MSME Development (Amendment) Act, 2026: Strengthening India’s MSME Ecosystem And Tackling Delayed Payments. – IMPRI Impact And Policy Research Institute

Policy Update
Arya Gupta

Background 

Micro, Small and Medium Enterprises (MSMEs) are a central component of India’s productive economy, contributing significantly to output, manufacturing, exports and employment. They span a diverse range of enterprises across rural, semi-urban and urban areas and play an important role in generating livelihoods and integrating smaller firms into formal supply chains. According to the Economic Survey 2025–26, MSMEs account for 31.1% of GDP, 35.4% of manufacturing output and 48.58% of exports. As of August 2026, 9.16 crore enterprises were registered on the Udyam platform, employing more than 40 crore people across rural, semi-urban and urban India.

At the same time, the MSME ecosystem has undergone substantial institutional and technological changes since the enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Udyam registration replaced the earlier Udyog Aadhaar system, while mechanisms such as the Trade Receivables Discounting System (TReDS), the MSME Samadhaan portal and the Online Dispute Resolution (ODR) mechanism were introduced to address formalisation, financing and delayed-payment challenges. However, several of these mechanisms initially operated through notifications, portals and administrative arrangements rather than being fully embedded in the parent legislation. Persistent delays in payments to MSMEs, alongside changes in registration and classification practices, created a case for updating the statutory framework.

Against this background, Parliament passed the Micro, Small and Medium Enterprises Development (Amendment) Act, 2026, introducing changes to MSME classification and registration while giving statutory backing to several payment and dispute-resolution mechanisms. This policy update examines the major provisions of the Amendment, its implications for MSME formalisation and delayed payments, and the implementation challenges that may shape its effectiveness.

Key Provisions of the 2026 Amendment

The Micro, Small and Medium Enterprises Development (Amendment) Act, 2026 received Presidential assent on 13 August 2026 and was published the same day in the Gazette of India as Act No. 16 of 2026, having been passed by the Rajya Sabha on 3 August and the Lok Sabha on 7 August 2026. Its key provisions are:

• Classification: The substituted Section 7 empowers the Central Government to classify enterprises as micro, small or medium based on two criteria applied together: investment in plant and machinery or equipment, and turnover with thresholds to be set by notification rather than fixed permanently in the Act. Certain expenditure, including on pollution-control measures, R&D and industrial safety devices, may be excluded while calculating investment.
• Registration: Filing the Udyam memorandum becomes free and voluntary for all MSMEs, including medium manufacturing enterprises for which filing was previously mandatory. The Udyam Registration Portal is given statutory permanence as a digital, self-declaration-based platform. While voluntary registration can reduce compliance costs, it may also create a risk of lower participation in the formal enterprise database. A possible way to preserve formalisation incentives without adding compliance burdens would be to develop event-triggered registration or interoperability with existing government systems, such as GST records, allowing eligible enterprises to be identified and encouraged to register with minimal additional paperwork.
• Mandatory TReDS settlement: Every Central Public Sector Enterprise (CPSE) must route settlement of invoices for goods or services procured from MSMEs through a TReDS platform authorised by the Reserve Bank of India. An enabling provision allows States to similarly encourage their own public sector enterprises to adopt TReDS.
• Online Dispute Resolution and enforcement: The Act provides for an online mechanism for conducting mediation or arbitration through audio-visual and other electronic means, subject to notification and prescribed procedures. It also strengthens enforcement of Micro and Small Enterprise Facilitation Council (MSEFC) awards, allowing amounts due to be recovered as arrears of land revenue through the District Collector, Deputy Commissioner or another notified authority.
• Decriminalisation and graded penalties: Conviction-based fines are replaced with graded civil penalties. A first instance of furnishing wrong information draws a warning; penalties apply only for second and subsequent instances. A new Section 27A creates a formal adjudication and appeal mechanism, with the newly defined role of ‘Development Commissioner’ the administrative head of that office in the Ministry of MSME designated as the adjudicating officer, replacing the earlier requirement of an officer ‘not below the rank of Joint Secretary’.

