The Micro, Small And Medium Enterprises Development Act, 2026: Key Changes To The Regulatory Framework

The Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act, 2006) was enacted to facilitate the promotion and development of micro, small and medium enterprises (MSMEs). MSMEs play a critical role in driving economic growth, generating employment, fostering innovation, and contributing significantly to India’s GDP and exports. They continue to serve as a vital pillar of the Indian economy. Over the years, the MSME sector has evolved significantly, driven by technological advancements, the emergence of information technology-enabled systems, and changes in the regulatory landscape. These developments have necessitated a review of the existing legislative framework to ensure that it remains responsive to the evolving needs of MSMEs and supports their sustained growth, competitiveness, and development.

Against this backdrop, the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026, seeking to amend the MSME Act, 2006, was introduced in the Rajya Sabha on July 28, 2026. The Bill was passed by the Rajya Sabha on August 3, 2026 and subsequently by the Lok Sabha on August 7, 2026. It received the President’s assent on August 13, 2026 and accordingly came into force as the Micro, Small and Medium Enterprises Development (Amendment) Act, 2026 (MSME Amendment Act, 2026).

The MSME Amendment Act, 2026 introduces several significant changes to the existing regulatory framework governing MSMEs, with the objective of strengthening the sector and facilitating its continued growth and development. Some of the key changes introduced by the MSME Amendment Act, 2026 are set out below:

Settlement through Trade Receivables Discounting System (TReDS)¹:  

The MSME Amendment Act, 2026 provides that all Central Public Sector Enterprises (CPSEs) shall settle their invoices for goods or services procured from MSMEs through a TReDS platform authorised by the Reserve Bank of India (RBI). The Central and State Governments may by a notification specify other authorities, bodies, or entities other than CPSEs to use TReDS for settling MSME invoices.

Settlement through TReDS helps MSMEs by improving cash flow and reducing payment delays. Instead of waiting for buyers to pay outstanding invoices, MSMEs can upload their invoices on the RBI authorised TReDS platform, where financiers can discount those receivables and provide funds to the MSME. This helps MSMEs meet working-capital requirements and reduce dependence on expensive short-term borrowing. Mandatory use of TReDS by CPSEs can also bring greater predictability and transparency to the payment process and strengthen payment discipline among large buyers. Overall, the provision is intended to reduce the working-capital pressure caused by delayed payments and improve the financial liquidity of MSMEs.

Registration of MSMEs: 

Under the MSME Act, 2006, registration is voluntary for micro and small enterprises, as well as medium enterprises engaged in providing or rendering services. However, a medium enterprise engaged in the manufacture is mandatorily required to obtain registration. The MSME Amendment Act, 2026 removes this distinction and provides that registration will be voluntary for all MSMEs.

The MSME Amendment Act, 2026 further provides for the establishment of a national digital platform to enable MSMEs to file their registration memorandum free of cost and voluntarily, in such form and manner as may be prescribed by the Central Government. The platform is intended to facilitate MSMEs in accessing benefits available under the MSME Act, 2006 and schemes of the Central Government. Similarly, State Governments may also establish State-level digital platforms to enable MSMEs to register voluntarily and access applicable benefits provided by the respective State Governments.

This amendment seeks to simplify the registration process, reduce regulatory burden, and promote greater ease of doing business for MSMEs, while providing a digital mechanism for accessing government benefits.

Classification of MSMEs by State Governments: 

The MSME Act, 2006 classifies enterprises as MSMEs based on investment in plant and machinery in case of manufacturing, and equipment in case of services. It also specifies thresholds of investment for classification between micro, small, and medium enterprises. The MSME Amendment Act, 2026 removes these thresholds and modifies the criteria. It empowers the Central Government to classify enterprises as MSMEs based on investment in:

(a) plant and machinery or equipment²; and

(b) turnover.

This amendment would help to ensure that MSME classification keeps pace with changes in business models, inflation, technological advancements and the evolving nature of enterprises. It also gives the Government greater flexibility to revise the applicable thresholds through notification without requiring a legislative amendment.

Procedure to be followed by micro and small enterprises facilitation council:

Under the MSME Act, 2006, state governments were empowered to establish one or more Micro and Small Enterprises Facilitation Councils but this power extended only to delineating the jurisdiction of the aforementioned Councils leaving their operational procedure unaddressed. The MSME Amendment Act, 2026, however expands this mandate by empowering the state governments to prescribe the procedure governing the functioning of these Council.

This amendment seeks to standardize the framework for the Council’s operations and to remove the scope for arbitrariness in how they function.

Timelines for mediation and arbitration:  

The MSME Act, 2006 provides for the resolution of disputes relating to amounts due to micro and small enterprises through mediation by the Micro and Small Enterprises Facilitation Council or by a mediation service provider to whom the matter is referred by the Council. Where the mediation is unsuccessful, the Act requires the dispute to be referred to arbitration. The MSME Amendment Act, 2026 introduces specific timelines to expedite the dispute resolution process. After the amendment, mediation must be completed within 90 days from the date fixed for the first appearance of the parties. If the mediation is unsuccessful, the dispute must be referred to arbitration within 30 days from the date of termination of the mediation. Further, the arbitral award must be made within 90 days from the date of completion of pleadings.

These amendments seek to reduce delays in the resolution of payment disputes and provide greater certainty and expeditious relief to micro and small enterprises.

Decriminalisation of certain offences:

As per the MSME Act, 2006, a buyer whose annual accounts are subject to audit under any applicable law to disclose details of unpaid dues to MSMEs in its annual statement of accounts. The MSME Amendment Act, 2026 replaces the existing fine of INR ₹10,000 with a graded penalty framework. A buyer will receive a warning for the first contravention. In case of a second contravention, a penalty ranging from ₹10,000 to ₹50,000 may be imposed. For a third or subsequent contravention, a fine ranging from ₹50,000 to ₹1 lakh may be imposed.

This amendment adopts a progressive enforcement approach, providing an opportunity to rectify the non-compliance at the first instance while imposing higher financial consequences for repeated violations.

Footnotes

^{1 “Trade Receivables Discounting System” means an electronic platform for facilitating the financing or discounting of trade receivables of micro, small and medium enterprises in accordance with the guidelines issued by the Reserve Bank from time to time.’.}

^{2 While calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.}