Parliament has recently passed the Micro, Small and Medium Enterprises Development (Amendment) Bill 2026 (“Amendment Bill”) in the current monsoon session. The Rajya Sabha passed the Amendment Bill by voice vote on 3 August 2026, and the Lok Sabha followed on 7 August 2026. The Bill now awaits the assent of the President.

The use of conciliation and arbitration under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), with a limited timeline of 90 days and interest compounding at monthly rests was a deliberate design to compel defaulting parties to promptly pay the outstanding amounts owed to MSMEs. However, in a system plagued with delayed adjudication and cases pending for years, the 90-day timeline got pushed to the background. The mechanism implemented with the intention of providing a simple and effective remedy for recovery of money eventually metamorphosed into a highly contested dispute resolution, leading to substantial delays. The data on the MSME Samadhaan website is evidence of the fact that a huge number of cases remain pending, depriving MSMEs of crucial funds to operate their businesses. This reflected a pain point for the MSME sector as well as the government. Consequently, it is understandable that the most emphasis in the Amendment Bill has been placed on this aspect of the MSME Act.

Why an Amendment was Overdue

Three separate issues led to the majority of the amendments in the Amendment Bill.

The first issue pertained to structural rigidity. Section 7 of the MSME Act classified the micro, small, and medium enterprises (“MSMEs”) on the basis of fixed investment and turnover thresholds. The 2020 revision of these thresholds had already been achieved through notification under the existing section 7, and the drafters of the 2026 Bill have simply completed that logic by removing the numbers from the MSME Act altogether and leaving the Central Government to notify them, indicating an important step considering the composition in the MSME sector shifts at a fast pace with inflation, with input costs, and with policy priorities.

The second issue, as discussed above, was the scale of overdue payments that section 18 exists to address. The current figures of the cases before the Micro, Small, and Medium Enterprises Facilitation Councils (“MSEFCs”) as per the MSME Samadhaan website are as under:

Table 1. Status of the cases filed before MSEFCs as per the data available on MSME Samadhaan portal as on 12 August 2026

The amount of Rs. 20,990.53 crore reveals that an amendment was required for facilitating the release of the unpaid dues of MSMEs.

The third issue is that the MSME Act's penalty architecture had criminalised routine compliance failures. Section 27 and the newly inserted section 27A now reflect the Government's shift from criminalisation to compliance, removing criminal consequences and providing for monetary penalties.

The Reforms

Clause 4 of the Amendment Bill amends section 7 and clause 5 substitutes section 8 with a new provision. The amendments work together to move both classification and registration out of primary legislation and into administrative machinery. The Udyam portal, which had operated administratively since 2020, now acquires statutory permanence as a free and voluntary national digital platform, with State Governments permitted to run parallel platforms for State-specific benefits. The unamended MSME Act required registration within 180 days for manufacturing medium enterprises and certain pre-existing units, while remaining discretionary for micro, small and services-medium enterprises. The Amendment Bill removes the requirement altogether and relies instead on the fact that credit guarantees, Trade Receivables Discounting System (“TReDS”) access and, crucially, recourse to the MSEFC mechanism itself remain conditioned on registration, which creates an incentive to register that operates through the promise of benefit rather than through the threat of penalty.

Newly introduced section 15A is one of the more consequential provisions in the Amendment Bill, because it pushes adoption of the TReDS system by MSMEs and government entities through statutory obligation rather than administrative encouragement. Every Central Public Sector Enterprise (“CPSE”) must now route settlement of MSME procurement invoices through an RBI-authorised Trade Receivables Discounting System platform, with a notwithstanding clause overriding inconsistent law, and both the Central Government and willing State Governments may extend the same obligation to other public bodies. Further, section 22A requires every CPSE and notified public body to report the details of invoices routed and settled through TReDS.

Section 18 has already been revised once by way of the Mediation Act, 2023, whose Seventh Schedule inserted a mandatory mediation stage ahead of arbitration and rewrote its later sub-sections. The Amendment Bill provides for strict timelines for each stage of dispute resolution:

Table 2. Section 18 timelines introduced by the Amendment Bill

The amended provision substitutes the current sub-section (5) with a new sub-section and fixes jurisdiction to the supplier's registered address regardless of where the buyer is located. Sub-section (6) adds an online dispute resolution mechanism, to be notified by the Central Government, contemplating video conferencing, electronic filing and electronic recording of evidence.

