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The Micro Small And Medium Enterprises Development Act 2006 And Its Amendment In 2018

Introduction

The Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006 was a landmark legislation in India aimed at promoting the growth and development of small businesses. In 2018, the Act underwent significant amendments to address the evolving needs of the MSME sector. This blog aims to provide a detailed overview of the MSMED Act 2006 and its 2018 amendment, highlighting their significance and impact on small and medium enterprises.

Understanding the MSMED Act 2006

The MSMED Act 2006 was enacted to facilitate the promotion, development, and enhancement of competitiveness of micro, small, and medium enterprises. It defined MSMEs based on their investment in plant and machinery or equipment for manufacturing enterprises and investment in equipment for service enterprises.

Classification of MSMEs: The Act classified MSMEs into two categories: manufacturing enterprises and service enterprises, with different investment thresholds for each category. Micro-enterprises have the lowest investment limit, followed by small enterprises, and medium enterprises.
Registration: The Act introduced the concept of registration for MSMEs, allowing them to avail of various benefits and support schemes provided by the government. Registration facilitates easier access to credit, subsidies, and other support measures.
Credit Facilities: One of the key provisions of the Act was to ensure timely and adequate credit flow to MSMEs. It mandated banks to extend credit facilities to these enterprises at preferential interest rates, reducing the financial burden on small businesses.
Delayed Payments: Another significant aspect of the Act was the provision for addressing the issue of delayed payments to MSMEs. It stipulated that buyers must make payments to MSME suppliers within a specified timeframe, failing which they would be liable to pay compound interest.
Promotion and Development: The Act aimed at promoting entrepreneurship and enhancing the competitiveness of MSMEs through various measures such as skill development, technology upgradation, and market access facilitation.

The 2018 Amendment: Key Changes and Implications

Recognizing the changing dynamics of the MSME sector and the need for reforms, the MSMED Act underwent significant amendments in 2018. These amendments aimed to address the emerging challenges faced by MSMEs and further streamline the regulatory framework to promote their growth.

Revised Definition and Classification: The 2018 amendment revisited the criteria for defining and classifying MSMEs, considering factors such as turnover in addition to investment in plant and machinery/equipment. This revised classification aimed at ensuring a more comprehensive and inclusive approach to categorizing MSMEs.
Udyog Aadhaar Registration: The amendment introduced the concept of Udyog Aadhaar registration, a simplified online registration process for MSMEs. This digital registration mechanism streamlined the registration process and made it more accessible to small business owners.
Enhanced Credit Facilities: In line with the government's initiatives to promote financial inclusion and ease of doing business, the amendment focused on enhancing credit facilities for MSMEs. It introduced measures such as interest subvention schemes and collateral-free loans to facilitate easier access to credit for small businesses.
Public Procurement Policy: The amended Act mandated that a certain percentage of government procurement be reserved for MSMEs. This provision aimed at providing MSMEs with greater market access and opportunities to participate in government contracts, thereby boosting their growth prospects.
Technology Upgradation and Innovation: Recognizing the importance of technology adoption and innovation in enhancing the competitiveness of MSMEs, the amendment emphasized support for technology upgradation and innovation through various incentive schemes and programs.
Ease of Compliance: One of the overarching objectives of the 2018 amendment was to simplify regulatory compliance for MSMEs. It introduced measures such as self-certification and deemed approval to reduce the regulatory burden on small businesses and promote ease of doing business.

Conclusion

The Micro, Small, and Medium Enterprises Development Act 2006 and its 2018 amendment have played a crucial role in fostering the growth and development of MSMEs in India. By providing a supportive regulatory framework, access to credit, and various incentives and support schemes, these legislations have helped MSMEs overcome challenges and seize opportunities for growth. However, continuous efforts are required to address the evolving needs of the MSME sector and ensure their sustained development. With the right policy interventions and support mechanisms, MSMEs can emerge as engines of inclusive growth and employment generation in the Indian economy.

Frequesntly Asked Questions

1. What is the MSMED Act 2006, and what is its purpose?

The MSMED Act 2006 stands for the Micro, Small, and Medium Enterprises Development Act. Its purpose is to promote the growth and development of micro, small, and medium enterprises (MSMEs) in India by providing various benefits and support measures.

