Our Constitution provides protection against laws imposing criminal liability for actions committed prior to the enactment of the law. Article 20 (1) under the Part III (Fundamental Rights), reads: 20. (1) No person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. Thus, the maximum penalty that can be imposed on an offender cannot exceed those specified by the laws at the time. In the context of the Bhopal Gas tragedy in 1984, the Indian Penal Code (IPC) was the only relevant law specifying criminal liability for such incidents. The CBI, acting on behalf of the victims, filed charges against the accused under section 304 of the IPC (See Note 1). Section 304 deals with punishment for culpable homicide and requires intention of causing death. By a judgment dated September 13, 1996, the Supreme Court held that there was no material to show that “any of the accused had a knowledge that by operating the plant on that fateful night whereat such dangerous and highly volatile substance like MIC was stored they had the knowledge that by this very act itself they were likely to cause death of any human being.” The Supreme Court thus directed that the charges be re-framed under section 304A of the IPC (See Note 2). Section 304A deals with causing death by negligence and prescribes a maximum punishment of two years along with a fine. Consequently, the criminal liability of the accused lay outlined by section 304A of the IPC and they were tried accordingly. Civil liability, on the other hand, was adjudged by the Courts and allocated to the victims by way of monetary compensation. Soon after the Bhopal Gas tragedy, the Government proposed and passed a series of laws regulating the environment, prescribing safeguards and specifying penalties. These laws, among other things, filled the legislative lacunae that existed at the time of the incident. Given the current provisions (See Note 3), a Bhopal like incident will be tried in the National Green Tribunal (once operationalized) and most likely, under the provisions of the the Environment (Protection) Act, 1986. The criminal liability provisions of the Act (See Note 4) prescribe a maximum penalty of five years along with a fine of one lakh rupees. Further, if an offence is committed by a company, every person directly in charge and responsible will be deemed guilty, unless he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such an offence.
The civil liability will continue to be adjudged by the Courts and in proportion to the extent of damage unless specified separately by an Act of Parliament.
Notes 1) IPC, Section 304. Punishment for culpable homicide not amounting to murder Whoever commits culpable homicide not amounting to murder shall be punished with imprisonment for life, or imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine, if the act by which the death is caused is done with the intention of causing death, or of causing such bodily injury as is likely to cause death, Or with imprisonment of either description for a term which may extend to ten years, or with fine, or with both, if the act is done with the knowledge that it is likely to cause death, but without any intention to cause death, or to cause such bodily injury as is likely to cause death. 2) IPC, Section 304A. Causing death by negligence Whoever causes the death of any person by doing any rash or negligent act not amounting to culpable homicide, shall be punished with imprisonment of either description for a term which may extend to two years, or with fine, or with both. 3) Major laws passed since 1984: 1986 - The Environment (Protection) Act authorized the central government to take measures to protect and improve environmental quality, set standards and inspect industrial units. It also laid down penalties for contravention of its provisions. 1991 - The Public Liability Insurance Act provided for public liability - insurance for the purpose of providing immediate relief to the persons affected by an accident while handling hazardous substances. 1997 - The National Environment Appellate Authority Act established to an appellate authority to hear appeals with respect to restriction of areas in which any industries, operations or processes are disallowed, subject to safeguards under the Environment (Protection) Act, 1986. 2009 - The National Green Tribunal Act, yet to be notified, provides for the establishment of a tribunal for expeditious disposal of cases relating to environmental protection and for giving relief and compensation for damages to persons and property. This Act also repeals the National Environment Appellate Authority Act, 1997. 4) Criminal liability provisions of the Environment Protection Act, 1986 Section 15. Penalty for contravention of the provisions of the Act (1) Whoever fails to comply with or contravenes any of the provisions of this Act, or the rules made or orders or directions issued thereunder, shall, in respect of each such failure or contravention, be punishable with imprisonment for a term which may extend to five years with fine which may extend to one lakh rupees, or with both, and in case the failure or contravention continues, with additional fine which may extend to five thousand rupees for every day during which such failure or contravention continues after the conviction for the first such failure or contravention. (2) If the failure or contravention referred to in sub-section (1) continues beyond a period of one year after the date of conviction, the offender shall be punishable with imprisonment for a term which may extend to seven years. Section 16. Offences by Companies (1) Where any offence under this Act has been committed by a company, every person who, at the time the offence was committed, was directly in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.
