Indian MSMEs, Government and COVID19

The Micro Small and Medium Enterprises (MSMEs) are enterprises engaged in manufacture or production, processing or preservation of goods, and have been defined under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. These units not only contribute to the economy and provide sustainability and employment to more than 80 million people but they are also known for playing a crucial role during the 2008 recession.

The current Covid- 19 pandemic has slowed down the global economy with India being no exception. The complete lockdown implemented by the Indian government has given a major blow to the msme units, impairing production, exports and trade. The Prime Minister announced a whopping 20 lac crores economic package for dealing with the effects of the pandemic on all sections of society, industry and businesses. The finance minister through a press conference held on 13.05.2020 announced a series of measures being undertaken by the government. One of them is the change in the definition of MSMEs so as to allow the inclusion of more businesses into MSMEs. The government has revised the investment limit of the MSMEs and introduced an additional criterion of “TURNOVER”. Along with that the distinction between the manufacturing and services sector has also been removed.

As per the Act[1] MSMEs were classified in two classes:

  1. Manufacturing Enterprises– These are the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation Act, 1951) or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use. The manufacturing enterprise are defined in terms of investment in Plant and Machinery.
  • Service Enterprises- These are the enterprises engaged in providing or rendering of services and are defined in terms of investment in the equipment.

The limit for investment in plant and machinery / equipment for manufacturing / service enterprises, as notified[2] earlier and the new criteria introduced  are provided as under[3]:

Apart from the aforementioned changes, the government also announced Rs.3 lakh crore collateral-free automatic loans for the MSMEs.[4]

[A collateral free loan is loan which is provided to the borrower without any guarantee, or in simple words money is borrowed at a certain rate of interest even if the borrower has nothing to pledge or invest.]

Highlights of this measure announced by the government:

  1. Borrowers with up to Rs. 25 crores outstanding and Rs.100 crore turnover are eligible.
  2. These loans will have a 4 year tenure and moratorium for 4 months.
  3. There will be a 100% credit guarantee cover, and to banks, and on principal and interest, the scheme can be availed till 30.10.2020.
  4. The government will facilitate provision of Rs.20,000 crore as subordinate debt for stressed MSMEs where promoters of the MSMEs will be given debt by banks which will be infused by them as equity in the concerned MSME unit.
  5. The government has banned global tenders for government procurement upto Rs.200 crore to support the initiative of Make in India and self-reliant India.

These measures if implemented in the right manner may help the MSMEs to ease the liquidity crunch and contribute in getting the economy back on track while the country fights and recovers from the effects of the pandemic.

The legalities of the taking loans and terms thereof are important considerations for any MSME and legal due-diligence is must before venturing into such lucrative loans.


[1] Micro, Small and Medium Enterprises Development (MSMED) Act, 2006

[2] S.O. 1642(E) dtd.29-09-2006 

[3] https://www.indiatoday.in/business/story/nirmala-sitharaman-new-definition-of-msmes-1677605-2020-05-13

[4] https://economictimes.indiatimes.com/small-biz/sme-sector/covid-19-relief-government-announces-rs-3-lakh-crore-collateral-free-automatic-loans-for-msmes/articleshow/75710137.cms

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