An important procedural caveat applies throughout: the Act does not automatically commence on the date of assent. Individual provisions take effect only on dates the Central Government separately notifies, meaning the practical, operative timeline for several of these changes particularly around enforcement and dispute resolution depends on notifications yet to be issued at the time of writing.

Data Snapshot of India’s MSME Sector

Source: Economic Survey 2025-26, as cited in Press Information Bureau Factsheet, Ministry of MSME, Government of India (August 2026). 

The Delayed-Payment Problem

Delayed payment has been a persistent structural problem facing India’s MSEs, despite the original 2006 Act’s statutory 45-day payment mandate. The Ministry of MSME’s response has been layered and largely administrative: the MSME Samadhaan portal was launched in October 2017 to let MSEs file and track delayed-payment applications online, with cases automatically referred to the relevant State’s MSEFC for adjudication. Following the Aatmanirbhar Bharat announcements, a dedicated sub-portal was created within Samadhaan on 14 June 2020 specifically to track and report dues owed by Central Ministries, Departments and CPSEs and by December 2022, official figures showed that ₹1,65,034 crore in dues had been paid to MSMEs by Central Ministries, Departments and CPSEs since May 2020 under this monitoring mechanism.

Even so, the underlying backlog persisted, prompting further reform: an Online Dispute Resolution (ODR) portal was launched in June 2025 to give MSEs a faster, digital route to resolving disputes, and the MSEFC network has since expanded to 161 councils across States and Union Territories as of the Ministry’s August 2026 disclosure. Alongside dispute resolution, the Reserve Bank of India-regulated TReDS platform through which MSMEs discount verified trade receivables with competing financiers has scaled sharply: invoice discounting through TReDS rose from ₹40,000 crore in FY 2022-23 to ₹3.47 lakh crore in FY 2025-26, an almost ninefold increase in three years.

What the New TReDS Provisions Change

It is worth being precise about sequencing here. Even before the 2026 Amendment Act, the Ministry of MSME had already notified, on 30 June 2026, the mandatory use of TReDS by all operating CPSEs for settling MSME supplier invoices, an administrative notification issued pursuant to an announcement in the Union Budget 2026-27. What the Amendment Act does, once its relevant provisions are separately commenced, is write this requirement directly into the MSMED Act as a statutory obligation, rather than leaving it resting on an executive notification that a future government could revise or withdraw without Parliamentary involvement.

Beyond elevating the mandate’s legal status, the Act adds accountability mechanisms: CPSEs must disclose details of MSME invoices routed and settled through TReDS in the manner the RBI specifies, and must obtain a statutory auditor’s certificate confirming TReDS registration and compliance as part of their annual audit. The Act also creates an enabling but not mandatory — provision for State Governments to nudge their own public sector enterprises toward TReDS adoption, extending the model’s reach beyond the central government’s own CPSEs, albeit without the same binding force.

Implementation Challenges

Because the Act was only gazetted on 13 August 2026, no post-implementation outcome data yet exists, and the following are potential and expected challenges rather than observed failures:

• Commencement uncertainty: since the Act does not automatically take effect on assent, the precise operative timeline for its enforcement and dispute-resolution provisions depends on notifications the Central Government has not yet issued, creating a transitional period of legal ambiguity for both MSMEs and buyers.
• MSEFC capacity: the strengthened enforcement powers including arrears-of-land-revenue recovery through District Collectors will only be as effective as the capacity of the 161 existing MSEFCs and district administrations to process the resulting additional caseload.
• Uneven coverage of the TReDS mandate: All CPSEs are required to route settlement of invoices for goods and services procured from MSMEs through TReDS, while the framework enables State Governments to require their own public sector enterprises and other specified entities to use TReDS. This creates scope for variation in adoption across States and may limit the uniformity of the delayed-payment reform.
• Voluntary registration trade-off: making Udyam filing voluntary for all MSMEs, including medium manufacturing enterprises for which it was previously mandatory, eases compliance burden but could, if take-up is not otherwise incentivised, reduce the completeness of the formal enterprise base that government schemes and protections are designed around.
• No baseline for measuring impact yet: because the Act’s provisions are still pending commencement notifications, there is currently no post-Amendment data against which to assess whether the newly codified enforcement powers succeed where two decades of the original Act and successive portal-level reforms achieved only partial, slow-building progress.

