India Overhauls MSME Law After 20 Years, Tightens Payment Rules and Eases Penalties

NEW DELHI: Parliament has cleared sweeping changes to the law governing India’s micro, small and medium enterprises, mandating that government-owned companies pay their MSME suppliers through a digital invoice platform, setting hard deadlines on payment disputes, and replacing criminal penalties with a civil fine ladder altogether in a single Bill that completed its passage on Friday with neither house finding time for meaningful debate.

The Lok Sabha approved the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026, on August 7, following the Rajya Sabha’s passage on August 3. The legislation replaces the MSME Development Act, 2006, which had gone unamended for twenty years even as the sector it governs transformed beyond recognition.

The MSME sector provides employment to over 40 crore people and accounts for 31% of India’s GDP, 36% of manufacturing output and 41% of exports, according to figures cited by Union MSME Minister Jitan Ram Manjhi in the Rajya Sabha. Both houses passed the Bill through voice vote amid Opposition protests over unrelated issues, with the lower house clearing it in roughly 16 minutes of functioning time, PTI reported.

The Payment Fix at The Centre of the Bill

The most substantive change is a new section, 15A, requiring every Central Public Sector Enterprise (CPSE), the large government-owned companies that are among the MSME sector’s biggest buyers  to route invoice settlements through the Trade Receivables Discounting System, or TReDS (an RBI-authorised electronic platform that allows small suppliers to sell their unpaid invoices at a discount and receive cash immediately, rather than waiting out long payment cycles).

The volume of invoice discounting on TReDS has grown from ₹40,000 crore in 2022-23 to ₹3.47 lakh crore in 2025-26, according to government data, but that growth has been voluntary. Making TReDS mandatory for CPSE procurement removes the biggest obstacle: large public buyers have had little incentive to adopt it without a legal obligation.

A companion provision, Section 22A, requires these entities to publicly disclose their MSME invoice data through TReDS, creating an accountability trail that did not previously exist.

Dispute Timelines, Partial Payment and Enforcement

The 2006 Act had no firm deadlines for resolving payment disputes before Micro and Small Enterprises Facilitation Councils (MSEFCs), which function as quasi-judicial bodies that mediate and arbitrate MSME payment claims. 

The amendment inserts hard stops: mediation must conclude within 90 days, arbitration awards must be issued within 90 days of completion of pleadings, and if a court appeal against an award runs beyond six months, at least 50% of the disputed amount must be released to the MSME supplier.

Meanwhile, arbitral awards and mediated settlements can now also be recovered as arrears of land revenue through the District Collector, and unpaid awards are recognised as enforceable debts under the Insolvency and Bankruptcy Code, opening the door to insolvency proceedings against chronically defaulting buyers.

Manjhi told the Rajya Sabha that outstanding credit to MSMEs had risen to over ₹38.35 lakh crore from ₹10 lakh crore in 2014-15, signalling growing credit access. “The objective is to balance the interests of all concerned parties while maintaining constitutional principles and the interests of businesses,” he said.

From Courts to Civil Penalties

The amendment also provides for decriminalisation and replaces conviction-based fines with graded civil penalties. Under the 2006 Act, registration and disclosure violations were criminal offences requiring a magistrate’s conviction. The new framework issues a warning on first non-compliance and escalates to monetary fines up to ₹1 lakh for repeat violations adjudicated by the Development Commissioner rather than a criminal court, with penalty floors rising 10% every three years.

The Bill also puts the existing Udyam Registration portal on statutory footing, mandating a free national digital platform for MSME registration, and removes investment thresholds from the statute itself, allowing the government to update classification limits by executive notification without returning to Parliament. Nevertheless, the reform is the most comprehensive overhaul of India’s MSME legal architecture since the 2006 Act, passed as the sector employs more people than any other outside agriculture and holds a growing share of the country’s export and manufacturing base.