Empowering MSMEs by Simplifying Legal Governance

Indranil Choudhury Oct 25, 2017

It’s no secret that the Indian regulatory quagmire poses a significant challenge to the commencement and continuing of business operations in India. But there is good news! Recognizing this challenge and conceding the need to support businesses, especially the Micro, Small and Medium Enterprises (MSMEs) which have all along been punching above their weight in creating employment in India, the Government has extended various incentives and relaxations to MSMEs.

Some of the important developments in this area are featured below.

Udyog Aadhaar Memorandum (UAM)

In a path breaking step to promote ease-of-doing-business for MSMEs in India, the filing of Entrepreneurs’ Memorandum (EM part-I & II) has been done away with. Now, the MSMEs simply need to file online a simple one-page UAM on http://udyogaadhaar.gov.in to instantly get a unique Udyog Aadhaar Number (UAN). The information sought is on a self-certification basis and no supporting documents are required at the time of online filing of UAM.

In a Press Information Bureau release dated 20 June, 2016, the Ministry of MSME has clarified that UAM is the only form of registration for MSMEs in India and there is no fee for the registration.

Relaxed compliance regime based on self-certification

In a move to relax labour-related compliance measures for micro, small and medium enterprises (MSMEs), the Government has issued an instruction on 27 May, 2016 to ease the regulatory compliances governing MSMEs during the initial 3 years of their establishment. According to this Advisory, the States and Union Territories have been advised to devise web based inspection schemes wherein a small percentage (not more than 5 percent) of MSMEs which are less than three years old, will be verified through a random risk based inspection system for compliance with the Industrial Disputes Act, 1947, the Payment of Gratuity Act, 1972, the Contract Labour (Regulation and Abolition) Act, 1970 and the Employees State Insurance Act, 1948 provided the MSMEs have self-certified their compliance with the afore stated laws through a combined single self-certified return.

It may however be noted that there are no specific notifications at the state level giving effect to this instruction. Hence the efficacy of this instruction as regards the states is unclear as things stand.

Relaxation of prior experience and turnover in Public Procurement projects

In a note dated 2 August, 2016, the Government has decided to relax the norms for Startup MSMEs. According, to the decision, has clarified that all Central Ministries Departments / Central Public Sector Undertakings (CPSUs) may relax condition of prior turnover and prior experience with respect of Micro & Small Enterprises (MSEs) in Public Procurements subject to meeting of quality and technical specifications The relaxation has been made to create a conducive environment for the startups in India.

Tax incentive

Prioritising tax incentives for small business houses with annual turnover up to Rs. 50 crore, the Income Tax department has reduced the corporate tax rate for MSMEs to 25% from 30%, a welcome move which is geared towards providing that competitive edge.

Lesser compliance burden for Small Company and One Person Company under Companies Act, 2013:

1. Recognising that Small Company and One Person Company (ies) (“OPC”) are going to be the structures most MSMEs will adopt and acknowledging their potential as the engines to drive economic growth, the Companies Act, 2013 has simplified various compliances for small companies. The Companies Act, 2013 defines a small company as private company which has a paid -up share capital not exceeding Rs. 50 lakhs and a turnover not exceeding Rs. 20 crores. An OPC is a company, under the Companies Act, 2013 which has only one person as a member.

2. The Ministry of Commerce and Industry has issued a notification (G.S.R. 501 (E)) dated 23 May, 2017 identifying an entity as a start-up in the following cases:

If is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India;
If its turnover for any of the financial years since incorporation/ registration has not exceeded Rupees 25 crores; and
If it is working towards innovation, development or improvement of products/processes/services with a high potential of employment generation or wealth creation.
An entity will be recognised as startup up to seven years from the date of its incorporation/ registration. However, in cases of startups in the biotechnology sector, the period will be up to ten years from the date of its incorporation/ registration.

Below is a brief summary of some of the relaxations for small companies and OPCs:

Small companies and OPCs are required to conduct only two board meetings in a calendar year (with at least one meeting in each half of the calendar year) thus exempting them from the requirement of having to conduct four board meetings in a calendar year. However please note that this will not apply to an OPC which has only one director on its board of directors.
In the case of filing an annual return, a small company and an OPC have the option of getting the same signed by the company secretary, or where there is no company secretary, by the director of the company. Companies other than small companies or OPCs will however need to continue to have their annual return filed both by director and the company secretary.
In the exemption notification (G.S.R. 583(E)) issued by the Ministry of Corporate Affairs dated 13 June 2017, small companies and OPCs having a turnover of less than Rs. 50 crores or a borrowing of less than Rs. 25 crores are exempted from disclosure on whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.
The normal restrictions on acceptance and renewal of deposits that are applicable to companies (viz., issuance of circular, filing of the circular with the Registrar, etc.) under the Indian Companies Act, 2013 will not be applicable to a start-up for five years from the date of its incorporation.

This slew of measures are indeed positive and will undoubtedly spur economic growth and stimulate employment, positioning MSMEs as the growth engines of the millennium in the still unfolding India Story.