The term MSME stands for Micro, Small, and Medium Enterprises, a concept defined by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. This Act is a comprehensive legal framework that came into effect in October 2006. Its origin lies in the need to free small enterprises from a "plethora of laws and regulations," following recommendations from the Abid Hussain Committee (1997) and the study group under S.P. Gupta (2000). The Act's objective is to promote, develop, and enhance the competitiveness of these enterprises.
The mechanism of the Act, detailed in Section 7, classifies enterprises based on a composite criterion of investment and annual turnover. A significant change was introduced in May 2020 under the Atmanirbhar Bharat package, which removed the distinction between manufacturing and service enterprises and introduced the turnover criterion. The classification was further revised via Gazette Notification No. 1364 (E) dated 21st March 2025, effective from April 1, 2025. Under the current definition, a Micro Enterprise has an investment up to ₹2.5 crore and turnover up to ₹10 crore. A Small Enterprise has an investment up to ₹25 crore and turnover up to ₹100 crore, and a Medium Enterprise has an investment up to ₹125 crore and turnover up to ₹500 crore.
Key provisions include the establishment of the National Board for Micro, Small and Medium Enterprise to advise the Central Government on policies. The Act also protects MSMEs from delayed payments, mandating that buyers must pay within 45 days (if agreed) or 15 days (if no agreement). For delays, the buyer is liable to pay compound interest at three times the bank rate notified by the RBI. Disputes are settled by the Micro and Small Enterprise Facilitation Councils (MSEFC). The sector is governed by the Ministry of Micro, Small & Medium Enterprises (M/o MSME), and enterprises register on the Udyam Registration Portal.