2. How are MSMEs classified under the MSMED Act 2006?

MSMEs are classified based on their investment in plant and machinery or equipment for manufacturing enterprises and investment in equipment for service enterprises. There are different investment thresholds for micro, small, and medium enterprises.

3. What are the benefits of registering under the MSMED Act 2006?

Registration under the Act facilitates easier access to credit, subsidies, and other support schemes provided by the government. It also helps in availing benefits such as timely payments and various promotional measures.

4. How does the MSMED Act 2006 address the issue of delayed payments?

The Act stipulates that buyers must make payments to MSME suppliers within a specified timeframe. If payments are delayed, buyers are liable to pay compound interest to the MSME suppliers.

5. What were the key changes introduced by the 2018 amendment to the MSMED Act?

The 2018 amendment revisited the criteria for defining and classifying MSMEs, introduced the concept of Udyog Aadhaar registration, enhanced credit facilities, mandated a certain percentage of government procurement for MSMEs, and emphasized technology upgradation and ease of compliance.

6. What is Udyog Aadhaar registration, and how does it benefit MSMEs?

Udyog Aadhaar registration is a simplified online registration process introduced by the 2018 amendment. It streamlines the registration process for MSMEs, making it more accessible and facilitating easier access to various benefits and support schemes.

7. How does the 2018 amendment enhance credit facilities for MSMEs?

The amendment introduced measures such as interest subvention schemes and collateral-free loans to facilitate easier access to credit for MSMEs. This helps in reducing the financial burden on small businesses and promoting their growth.

8. What is the significance of the public procurement policy introduced by the 2018 amendment?

The public procurement policy mandates that a certain percentage of government procurement be reserved for MSMEs. This provides MSMEs with greater market access and opportunities to participate in government contracts, thereby boosting their growth prospects.

9. How does the 2018 amendment emphasize technology upgradation and innovation for MSMEs?

The amendment emphasizes support for technology upgradation and innovation through various incentive schemes and programs. This helps MSMEs stay competitive and adapt to changing market trends.

10. How does the MSMED Act contribute to the overall growth and development of the MSME sector in India?

The MSMED Act, along with its 2018 amendment, provides a supportive regulatory framework, access to credit, and various incentives and support schemes for MSMEs. This contributes to their growth and development, making them engines of inclusive growth and employment generation in the Indian economy.

Startup

Types of Franchise Business Models

Franchising is a form of business model where the owner of a business (known as franchisor) grants an individual or group of individuals (known as franchisee) the permission to operate under the brand, trademark & the business model owned by the franchisor.

Different Types of Franchise Models

There are 4 types of franchise models:

Company Owned Company Operated (COCO)
Company Owned Franchise Operated (COFO)
Franchise Owned Company Operated (FOCO)
Franchise Owned Franchise Operated (FOFO)

Franchise structure differs across these various franchise models.

Company Owned Company Operated (COCO) - COCO is a model where the franchise store unit is owned by the brand and is run by the brand. It has nothing to do with franchising in the least. As a result, the franchise is funded entirely by the company. Employees of the brand run the franchise. Example: Reliance Jio Mart, Bigbazar.

Company Owned Franchise Operated (COFO) - This is where the company invests in the franchise business and the franchisee runs it according to the company's guidelines. This is unusual and uncommon in the market because most businesses that invest in expanding their operations choose to do so by themselves. Example: call centers that handle calls on behalf of a company.

Franchise Owned Company Operated (FOCO) - The franchisee is the one that owns the property and is responsible for all additional capital expenditures. The store/outlet operations are managed by the franchising company. It is also known as Franchise Invested Company Operated. Example: Bistro57.

Franchise Owned Franchise Operated (FOFO) - The company gives the franchise investor its brand name in this FOFO model. They do so in exchange for a non-refundable (franchise fee) and a pre-determined period. The brands decide on the prices and items for the outlet. As a result, the franchise investor is the store's owner, and the franchise must bear all operational costs. Also, the Franchise is required to pay the Brand a percentage of income (royalty). This model is the most used in the marketplace.

Advantages and Disadvantages of Franchise Model

The various structures and models of franchise business in India have their advantages and disadvantages. Let us discuss the benefits and cons of each franchise model:

COCO Model:

Advantages of COCO model:

The entire profit goes to the company because there is no channel partner to share it.
It allows the company to expand in locations where franchisees are hard to come by.
Helps a company in showcasing its outlet and product range.

