Reforming India's Payment Ecosystem for 7.47 Crore Enterprises

Study OAS Prism | August 9, 2026

 

The Micro, Small and Medium Enterprises (MSME) sector is not a peripheral category of the Indian economy — it is the connective tissue that holds manufacturing, employment, and exports together. Any legislative change affecting this sector reaches into the livelihoods of hundreds of millions of Indians. Understanding the Amendment Bill passed on August 7, 2026, therefore requires us to first comprehend the sector's weight.

Defining the Sector

Under the MSME Development Act, 2006, enterprises are classified based on investment in plant and machinery/equipment AND annual turnover, revised in 2020:

The 2020 revision was significant: it introduced turnover as a second criterion and raised investment ceilings substantially to account for inflation and the changed economic scale of Indian business. The 2026 Amendment goes further — it removes fixed thresholds from the Act itself, leaving them to be set by government notification, allowing flexibility without legislative amendments in the future.

Why the Sector Matters

• 7.47 crore registered enterprises as of 2025-26 — more than the entire formal workforce of many European nations
• 32.82 crore workers employed — India's single largest non-agricultural employer
• 31.1% of GDP — the sector's contribution to national output (Economic Survey 2026)
• 48.58% of total exports — MSMEs underpin India's export competitiveness in textiles, engineering goods, gems and jewellery
• 35.4% of manufacturing output — critical to India's aspirations under 'Make in India' and PLI schemes

These numbers underscore a fundamental truth: what happens to MSMEs does not stay in MSMEs. A liquidity crisis in this sector transmits quickly into rural unemployment, reduced tax revenues, and slowdown in the broader economy.

Before evaluating what the 2026 Amendment does, one must understand the specific disease it is designed to treat. For two decades, the single most debilitating structural problem for India's small enterprises has not been taxation, licensing, or even credit access — it has been delayed payment from large buyers.

The Scale of the Problem

According to the Economic Survey 2025-26, an estimated ?8.1 trillion (?8.1 lakh crore) remains locked in delayed payments across the MSME sector at any given time. This is not a rounding error — it represents a sum larger than the GDP of many countries.

Why Suppliers Don't Fight Back

The law — specifically Section 15 of the MSME Act, 2006 — already mandated that buyers pay within 45 days of accepting goods. In its absence of written agreement, the limit is 15 days. Yet large buyers routinely delay for 90, 120, or even 180 days. Why do small suppliers tolerate this?

The Economic Survey captures the core reason candidly: "When an MSME files a delayed payment case against a buyer, it may strain or even damage the business relationship." A Micro or Small enterprise that depends on one or two large buyers for the bulk of its orders cannot afford to be blacklisted. The legal remedy exists on paper; the commercial reality makes it unreachable.

The Facilitation Council Mechanism — A Well-Intentioned Failure

The 2006 Act created Micro and Small Enterprises Facilitation Councils (MSEFCs) — quasi-judicial bodies in each state mandated to conciliate and arbitrate delayed payment disputes. The mechanism had promise. The execution has been uneven. States like Punjab and Maharashtra established multiple councils; others operated with minimal capacity. Awards, even when secured, often remain unenforced. The 2026 Amendment attempts to fix the timeline and enforcement gaps — not the institutional will gap, which is harder to legislate.

Legislative Timeline

• Introduced in Rajya Sabha: July 28, 2026
• Rajya Sabha passage: August 3, 2026
• Lok Sabha passage: August 7, 2026
• Minister: Jitan Ram Manjhi, Union Minister for Micro, Small and Medium Enterprises

The Bill amends the MSME Development Act, 2006 across six major dimensions. Each change addresses a specific gap in the earlier framework.

The 90-Day Court Relief Rule

One of the most practically significant provisions is the new Section 18A. When a party challenges an MSEFC award in court, the court may now order payment of 'a reasonable percentage' of the disputed amount to the MSME during the pendency of the challenge. Critically, after six months of pendency, the minimum payment rises to 50% of the awarded sum. This prevents buyers from using court challenges as an indefinite deferral tool — a tactic that was rampant under the older framework.

The Trade Receivables Discounting System (TReDS) is an RBI-authorized electronic platform that enables MSMEs to discount their invoices against large buyers. In simple terms: an MSME supplies goods, raises an invoice, uploads it to TReDS, and financiers (banks, NBFCs) bid to purchase that receivable at a competitive discount rate. The MSME gets immediate cash; the financier collects payment from the buyer on due date.

How TReDS Resolves the Liquidity Problem

The genius of TReDS is structural. It removes the MSME from direct confrontation with the buyer. The MSME is paid now by a financier; the buyer repays the financier on the agreed date. The legal relationship is now between buyer and financier — not buyer and MSME. The MSME retains the commercial relationship intact while accessing liquidity.