On June 1, 2020, the Cabinet Committee on Economic Affairs approved a revision in the definition of Micro, Small and Medium Enterprises (MSMEs).[1] In this blog, we discuss the change in the definition as approved by the Cabinet, and examine some of the common criteria used for classification of MSMEs.
Currently, MSMEs are defined under the Micro, Small and Medium Enterprises Development Act, 2006.[2] The Act classifies them as micro, small and medium enterprises based on: (i) investment in plant and machinery for enterprises engaged in manufacturing or production of goods, and (ii) investment in equipment for enterprises providing services. As per the Cabinet approval, the investment limits will be revised upwards and annual turnover of the enterprise will be used as additional criteria for the classification of MSMEs (Table 1).
Earlier attempts to amend the definition of MSMEs
The central government has sought to revise the definition of MSMEs in the Act on two earlier occasions. The government introduced the MSME Development (Amendment) Bill, 2015 which proposed to increase the investment limits for manufacturing and services MSMEs.[3] This Bill was withdrawn in July 2018 and another Bill was introduced. The MSME Development (Amendment) Bill, 2018 proposed to: (i) use annual turnover as criteria instead of investment for classification of MSMEs, (ii) remove the distinction between manufacturing and services, and (iii) provide the central government with the power to revise the turnover limits, through a notification.[4] The 2018 Bill lapsed with the dissolution of 16th Lok Sabha.
Global trends in criteria for the classification of MSMEs
While India will now be using investment and annual turnover as the criteria to classify MSMEs, globally, the number of employees is the most widely used criteria for classifying MSMEs. The Reserve Bank of India's Expert Committee on MSMEs (2019) cited a study by the International Finance Corporation in 2014 which analysed 267 definitions used by different institutions in 155 countries.[5],[6] According to the study, countries used a combination of criteria to classify MSMEs. 92% of the definitions used the number of employees as one of the criteria. Other frequently used criteria were: (i) turnover (49%), and (ii) value of assets (36%). 11% of the analysed definitions used alternative criteria such as: (i) loan size, (ii) years of experience, and (iii) initial investment.
Evaluation of common criteria used to define MSMEs
Investment: The 2006 Act uses investment in plant, machinery, and equipment to classify MSMEs. Some of the issues with the investment criteria include:
Due to their informal and small scale of operations, firms often do not maintain proper books of accounts and hence find it difficult to get classified as MSMEs as per the current definition.5
The investment-based classification incentivises promoters to keep the investment size restricted to retain the benefits associated with the micro or small category.7
Turnover: The 2018 Bill sought to replace the investment criteria with annual turnover as the sole criteria for the classification of MSMEs. The Standing Committee agreed with the proposal under the Bill to use annual turnover as the criteria instead of investment.7 It observed that this could overcome some of the shortcomings of classification based on investment. While turnover based criteria will also require verification, the Committee noted that the GST Network (GSTN) data can act as a reliable source of information for this purpose. However, it also observed that:7
With turnover as a criterion for classification, corporates may misuse the incentives meant for MSMEs. For instance, there is a possibility that a multi-national company may produce a large quantity of products worth a high turnover and then market it through various subsidiaries registered as Micro or Small enterprise under GSTN.
The turnover of some enterprises may fluctuate depending on their business, which may result in the change of classification of the enterprise during a year.
The Committee noted that there is a wide gap in turnover limits. For instance, an enterprise with a turnover of Rs 6 crore and an enterprise with a turnover of Rs 75 crore (as proposed in 2018 Bill) would both be classified as a small enterprise, which seems incongruous.
The Expert Committee (RBI) also recommended using annual turnover as the criteria for classification instead of investment.5 It observed that turnover based definition would be transparent, progressive, and easier to implement through the GSTN. It also recommended that the power to change the definition of MSMEs should be delegated to the executive as it will help in responding to changing economic scenarios.