Way Forward 

The 2026 Amendment provides a stronger statutory framework for addressing delayed payments and simplifying the regulatory environment for MSMEs, but its effectiveness will depend substantially on implementation and subsequent policy development. Several measures could complement the reforms.

First, strengthening formalisation without increasing compliance costs will be important. While making Udyam registration voluntary reduces the administrative burden on enterprises, it may also reduce the completeness of the formal enterprise database. Event-triggered registration or interoperability between Udyam and existing government systems, such as GST and other relevant business databases, could help identify eligible enterprises and facilitate registration with minimal additional paperwork.

Second, the coverage of TReDS could be progressively expanded. The Act mandates TReDS-based settlement for CPSEs but provides only an enabling mechanism for State Governments to encourage their public sector enterprises to adopt the platform. Establishing measurable State-level adoption targets, potentially accompanied by appropriate fiscal or performance-based incentives, could strengthen the reach of the delayed-payment reform. Policymakers could also examine the feasibility of extending TReDS requirements to large private-sector buyers, subject to suitable thresholds and implementation capacity.

Third, implementation of the new dispute-resolution and enforcement mechanisms should be monitored through transparent outcome indicators. The expansion of the MSEFC network and the introduction of Online Dispute Resolution are intended to make the resolution of delayed-payment disputes more timely and accessible. Regular publication of data on the number of cases filed, average resolution time, awards issued, and amounts actually recovered could help assess whether stronger statutory provisions are translating into effective enforcement.

Finally, the transition from administrative mechanisms to statutory obligations should be accompanied by clear commencement notifications, implementation guidelines and adequate institutional capacity. Since several provisions depend on subsequent notifications and operational arrangements, the effectiveness of the Amendment will ultimately depend not only on the legal changes themselves but also on how consistently they are implemented across the Centre and the States..

References 

      Press Information Bureau. (2026, August 11). The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026. Government of India. https://www.pib.gov.in/FactsheetDetails.aspx?Id=150826&reg=48&lang=2

      Press Information Bureau. (2026, August 11). The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026 [Key reform areas, TReDS and ODR data]. Government of India. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2297792&reg=3&lang=1

      Press Information Bureau. (2026, July). Faster Payments, Stronger MSME: Government Mandates TReDS for Settlement of All MSME Invoices by Central Public Sector Enterprises. Ministry of MSME, Government of India. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2283195&reg=48&lang=1

      Newsonair / All India Radio. (2026, August 13). Parliament Passes Micro, Small, Medium Enterprises Development (Amendment) Bill 2026. Government of India. https://newsonair.gov.in/parliament-passes-micro-small-medium-enterprises-development-amendment-bill-2026/

      Press Information Bureau. (2020). A Comprehensive Push for Rural and Semi-Urban MSMEs [Samadhaan sub-portal for CPSE dues; ₹1,65,034 crore paid since May 2020]. Ministry of MSME, Government of India. https://www.pib.gov.in/PressNoteDetails.aspx?id=158608&NoteId=158608&ModuleId=3&reg=6&lang=1

      Press Information Bureau. (n.d.). Schemes to Clear Delayed Payment in MSMEs. Ministry of MSME, Government of India. https://www.pib.gov.in/PressReleasePage.aspx?PRID=1942085

      Ministry of Micro, Small and Medium Enterprises. (n.d.). MSME SAMADHAAN — Delayed Payment Monitoring System [Official portal]. Government of India. https://samadhaan.msme.gov.in/

About the Contributor

Arya is a Research and Editorial Intern at IMPRI Impact and Policy Research Institute, New Delhi. A Master’s student pursuing Economics at Delhi School of Economics and Economics graduate from Shri Ram College of Commerce (SRCC), University of Delhi, and originally from Jharkhand, Arya’s research interests include Indian political economy, labour markets and development policy.

Acknowledgements

The author thanks the IMPRI review team (Sneha Kohli and Anooran Bordoloi) for their comments and guidance on this Policy Update. 

Disclaimer 

All views expressed in the article belong solely to the author and not necessarily to the organisation.

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