Disadvantages of COCO model:

A corporation spends time and money on activities that are not its core business, such as owning and managing a store.

COFO Model:

Advantages of COFO model:

No operational expenses to bear.
High productivity and efficiency because the outlets are managed by an entrepreneur.
A company can open its outlet in the areas where it is not finding the franchisees.

Disadvantages of COFO model:

A franchisee is in charge of the customer experience. If it isn't appropriate, the company's name will be harmed.
If a franchisee leaves, the company may be at a loss regarding what to do next.

FOCO model:

Advantages of FOCO model:

Better customer handling as the customer experience is in the hands of company.
Company does not pay for set-up expenses, franchisee does not pay for operational expenses.

Disadvantages of FOCO model:

Not suited for those planning to rent property to become a franchisee.
Due to the franchisee's lack of involvement in day-to-day operations.

FOFO Model:

Advantages of FOFO model:

A variety of franchise opportunities to choose from.
Excellent return on investment on a successful franchisee.

Disadvantages of FOFO model:

Higher failure rate compared to other franchise business models.
This franchise concept is seen by some franchisors as a quick way to success. As a result of the hefty franchise fees and other investments, the return on investment time may be undesirable.

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Hybrid Franchise Model

In the world of franchise business models, hybrid franchising is relatively new. It is a hybrid franchise platform that combines physical and digital franchises. Traditional enterprises are digitally turned into a multi-functional hybrid franchise platform.

In brief, hybrid franchising involves digitizing a traditional brick-and-mortar franchise and combining it with other business concepts. Several teams and business models collaborate to assist franchisees in growing their businesses.

A hybrid business model combines elements of single proprietorship with those of a larger corporation. It enables a business owner to expand their own company while working within the concept and structure of a larger corporation. Individuals buy the rights to utilize their brand name, systems, logo, and model from franchise owners, allowing them to start their enterprises.

In a more modern sense, a hybrid business refers to a company's efforts to advertise its main products in a variety of contexts. This business model can include running a brick and mortar store while also keeping an internet store and employing catalogue sales to generate orders via the mail. Typically, the hybrid company will have its warehouses to manage orders received through the mail and those received through the internet site. This brick and mortar back end operation may be outsourced to order fulfillment providers in some situations as a strategy to reduce overall operating costs.

(FAQs) about different types of franchise business models:

What is a Single-Unit Franchise?
- A single-unit franchise involves a franchisee operating one location of a franchised business. It's the simplest form of franchise arrangement, where the franchisee typically has exclusive rights to operate within a specific territory.
What is a Multi-Unit Franchise?
- In a multi-unit franchise, a single franchisee operates multiple units or locations of the same franchise brand within a designated area. This model allows for more significant economies of scale and broader market penetration.
What is a Master Franchise?
- A master franchisee essentially serves as a sub-franchisor. They buy the rights to develop and sell franchises within a specific territory. They then recruit, train, and support individual franchisees within that territory.
What is a Area Development Franchise?
- Area development franchising involves an agreement where a franchisee is granted the right to open multiple units within a defined geographic area over a specified period. This model often requires the franchisee to meet certain development milestones.
What is a Conversion Franchise?
- Conversion franchising involves converting an existing independent business into a franchised outlet of a well-established brand. This model allows existing businesses to benefit from established branding, systems, and support.
What is a Co-Branding Franchise?
- Co-branding franchises involve combining two or more brands under one roof. For example, a fast-food restaurant might offer products from another brand, such as a popular coffee chain, within its premises.
What is a Product Distribution Franchise?
- In a product distribution franchise, the franchisee sells the franchisor's products without necessarily operating a traditional storefront. This could involve distributing goods to retailers, businesses, or directly to consumers.
What is a Business Format Franchise?
- Business format franchising is the most common type, where the franchisee not only uses the franchisor's trademark and products but also adopts its entire business model, including operational processes and standards.
What is a Joint Venture Franchise?
- Joint venture franchising involves a partnership between the franchisor and the franchisee, where both parties contribute resources and share profits and risks associated with operating the franchise.
What is a Master License Franchise?
- Master license franchising is similar to master franchising but typically involves international expansion. A master licensee purchases the rights to develop and sell franchises within a specific country or region on behalf of the franchisor.