and unorganized workers, extending social security benefits across formal and informal sectors. Defines and includes gig workers, platform workers, and unorganized sector workers, addressing a longstanding need for inclusive social security.
u Provident Fund (PF): Employees’ contributions for retirement benefits, with provision for minimum contributions.
u Employee State Insurance (ESI): Medical and health insurance benefits for covered employees and their families.
u Gratuity: Defined benefits for employees based on tenure, with new inclusions such as fixed-term employees.
u Maternity Benefit: Mandates paid maternity leave and benefits for women employees.
u Employee Compensation: Compensation for work-related injuries or deaths.
u Other Welfare Programs: Schemes for life insurance, disability cover and oldage pension.
u Gig and Platform Workers: Definition and recognition of gig and platform workers as part of the formal labour force. Provision for contributions towards social security schemes from digital platform companies.
u Regulatory and Administrative Framework: State and National Social Security Boards for unorganized, gig and platform workers to monitor and implement
schemes. Role in ensuring scheme coverage, addressing grievances and regular monitoring.
2.2.5 Reserve Bank of India (RBI) Guidelines
In the past few years, besides the GOI, the RBI has been taking pro-active steps to ensure that the MSME sector is resilient and that units/enterprises facing distress are given adequate support. A few guidelines/notifications are enumerated below to understand the support given by the regulators.
u Relief for MSME Borrowers registered under Goods and Services Tax (GST) (RBI Notification - DBR.No.BP.BC.100/21.04.048/2017-18 dated February 07, 2018 )
n Banks and NBFCs in India generally classified a loan account as NonPerforming Asset (NPA) based on 90 days and 120 days’ delinquency norms, respectively.
n It was observed that formalization of business through registration under GST had adversely impacted the cash flows of the smaller entities during the transition phase with consequent difficulties in meeting their repayment obligations to banks and NBFCs.
n As a measure of support to these entities in their transition to a formalized business environment, RBI decided that the exposure of banks and NBFCs to an MSME borrower shall continue to be classified as a standard asset in the books of banks and NBFCs subject to certain conditions.
u Steps for Encouraging formalization of MSME sector
(RBI Notification - DBR.No.BP.BC.108/21.04.048/2017-18 dated June 6, 2018)
n Referring to the aforesaid circular and having regard to the input credit linkages and ancillary affiliations, RBI decided to temporarily allow banks and NBFCs to classify their exposure, as per the 180 days past due criterion, to all MSMEs, including those not registered under GST, as a ‘standard’ asset, subject to 2, of banks and NBFCs to the borrower not exceeding Rs. 250 million as on May 31, 2018; the borrower’s account being standard as on August 31, 2017, etc.
n The timelines for the restructuring were extended periodically and as per the latest guidelines ( RBI/2021-22/32 DOR.STR.REC.12/21.04.048/2021-22 dated May 5, 2021 ) the borrower’s account should have been a ‘standard asset’ as on March 31, 2021 and the restructuring of the borrower account should be invoked by September 30, 2021.
The Restructuring of loan accounts is also covered in detail in a later unit.
u Micro, Small and Medium Enterprises (MSME) sector - Restructuring Advances
(RBI Notification- DBR.No.BP.BC.18/21.04.048/2018-19 dated January 1, 2019)
n Further to the aforesaid circulars, and with a view to facilitate meaningful restructuring of MSME accounts that have become stressed, RBI decided to permit a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a downgrade in the asset classification, subject to the aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower not exceeding Rs. 250 million as on January 1, 2019; the borrower’s account being in default but a ‘standard asset’ as on January 1, 2019 and continues to be classified as a ‘standard asset’ till the date of implementation of the restructuring etc.
u
Credit to MSME Entrepreneurs
(RBI notification No. DOR. No. Ret.BC.37/12.01.001/2020-21 dated February 05, 2021; and RBI notification No. DoR.RET.REC.09/12.01.001/2021-22 dated May 05, 2021)
n Scheduled Commercial Banks have been permitted to deduct the amount equivalent to credit disbursed to ‘New MSME borrowers’ from their Net Demand and Time Liabilities (NDTL) for calculation of the Cash Reserve Ratio (CRR). For the purpose of this exemption, New MSME borrowers’ have been defined as those MSME borrowers who have not availed any credit facilities from the banking system as on January 1, 2021. This exemption has been made available only up to Rs. 25 lakh per borrower disbursed up to the fortnight ending December 31, 2021, for a period of one year from the date of origination of the loan or the tenure of the loan, whichever is earlier. Also, Banks are required to report the exemption availed at the end of a fortnight.
u
NPA norms for NBFCs
(RBI notification RBI/2021-22/112 DOR.CRE.REC. No.60/03.10.001/2021-22 dated October 22, 2021)
Recently, the NPA norms for NBFCs have been modified by RBI. The extant NPA classification norm stands changed to an overdue period of more than 90 days for all categories of NBFCs. A glide path is provided to NBFCs in Base Layer to adhere to the 90 days NPA norm as under:
NPA Norms
Timeline
>150 days overdue By March 31, 2024
>120 days overdue By March 31, 2025
> 90 days By March 31, 2026
Explanation. The glide path will not be applicable to NBFCs which are already required to follow the 90-day NPA norm.
