The MSMED Act, 2006 — payment protection

The Micro, Small and Medium Enterprises Development Act, 2006 is the single most powerful payment-recovery statute for small businesses. Section 15 mandates payment within 45 days from acceptance / deemed acceptance of goods or services. Beyond 45 days, Section 16 imposes compound interest at 3× the RBI bank rate — non-deductible under Section 23 of the Income Tax Act, making it a powerful disincentive against delay.

Registration as a precondition

To invoke MSMED benefits, the supplier must be registered as a micro or small enterprise (medium enterprises are excluded from Section 15) on the Udyam Portal at the time of supply. Registration is free, paperless, based on PAN and Aadhaar, and gives Udyam Registration Number (URN). Without URN at the time of supply, Section 15 benefit is lost — Silpi Industries v. Kerala SRTC (2021) 18 SCC 790.

MSEFC proceedings in Kota

A reference under Section 18 MSMED Act is filed with the MSEFC, Kota. Conciliation under Section 18(2) — informal discussions — is the first stage. If conciliation fails, the dispute proceeds to arbitration under Section 18(3) read with the Arbitration Act, 1996. The award is enforceable as a decree under Section 36 of the Arbitration Act. Pre-deposit of 75% of the award is mandatory for buyer’s appeal under Section 19.

Award amounts and interest computation

The award typically covers (i) principal — the unpaid invoice value, (ii) compound interest at 3× RBI bank rate from due date till payment, (iii) costs. For a ₹10 lakh invoice unpaid for 3 years, the interest component alone often exceeds the principal — making MSEFC awards uniquely punitive on defaulting buyers.

Practical tips for MSME suppliers

Register on Udyam before raising invoices. Mention URN on every invoice. Send routine reminders in writing creating a paper trail. Keep delivery challans signed. For high-value contracts include MSMED Section 15 reference in the PO acceptance. Move under Section 18 within 3 years of default; longer delay raises limitation defences.