Current Scale of TReDS

• ?2,00,000 crore — cumulative MSME invoice financing through RXIL (one of three active TReDS platforms)
• ?80,500 crore — financing in FY 2024-25 alone through RXIL
• 44,000+ MSMEs across 1,600 postal codes supported in FY25
• 88.5 lakh invoices discounted cumulatively through RXIL's digital infrastructure
• Three TReDS platforms currently operate: RXIL, Invoicemart (A.TReDS), and M1xchange — all regulated by RBI

The Mandatory CPSE Provision — Why It Matters

Previously, TReDS adoption by government buyers (CPSEs) was encouraged but not mandated. Large PSUs often chose to manage their own payment timelines. The 2026 Amendment mandates that every Central Public Sector Enterprise must settle all MSME procurement invoices through TReDS. This is significant because CPSEs — from Oil PSUs to defence manufacturers to infrastructure enterprises — are among the largest buyers from small enterprises.

State governments and other public entities may extend this mandate further through their own notifications, enabling a cascading compliance framework.

The shift from criminal penalties to graduated administrative fines in the 2026 Amendment is part of a broader legislative philosophy that has been reshaping Indian regulatory law since 2019. The idea is straightforward: when a provision criminalizes a technical or procedural lapse — providing incorrect information during registration, failing to file routine compliance reports — it creates a disproportionate deterrent that discourages voluntary compliance rather than encouraging it.

Penalty Structure Under the 2026 Amendment

These fines increase by a minimum of 10% every three years post-enactment, ensuring the deterrence value is maintained against inflation. The removal of criminal liability for registration-related lapses removes a genuine barrier that caused many enterprises — particularly first-generation entrepreneurs — to avoid formal MSME registration altogether, thereby forfeiting their access to government schemes and protections.

Broader Context: India's Decriminalization Trend

This Amendment follows a pattern established by the decriminalization of provisions in the Companies Act (2020), the Limited Liability Partnership Act (2021), and various sector-specific statutes. The objective across all these reforms is to distinguish between minor procedural lapses and genuine fraud — reserving criminal sanction for the latter.

Odisha's MSME sector has undergone a visible transformation in the five years between 2021 and 2026. Yet the aggregate registration data conceals a more complex reality of accelerating closures that demands sober examination — especially in the context of what the 2026 Amendment can and cannot deliver to the state's small enterprise ecosystem.

Growth in Numbers

The Troubling Closure Trend

The top three districts for closures — Khordha (601), Cuttack (293), and Ganjam (236) — are also the state's most active MSME districts. This is not coincidental: urban and semi-urban markets are more exposed to competition from large formal firms and online platforms. The closures suggest that registration numbers substantially overstate the health of Odisha's MSME ecosystem.

Odisha Government's Policy Response

The Odisha government, under Chief Minister Mohan Charan Majhi, has launched a comprehensive MSME drive. Key institutional actions:

• Odisha MSME Development Policy 2022 — provides Capital Investment Support of 25–30% (enhanced for women/SC/ST entrepreneurs), SGST reimbursement of 75–100% over 3–5 years, and 100% stamp duty exemption for qualifying enterprises
• Women Entrepreneurship Platform (WEP) — launched in collaboration with NITI Aayog, integrating Mission Shakti, Startup Odisha, and institutional banking to provide mentorship, finance, and market linkage to women entrepreneurs
• Rice Milling Cluster, Balasore — ?24.18 crore investment, targeting Odisha's dominant paddy-growing regions for value addition
• Rasagola Cluster, Pahala — ?17.70 crore investment, building organized manufacturing capacity for one of Odisha's most iconic food products with GI potential
• Multi-Product MSME Parks in Ganjam (?10 crore) and Kalahandi (?10 crore) — targeting industrially lagging areas with shared infrastructure
• Subhadra Yojana — over 1 crore women beneficiaries, with financial empowerment forming the base for micro-entrepreneurship expansion
• Target: $500 billion economy by 2036 — with every district housing at least one multi-product MSME park

Constitutional Provisions

• Article 19(1)(g) — Guarantees every citizen the right to practise any profession or carry on any occupation, trade or business. MSME promotion and protection legislation derives moral authority from this fundamental right.
• Article 38 — Directs the State to promote the welfare of the people and minimise inequalities in income and status — the foundational justification for preferential treatment of small enterprises.
• Article 39(b) and (c) — Ownership and control of material resources should subserve the common good; concentration of wealth should not be to the detriment of the community — the rationale for protecting small businesses from unfair buyer dominance.
• Article 43 — The State shall endeavour to secure, by suitable legislation, work and a living wage for all workers — directly applicable to the MSME workforce of 32.82 crore.
• Article 298 — Executive power to carry on trade or business; enables both Central and State governments to enter procurement commitments with MSME vendors.
• Seventh Schedule, Union List Entry 52 — Industries, the control of which by the Union is declared by Parliament by law to be expedient in the public interest — the primary legislative basis for the MSME Act.

