Amendments to MSME Bill clear Parliament. How new rules aim to fix delayed payments, ease business
The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026 was passed by the Lok Sabha, days after the Rajya Sabha cleared it, completing the parliamentary process
The Bill amends the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 and makes MSME registration free and voluntary, with a shift from criminal prosecution to administrative penalties for violations such as furnishing false information
A new Section 15A creates a mandatory Trade Receivables Discounting System (TReDS)-based payment mechanism, initially for Central Public Sector Enterprises (CPSEs) procuring from MSMEs, to improve access to working capital
Dispute resolution timelines are tightened: mediation before the Micro and Small Enterprises Facilitation Council (MSEFC) must conclude within 90 days, arbitral awards within 90 days, and courts must release 50% of the disputed amount to the MSME if an appeal against an award exceeds six months
A "Development Commissioner," heading the Office of the Development Commissioner within the Ministry of MSME, is designated as the adjudicating authority for penalties under the amended Act
TReDS — Trade Receivables Discounting System
TReDS is an RBI-regulated electronic platform that allows MSME suppliers to auction and discount their trade receivables (unpaid invoices) from corporate, government, and PSU buyers to financiers (banks/NBFC factors), converting future payments into immediate working capital. It was conceptualised by the RBI in 2014 as a response to the chronic delayed-payment problem MSMEs face when supplying to large buyers who enjoy stronger bargaining power.
Key Details
- Introduced by the RBI in 2014 under the Payment and Settlement Systems Act, 2007; the first TReDS platforms (RXIL, M1xchange, Invoicemart) became operational from 2017
- Involves three participants — MSME sellers, corporate/PSU/government buyers, and financiers — with the exchange running a bidding process for the best discount rate
- The 2026 Amendment inserts Section 15A into the MSMED Act, 2006, making TReDS-based settlement mandatory for CPSE procurement from MSMEs, and empowers governments to extend this to other public entities
- Complements — but is distinct from — the Section 15/16 payment-timeline and interest provisions, which apply to buyer-supplier relationships generally
By statutorily mandating TReDS routing for CPSE payments, the amendment converts what was until now a voluntary RBI-regulated facility into a binding legal requirement, directly targeting the "better access to working capital" objective highlighted in the Bill.
Delayed Payment Framework — Sections 15–18 of the MSMED Act, 2006
Sections 15 to 18 form the MSMED Act's dedicated chapter on timely payments to micro and small enterprises, requiring buyers to pay within a stipulated period and providing a statutory dispute-resolution route through the MSEFC when payments are delayed.
Key Details
- Section 15: payment must be made within the period agreed in writing, not exceeding 45 days from the date of acceptance (or deemed acceptance) of goods or services
- Section 16: delayed payment attracts compound interest at three times the RBI-notified bank rate, payable monthly
- Section 18: any dispute over amount due is referred to the MSEFC, which first attempts conciliation and, failing that, proceeds to arbitration under the Arbitration and Conciliation Act, 1996
- The 2026 Amendment fixes outer timelines within this chain — mediation within 90 days and arbitral awards within 90 days — and adds an interim-relief safeguard (50% release of the disputed amount) where an award is challenged in court for over six months, alongside online dispute-resolution mechanisms
The Bill's "faster dispute resolution" promise operationalises Section 18 by imposing binding timelines on a process that previously had no statutory deadline, a gap MSMEs have long cited as a reason recovery through the MSEFC route was slow.
Registration Reform — From Mandatory Filing to Voluntary, Decriminalised Compliance
The 2026 Amendment makes the MSME memorandum/registration process free and voluntary rather than mandatory, and replaces criminal liability for filing lapses (such as furnishing false information) with a graded system of administrative warnings and monetary penalties.
Key Details
- Registration under the MSMED Act is presently done through the Udyam Registration Portal (effective 1 July 2020), the unified online system linked to the composite investment-plus-turnover classification adopted in 2020
- The amendment designates a "Development Commissioner" (inserted as Section 2(da)), heading the Office of the Development Commissioner in the Ministry of MSME, as the adjudicating authority for penalties, with appeal to the MSME Secretary
- This decriminalisation approach mirrors the broader Jan Vishwas (Amendment of Provisions) Act, 2023, which converted over 180 minor criminal offences across 42 central laws into civil, administratively-adjudicated penalties to ease compliance burdens on businesses
Making registration voluntary and shifting penalties from criminal to administrative directly serves the Bill's stated goal of "easing business" by removing prosecution risk for procedural, non-fraudulent lapses.
- MSMED Act enacted: 2006; amendment passed by Rajya Sabha 3 August 2026 and by Lok Sabha 7 August 2026
- Payment period under Section 15: maximum 45 days from acceptance of goods/services
- Interest on delayed payment under Section 16: compound interest at three times the RBI-notified bank rate
- Dispute-resolution timelines introduced: mediation within 90 days; arbitral award within 90 days
- Interim relief: 50% of disputed amount released to MSME if a court appeal against an award exceeds six months
- 2020 MSME classification: Micro (investment ≤₹1 crore, turnover ≤₹5 crore); Small (≤₹10 crore, ≤₹50 crore); Medium (≤₹50 crore, ≤₹250 crore)
- New Section 15A mandates TReDS-based invoice settlement, starting with CPSEs procuring from MSMEs