Parliament Passes MSME Bill to Tackle Delayed Payments

Delayed payments have remained a major cash-flow problem for micro and small enterprises, prompting the amended law to introduce Online Dispute Resolution and stricter timelines for settling cases.

India has moved to strengthen protections for millions of small businesses after Parliament passed the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026, introducing tighter timelines for payment disputes, wider use of digital invoice financing and simpler compliance rules for enterprises.

The Lok Sabha passed the Bill on August 7 after its approval by the Rajya Sabha on August 3, marking a major update to the MSMED Act two decades after the original legislation was notified in 2006. The changes come as Udyam registrations have climbed from 1.65 crore in April 2023 to 9.16 crore, while the MSME sector supports employment for more than 40 crore people.

New Rules Target Delayed Payments

Delayed payments have remained a major cash-flow problem for micro and small enterprises, prompting the amended law to introduce Online Dispute Resolution and stricter timelines for settling cases.

Mediation must be completed within 90 days from the date fixed for the first appearance, while unresolved cases must be referred for arbitration within 30 days after mediation ends. An arbitral award must then be made within 90 days from completion of pleadings, creating clearer deadlines for businesses waiting to recover money.

Where an application challenging an award remains pending for more than six months, courts will be required to order payment of at least 50% of the awarded amount to the micro or small enterprise supplier.

Recovery powers have also been strengthened, allowing mediated settlements and arbitral awards covered by the law to be recovered as arrears of land revenue through the District Collector, Deputy Commissioner or another notified authority where the buyer's assets are located.

CPSE Invoices to Move Through TReDS

Central Public Sector Enterprises will be required to route settlement of invoices for goods and services purchased from MSMEs through Trade Receivables Discounting System platforms, commonly known as TReDS.

The digital system allows MSMEs to obtain liquidity against invoices rather than waiting for buyers to complete their normal payment cycles. Invoice discounting through TReDS has grown sharply from ₹40,000 crore in 2022-23 to ₹3.47 lakh crore during 2025-26, showing the platform's increasing role in small-business financing.

States will also have an enabling mechanism to encourage their public sector enterprises to use TReDS for invoice settlements.

Udyam Registration Gets Permanent Legal Backing

The amendments formally incorporate the twin criteria of investment in plant or machinery and turnover for MSME classification, bringing the legislation in line with the way enterprises are currently categorised.

Udyam Registration will receive permanent recognition in the Act as a free, digital and voluntary registration platform, supporting the wider formalisation of businesses while retaining voluntary registration for MSMEs.

States will gain greater flexibility over the composition of Micro and Small Enterprises Facilitation Councils, allowing more councils to be created where required and potentially reducing the time businesses spend waiting for payment disputes to be resolved.

Criminal Penalties Replaced With Graded Approach

Compliance provisions have also been softened as part of the government's push for a more trust-based regulatory environment, replacing several conviction-based punishments with warnings and graded civil penalties.

Non-compliance involving registration filings or incorrect information will generally attract a warning for the first instance before financial penalties apply to subsequent violations. Similar changes apply when buyers fail to disclose unpaid amounts and applicable interest in their annual accounts.

The government expects the revised framework to improve ease of doing business while giving smaller enterprises stronger mechanisms for recovering money owed to them. With MSMEs playing a large role in employment and domestic production, faster payments and easier dispute resolution could give businesses more working capital to invest, hire and expand as India pursues its Viksit Bharat 2047 goals.