Rajya Sabha passes MSME bill to curb payment delays
The Rajya Sabha passed the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026, which amends the Micro, Small and Medium Enterprises Development Act, 2006.
The bill mandates that all Central Public Sector Enterprises (CPSEs) route payments for goods and services procured from MSMEs through the Trade Receivables Discounting System (TReDS) platform.
It introduces time-bound dispute resolution: mediation must be followed by referral to arbitration within 30 days if unsuccessful, and an arbitration award must be passed within 90 days of conclusion of pleadings.
Courts are empowered to direct buyers to deposit disputed payment amounts; if proceedings remain pending beyond six months, at least 50% of the awarded amount must be released to the MSME supplier from the deposited sum.
The bill decriminalises certain violations, replacing conviction-based fines with graded penalties and warnings for first-time non-compliance, and proposes a national digital platform for voluntary MSME registration.
MSMED Act, 2006 — Delayed Payment Provisions (Sections 15 and 16)
The Micro, Small and Medium Enterprises Development Act, 2006 was enacted to promote and facilitate MSMEs and provide a statutory mechanism against delayed payments by buyers. Section 15 fixes the payment timeline, and Section 16 imposes a punitive compound interest liability for delays, making the MSMED Act one of the strongest statutory payment-protection regimes for any business category in India.
Key Details
- Section 15: Where there is a written agreement, payment must be made by the agreed date or within 45 days of acceptance of goods/services, whichever is earlier; absent an agreement, payment is due within 15 days.
- Section 16: A buyer who delays payment beyond the Section 15 timeline is liable to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India.
- Disputes are adjudicated by Micro and Small Enterprises Facilitation Councils (MSEFCs) constituted under Section 20 of the Act, which can conduct conciliation and, failing that, refer the matter to arbitration.
The 2026 amendment builds directly on this existing Section 15-16 framework by adding hard timelines for the mediation-to-arbitration transition and the arbitration award itself, and by giving courts explicit power to compel interim deposit of disputed sums — addressing the long-standing complaint that MSEFC awards took years to enforce even though the underlying interest liability was already stringent on paper.
MSME Classification — Investment and Turnover Criteria
MSMEs are classified under Section 7 of the MSMED Act, 2006 based on a composite criterion of investment in plant and machinery/equipment and annual turnover, revised most recently by a government notification effective July 1, 2020.
Key Details
- Micro: investment up to ₹1 crore and turnover up to ₹5 crore.
- Small: investment up to ₹10 crore and turnover up to ₹50 crore.
- Medium: investment up to ₹50 crore and turnover up to ₹250 crore.
- The 2020 revision removed the earlier manufacturing/services distinction, applying a single composite criterion to both.
The payment-delay reforms apply across this entire MSME universe — from micro-enterprises with the least bargaining power against large buyers to medium enterprises supplying CPSEs — making the CPSE-TReDS mandate and faster dispute resolution especially significant for liquidity-constrained micro and small units.
TReDS (Trade Receivables Discounting System)
TReDS is an electronic platform, regulated by the Reserve Bank of India, for financing/discounting trade receivables of MSMEs through multiple financiers, enabling MSMEs to convert invoices raised on buyers (including large corporates and CPSEs) into immediate working capital.
Key Details
- TReDS was introduced by the RBI under guidelines issued in 2014, operating under the Payment and Settlement Systems Act, 2007.
- Currently operational TReDS platforms include RXIL, Invoicemart, and M1xchange.
- Central Public Sector Enterprises have periodically been directed (e.g., by Department of Public Enterprises guidelines) to onboard TReDS, but compliance had remained uneven prior to this statutory mandate.
The 2026 amendment elevates CPSE participation in TReDS from an administrative directive to a statutory obligation under the MSMED Act, aiming to close a persistent liquidity gap where government-linked buyers were themselves a source of delayed payments to MSME suppliers.
- The MSMED Act, 2006 governs delayed payments; Section 16 prescribes compound interest at three times the RBI-notified bank rate for delayed payments.
- Payment timeline under Section 15: earlier of the agreed date or 45 days (with agreement); 15 days (without agreement).
- New timelines under the 2026 amendment: 30 days to refer failed mediation to arbitration; 90 days for the arbitration award after conclusion of pleadings; mandatory release of at least 50% of the awarded sum if proceedings exceed 6 months.
- MSME classification (effective July 1, 2020): Micro (investment ≤ ₹1 crore, turnover ≤ ₹5 crore); Small (≤ ₹10 crore, ≤ ₹50 crore); Medium (≤ ₹50 crore, ≤ ₹250 crore).
- The bill mandates all Central Public Sector Enterprises to route MSME payments through TReDS.