Key Policy Documents and Initiatives

• National Manufacturing Policy, 2011 — Targeted 25% manufacturing share of GDP and 100 million jobs in manufacturing; MSMEs are central to this architecture.
• Aatmanirbhar Bharat Package (2020) — ?3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) provided critical liquidity to MSMEs during COVID-19; revised MSME classification was part of this package.
• PM Vishwakarma Yojana (2023) — Targets 18 categories of traditional artisans and craftspeople — the informal fringe of the MSME ecosystem — with skill upgradation and credit support.
• Udyam Registration Portal — Aadhaar-linked, self-declared, free digital registration system launched in 2020; the 2026 Amendment formalizes its digital-first, voluntary framework in statute.
• MSME Samadhaan Portal — Delayed payment monitoring system under which Micro and Small enterprises file payment applications against buyers; feeds into MSEFC processes that the 2026 Amendment now seeks to accelerate.

Genuine Strengths

• Mandatory TReDS for CPSEs is the single most impactful provision. Government procurement is predictable, large, and reliable — making it ideal for invoice discounting. MSMEs supplying CPSEs will see immediate liquidity improvement.
• Decriminalization removes a genuine deterrent to formal registration, expanding the number of enterprises that can access legal protections and government schemes.
• Enforcement through land revenue — treating MSEFC awards as land revenue arrears is a powerful mechanism; District Collectors can enforce without court intervention, bypassing the slow civil execution process.
• Flexibility in classification thresholds via notification means the government can respond rapidly to economic changes without waiting for Parliament, avoiding the rigidity that kept 2006 thresholds out of sync with inflation for 14 years.

Significant Gaps

• The retaliation problem remains unaddressed. No provision prevents a buyer from commercially blacklisting a supplier who invokes MSEFC remedies. Until MSMEs can complain anonymously or report through aggregated buyer conduct metrics, the chilling effect on legal action will persist.
• Medium enterprises excluded from payment protections. The Bill's dispute resolution framework and TReDS obligations apply only to Micro and Small enterprises. A firm with ?50 crore investment but ?200 crore turnover — a genuine medium enterprise — receives no additional payment protection.
• ODR Portal gap. The Online Dispute Resolution portal introduced as a faster channel has processed only 17 cases in eight months of operation — a near-complete failure of implementation that the Bill does not address.
• No mandatory digital integration. The Bill does not require automatic invoice recognition through GST systems. Without GST-TReDS-Udyam integration, buyers can still dispute invoice validity to delay payment regardless of the new timelines.
• Penalty amounts remain low. A maximum fine of ?1 lakh for systemic non-payment involving crores of rupees provides insufficient deterrence to large corporations. The bill's penalty framework needs a proportionality element — fines as a percentage of outstanding dues.
• State MSEFC capacity not addressed. The fundamental unevenness in facilitation council quality across states is an institutional problem that more timelines in the statute cannot solve without accompanying capacity-building investments.

The 2026 Amendment is a meaningful improvement. It will not, by itself, solve the delayed payment crisis. Converting its promise into practice requires action on multiple fronts simultaneously:

• GST-TReDS-Udyam integration — The government must mandate data sharing between the GST Network, TReDS platforms, and the Udyam portal. When an invoice is raised on the GST portal, it should automatically become TReDS-eligible without a separate upload. This eliminates buyer-side delays in invoice acceptance — the current system's biggest loophole.
• Mandatory habitual defaulter disclosure — Any buyer with more than 10 MSEFC cases pending or ?10 crore or more in unpaid dues should be required to publicly disclose this on their GST filing and Annual Report. Market-based deterrence — credit agencies, public procurement eligibility, equity analyst scrutiny — can supplement legal enforcement.
• One-District-One-Cluster strategy — Odisha's model of creating product-specific clusters (rice milling in Balasore, rasagola in Pahala) can be scaled into a national programme with matching support from the Centre, integrating Udyam registration, GeM onboarding, and TReDS access as a bundled package for cluster members.
• Digital literacy for MSME Samadhaan — The Bureau of Small Industries (BSI) and MSME Development Institutes must actively train MSME operators — particularly in Odisha's tribal districts — in using Samadhaan, Udyam, and TReDS platforms rather than assuming self-uptake.
• Proportional fines for large corporates — A future amendment should cap fines not at ?1 lakh flat but at a percentage (say, 1–3%) of outstanding dues, with each additional month of delay adding to the percentage. This creates genuine commercial incentive for large buyers to settle rather than contest.
• Review mechanism — Parliament's Standing Committee on Industry must be mandated to review the MSEFC performance data annually and table a report on state-level implementation, creating an accountability loop that the 2006 Act completely lacked.

The larger ambition behind this Amendment is a formal, transparent payment ecosystem where an entrepreneur in Bolangir can raise an invoice to a CPSE in Rourkela, discount it on TReDS within 48 hours, and receive working capital without fearing commercial retaliation. That ambition is structurally sound. Achieving it will depend on institutional implementation, not just legislative text.