u Udyam Registration (UR) portal:
Inclusion of the urban street vendors in MSME category: Ministry of MSME have directed for inclusion of the Urban Street Vendors in MSME category. Accordingly, Street Vendors can register as retail traders on Udyam Registration (UR) portal.
u Relief Measures during the Pandemic:
Several measures were extended during the pandemic. Government of India/ RBI issued various guidelines/regulations related to support measures/ relaxations to the stressed MSME sector in view of the COVID -19 PANDEMIC. Guidelines in this regard were issued time-to-time with modifications/ additions for the MSME sector.
2.3 NECESSARY COMPLIANCE AND DOCUMENTATION FOR MSME s
The MSMEs need to understand the Labour Laws discussed in this chapter (2.2) and ensure the necessary compliances, else the penalty provisions apply.
The Code on Wages, 2019 : Compliance requirements
u Record-Keeping Requirements
n Employers are required to maintain records of wages, deductions, and other payment details.
n Simplification of record-keeping processes under the unified code to reduce the administrative burden on employers.
u Digital Wage Payments
n Encouragement of digital wage payments to enhance transparency and compliance.
n Opportunities for employers to adopt technology-driven payroll solutions that simplify compliance with wage provisions.
u Penalties and Inspections
n Stipulates penalties for non-compliance and failure to pay wages on time.
n Introduce new inspection regimes to ensure compliance with wagerelated laws, with an emphasis on grievance redressal mechanisms.
Rs. 1,175/-
MICRO SMALL AND MEDIUM ENTERPRISES
AUTHOR : Indian Institute of Banking & Finance (IIBF)
PUBLISHER : Taxmann Publications
DATE OF PUBLICATION : November 2025
EDITION : 2025 Edition
ISBN NO : 9789371265102
NO. OF PAGES : 716
BINDING TYPE : PAPERBACK
DESCRIPTION
Micro, Small, and Medium Enterprises is a concise, practice-focused handbook offering a clear, up-to-date overview of India's MSME ecosystem. Developed as the official courseware of IIBF, it covers the definition and classification of MSMEs, key policies, regulatory requirements, financing frameworks, compliance obligations, operational management, and emerging sectoral trends. The book integrates recent policy changes, revised MSME thresholds, major government schemes, RBI circulars, SIDBI initiatives, developments in digital lending, and global influences on MSME competitiveness. It combines foundational concepts with contemporary topics such as digital onboarding, FinTech adoption, TReDS, sustainability, receivables management, and IBC mechanisms, structured across 15 chapters and 13 annexures. This book is intended for the following audience:
• Bankers & Financial Practitioners
• Entrepreneurs, MSME Promoters & Start-up Founders
• Regulators, Policymakers, Development Institutions, & Government Agencies
• Consultants, Credit Counsellors & Industry Advisors
• Professionals in SIDBI, NABARD, NBFCs, MFIs & Digital Lending Platforms
The Present Publication is the 2025 Edition, revised and updated by Professor Emeritus (Dr.) Rajendra Kumar Sinha, an eminent authority on MSME development and banking, and vetted by CMA/CS (Dr.) P. Siva Rama Prasad. Taxmann exclusively publishes this book for the Indian Institute of Banking and Finance with the following noteworthy features:
• [Comprehensive MSME Ecosystem Coverage] Covers the full lifecycle of MSME development—from definitions and classifications to policy, compliance, and competitiveness
• [Latest Policy & Regulatory Updates] Incorporates revised MSME thresholds, MSMED Act developments, RBI/CGTMSE updates, and FY 2025–26 Budget provisions
• [Complete Financing Ecosystem Analysis] Explains MSME credit channels, SIDBI/NABARD roles, digital lending, risk assessment, credit appraisal, NPA management, and recovery
• [Practical Tools for Bankers] Includes case studies, early-warning indicators, monitoring tools, credit-delivery best practices, and ethical banking guidance
• [Digital Transformation Orientation] Discusses digital onboarding, e-KYC, online documentation, FinTech integration, and TReDS platforms
• [Schemes Compendium] Summarises major central/state schemes, PLI initiatives, logistics reforms, cluster programs, EDIs, and women-focused MSME schemes
• [Operational Handbook for MSMEs] Addresses marketing, sales, HRM, supply-chain challenges, regulatory bottlenecks, and operational improvement strategies
• [Sickness Detection & Rehabilitation] Provides frameworks for early diagnosis, restructuring, IBC pre-pack processes, and NARCL-related mechanisms
• [Rich Annexures] Includes statutory texts, RBI circulars, SIDBI schemes, CGTMSE fee details, Budget 2025–26 initiatives, and scheme catalogues
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