The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”), was enacted to promote and develop micro, small and medium enterprises. The MSMED Act contains a special mechanism to ensure timely payments unto Micro And Small Enterprises (“MSEs”) and established a dispute resolution mechanism when timely payments were not forthcoming.
The MSMED Act enabled any party to a dispute to file a reference with the Micro and Small Enterprises Facilitation Council (“MSEFC”) for recovery of the moneys due from the concerned buyer. About 1,48,697 references were recorded on the MSME Samadhan Portal over the period from 01.04.2022 to 01.02.2026, demonstrating that the facility is used on a significant scale. Of these, 76,448 references (accounting for approximately 51.4% of filings) remain pending. In a bid to ramp up the framework, the Micro, Small and Medium Enterprises Development (Amendment) Act, 2026 (“2026 Amendment”) was brought into force on 13.08.2026.
In addition to streamlining processes under the MSMED Act, the 2026 Amendment galvanizes the framework for timely payments unto MSEs. This Article examines the changes to the regime for delayed payments under Chapter V of the MSMED Act.
The MSMED Act mandates that a ‘buyer’ shall make timely payments to MSEs, requiring the buyer to remit payment within the contractually agreed time. In the absence of such a contractual agreement, the buyer should pay within the ‘appointed day’, i.e., within 15 days from acceptance of goods or services supplied to the buyer. The outer limit for remitting payments was fixed at 45 days from the date of acceptance [Sections 15 to 17, MSMED Act, 2005]. A party to a dispute could file a reference before the MSEFC, to kickstart mediation under the Mediation Act, 2023 (“Mediation Act”). If mediation failed, the dispute would be referred to arbitration under the Arbitration and Conciliation Act, 1996 (“A&C Act”) [Section 18, MSMED Act, 2005].
This fundament continues under the 2026 Amendment, with timelines instituted for the existing mechanism - the mediation of a reference will have to be completed within 90 days from the date of reference [Section 18(3A), 2026 Amendment Act]. If mediation fails, such termination of mediation and reference to arbitration should be completed within 30 days from the date of termination [Section 18(4), 2026 Amendment Act]. Once the dispute is taken up for arbitration, the award should be made within 90 days from completion of pleadings [Section 18(4A), 2026 Amendment Act].
As welcome as these timelines are, the amendments evoke interpretative questions.
For one, this amendment would be enlivened only upon the operationalisation of Section 62 of the Mediation Act read with the Seventh Schedule to the Mediation Act. Until then, the unamended Section 18 as it existed on 13.09.2023 (prior to the introduction of the Mediation Act) would operate.
For another, the effect of not abiding by these timelines is not manifestly clear – Is a Mediated Settlement Agreement issued by the MSEFC beyond the timeline a nullity? Would the MSEFC be empowered to grant extension for bonafide reasons? Would parties be able to seek extension? Would a delay in completion of the arbitration affect the validity of the award?
These questions arose in the context of the unamended Section 18(5) of the MSMED Act and it was held that the timeline of 90 days for completing a reference was merely directory, as the MSMED Act did not prescribe any consequence for failure to adhere to the timeframe. Since the 2026 Amendment also does not prescribe any consequence for violating the stipulated timelines, these timelines are likely to be regarded as not mandatory and the introduction of stricter timelines under the 2026 Amendment would be rendered toothless. As such, the decision in M/s. Vast India Private Ltd v. Maharashtra Public Service Commission will substantially impact the interpretation and practical effectiveness of the new framework.
Registration was always enabled under the MSMED Act [Section 8, MSMED ACT], providing that a person intending to set up a micro or small enterprise may file a memorandum for registration. The unamended Section 18(5) vested jurisdiction with the MSEFC for a supplier located within its jurisdiction and a buyer located anywhere in India. A conjoint reading plausibly meant that registration as an MSE under the MSMED Act was not a pre-requisite for an entity to invoke the scheme for delayed payments under Chapter V.
Under the amended Section 18(5), the jurisdiction for MSEFC is determined with reference to the supplier’s official address as recorded in the registration held under Section 8 of the MSMED Act. Section 8 is amended to maintain registration as ‘free’ and ‘voluntary’, implying that entities can elect to not to obtain registration. That said, such an election would functionally determine whether the entity can approach the MSEFC. This is hemmed in by the amendment to Section 19(3), which requires a challenge to be made within the jurisdiction of the Court where the official address of the supplier is located as per the registration under Section 8 of the MSMED Act.
In sum, the 2026 Amendment places an MSE supplier’s registration at the fore, making registration a commercially significant consideration for businesses. Significantly, this situs would fix only the jurisdiction for mediation. Where mediation fails and the reference enters the arena of arbitration, the contractual stipulation for exclusive jurisdiction or seat of arbitration would prevail.
The 2026 Amendment inserts Section 18A, prescribing an enforcement mechanism for the Mediated Settlement Agreement or the arbitral award. Section 18A envisages that the amount(s) declared as being due may be recovered as arrears of land revenue by the State government where the asset of the defaulting buyer is located. Section 18A enjoins that the decretal amount would be a debt recognised under the Insolvency and Bankruptcy Code, 2016.
Previously, a supplier looking to enforce an arbitral award issued under Section 18 would have to initiate enforcement proceedings under Section 36 of the A&C Act.
Section 18A portends a stronger and time-efficient route for recovery unto a supplier. The phraseology of Section 18A abundantly clarifies that this recovery mechanism is available only unto a supplier seeking to recover dues from a buyer. A buyer who successfully instituted a reference or a counterclaim against an MSE supplier would have resort to enforcement proceedings under Section 36 of the A&C Act. The effectiveness of Section 18A will depend on administrative coordination, because the adjudicatory forum will be tied to the supplier’s registration whereas the recovery forum would be reckoned with reference to location of the buyer’s assets.
The 2026 Amendment substitutes Section 19, imposing further conditions on a person challenging the award made under Section 18.
The requirement of pre-deposit of 75% of the awarded amount by the buyer invoking Section 19 of the MSMED Act continues with an additional safeguard for a supplier. The proviso to Section 19(2) contemplates that if a challenge remains pending for more than 6 months, the Court must order payment of at least 50% out of the deposited amount to be paid to the supplier (as the defending party).
A laudable amendment, this amendment aims to thwart dilatory tactics that may be adopted to evade payments due to an MSE supplier. At the same time, this mandate should not operate in absolute terms, lest the host of factors beyond the control of either party operate to the detriment of such applicant.
The scheme of Section 19 appears to have been designed to secure the amounts declared as payable unto a MSE supplier. Section 19 does not, per se, mandate that an MSE supplier challenging a mediated settlement agreement or an Award against a buyer must also pay such deposit under Section 19. This distinction reflects the supplier-protective character of Section 19.
The 2026 Amendment marks a significant shift in terms of distance and direction – registration may prove to be the fulcrum for the protective regime for recovery of delayed payments under the MSMED Act, with major thrust on expedited recovery and enforcement. With the enforcement of the Mediation Act, these amendments would operate seamlessly to energise the MSE sector.
About the authors: Raghavan Ramabadran is a Senior Partner, Krithika Jaganathan is a Partner and Deepak Krishnan M is a Senior Associate at Lakshmikumaran & Sridharan attorneys.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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