Before the Amendment Bill, a mediated settlement or an arbitral award under section 18 was enforceable only through ordinary execution proceedings or, for an award, as a decree under the Arbitration and Conciliation Act, 1996, a route suppliers have long complained is slow. New section 18A allows recovery of either a mediated settlement or an arbitral award as an arrear of land revenue through the State's District Collector or Deputy Commissioner, and deems the amount a legally enforceable debt recognisable under the Insolvency and Bankruptcy Code, 2016, opening the possibility of triggering insolvency proceedings against a defaulting buyer on the strength of the award or settlement alone.

Section 19 has been one of the most litigated provisions in the Act, because it mandates that a buyer deposit 75% of the awarded amount for challenging an MSEFC award. Clause 10 of the Amendment Bill retains the deposit requirement, but it introduces a new safeguard, mandating release of at least 50% of the awarded amount to the supplier once the challenge has been pending for more than six months, and it expressly fixes jurisdiction to the court within whose territory the supplier's registered address is located, addressing a recurring forum shopping dispute.

Clauses 11 and 12 of the Amendment Bill, substituting sections 20 and 21 of the MSME Act, require States to establish an adequate number of Facilitation Councils corresponding to the volume of pending cases, and mandate regular meetings on a prescribed schedule. Further, for the first time every Council must include at least one member from the field of law, which may help address a long-standing criticism that Councils acting as arbitrators under section 18(3) frequently lacked the legal expertise to conduct proceedings and write awards capable of withstanding scrutiny under section 34 of the Arbitration and Conciliation Act.

Sections 27 and 27A replace conviction-based fines, which ranged up to one thousand rupees for a first conviction and between one thousand and ten thousand rupees for a subsequent one, with a graded, administratively adjudicated penalty beginning with a warning at first instance.

Table 3. New penalty structure under sections 27 and 27A

The Development Commissioner becomes the adjudicating officer for levying penalties, with a thirty-day window to appeal to the MSME Secretary and a sixty-day period within which that appeal must be disposed of, and minimum penalties are set to rise by ten per cent every three years.

What the Amendment Bill Leaves Untouched

Several Supreme Court judgments on section 18 remain undisturbed by the Amendment Bill. As per the dictum in Silpi Industries v. Kerala State Road Transport Corporation, the Limitation Act, 1963 continues to apply to a reference under section 18(3) of the MSME Act, and a supplier must be registered under the Act at the relevant time to claim the benefit of section 18. In Jharkhand Urja Vikas Nigam Ltd. v. State of Rajasthan, the Supreme Court held that a Facilitation Council must properly record the failure of conciliation and follow the statutory sequence before proceeding to arbitration. And, in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd., the Supreme Court held that section 18 read with the non-obstante clause in section 24 of the MSME Act supersedes the section 80 bar entirely, so that a Facilitation Council which has conducted conciliation is fully competent to continue as the arbitral tribunal for the same dispute, and that this statutory mechanism overrides even an independent arbitration agreement the parties may have entered into for the same underlying transaction. These findings continue to hold true.

However, the Amendment Bill does not address an important issue that is affecting MSMEs. In several judgments, such as Sterling Wilson Pvt. Ltd. v. Union of India & Ors., Tata Power Company Ltd. v. Genesis Engineering Co., P.L. Adke v. Wardha Municipal Corporation, and National Textile Corporation Ltd vs. Elixir Engineering Pvt Ltd & Anr., the High Courts have held that a dispute arising out of a works contract cannot be adjudicated under the MSME Act. As a result, a substantial number of contracts entered into by an MSME have been excluded from the purview of the dispute resolution mechanism. The issue is currently pending before the Supreme Court for a final resolution in P.L. Adke v. Wardha Municipal Corporation [SLP(C) No. 4970/2021]. The Amendment Bill could have resolved the issue by including works contracts under the definition of enterprises under section 2(e) of the MSME Act. Secondly, the Government ought to have found a way to curb buyers' practice of filing writ petitions at different stages of dispute resolution merely to stall the recovery process. These omissions, particularly when the Act is being amended after two decades, are a missed opportunity.

The Amendment Bill envisages several changes for the benefit of MSMEs such as voluntary digital registration, monetary penalties instead of criminal consequences for non-compliance, mandatory routing of CPSE payments through TReDS, strict timelines for concluding mediation and arbitration, and an adequate number of MSEFCs to handle the caseload. At the same time, it leaves certain questions open, including the exclusion of works contracts from the purview of the MSME Act, the uncertain status of the section 18 timelines and the absence of any stated consequence for missing them, and the absence of a mechanism to curb buyers' repeated use of writ petitions to stall dispute resolution and the enforcement of awards. All in all, the Amendment Bill makes relevant changes to the MSME Act. Now, whether the amendments turn out to be a boon or a bane will have to be seen upon their implementation.

Author is an Advocate based in Delhi. Views are personal.