Number of employees: The Standing Committee had highlighted that in a labour-intensive country like India, appropriate focus is required on employment generation and MSME sector is the most suitable platform for this.7 It had recommended that the central government should assess the number of persons employed in the MSME sector and also consider employment as a criterion while classifying MSMEs. However, the Expert Committee (RBI) stated that while the employment-based definition is an additional feature preferred in some countries, the definition would pose challenges in implementation.5 According to the Ministry of MSME, employment as a criterion has problems due to: (i) factors such as seasonality and informal nature of engagement, (ii) similar to investment criteria, this would also require physical verification and has associated cost overheads.7
Number of MSMEs
According to the National Sample Survey (2015-16), there were around 6.34 crore MSMEs in the country. The micro sector with 6.3 crore enterprises accounted for more than 99% of the total estimated number of MSMEs. The small and medium sectors accounted for only 0.52% and 0.01% of the estimated number of enterprises, respectively. Another dataset to understand the distribution of MSMEs is Udyog Aadhaar, a unique identity provided by the Unique Identification Authority of India (UIDAI) to MSME enterprises.[8] Udyog Aadhaar registration is based on self-declaration by enterprises. Between September 2015 and June 2020, 98.6 lakh enterprises have registered with UIDAI. According to this dataset, micro, small, and medium enterprises comprise 87.7%, 11.8% and 0.5% of the MSME sector respectively.
Employment in the MSME sector
The MSME sector employed nearly 11.1 crore people in 2015-16. The sector was the second largest employer after the agriculture sector. The highest number of employed persons were engaged in trade activity (35%), followed by persons engaged in manufacturing (32%).
Implications of change in the definition of MSMEs
The change in the definition of MSMEs may result in many enterprises which are currently classified as Small enterprises be reclassified as Micro, and those classified as Medium enterprises be reclassified as Small. Further, there may be many enterprises which are not currently classified as MSMEs, which may fall under the MSME classification as per the new definition. Such enterprises will also now benefit from the schemes related to MSMEs. The Ministry of MSME runs various schemes to provide for: (i) flow of credit to MSMEs, (ii) support for technology upgrade and modernisation, (iii) entrepreneurship and skill development, and (iv) cluster-wise measures to promote capacity-building and empowerment of MSME units. For instance, under the Credit Guarantee Fund Scheme for Micro and Small Enterprises, a credit guarantee cover of up to 75% of the credit is provided to micro and small enterprises.[9] Thus, the re-classification may require a significant increase in budgetary allocation for the MSME sector.
Other announcements related to MSMEs in the aftermath of COVID-19
MSME sector accounted for nearly 33.4% of the total manufacturing output in 2017-18.[10] During the same year, its share in the country’s total exports was around 49%. Between 2015 and 2017, the contribution of the sector in GDP has been around 30%. Due to the national lockdown induced by COVID-19, businesses including MSMEs have been badly hit. To provide immediate relief to the MSME sector, the government announced several measures in May 2020.[11] These include: (i) collateral-free loans for MSMEs with up to Rs 25 crore outstanding and up to Rs 100 crore turnover, (ii) Rs 20,000 crore as subordinate debt for stressed MSMEs, and (iii) Rs 50,000 crore of capital infusion into MSMEs. These measures have also been approved by the Union Cabinet.[12]
For more details on the announcements made under the Aatma Nirbhar Bharat Abhiyan, see here.
[1] “Cabinet approves Upward revision of MSME definition and modalities/ road map for implementing remaining two Packages for MSMEs (a)Rs 20000 crore package for Distressed MSMEs and (b) Rs 50,000 crore equity infusion through Fund of Funds”, Press Information Bureau, Cabinet Committee on Economic Affairs, June 1, 2020.
[2] The Micro, Small and Medium Enterprises Development Act, 2006, https://samadhaan.msme.gov.in/WriteReadData/DocumentFile/MSMED2006act.pdf.
[3] The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2015, https://www.prsindia.org/sites/default/files/bill_files/MSME_bill%2C_2015_0.pdf.
[4] The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018, https://www.prsindia.org/sites/default/files/bill_files/The%20Micro%2C%20Small%20and%20Medium%20Enterprises%20Development%20%28Amendment%29%20Bill%2C%202018%20Bill%20Text.pdf.
[5] Report of the Expert Committee on Micro, Small and Medium Enterprises, The Reserve Bank of India, July 2019, https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/MSMES24062019465CF8CB30594AC29A7A010E8A2A034C.PDF.
[6] MSME Country Indicators 2014, International Finance Corporation, December 2014, https://www.smefinanceforum.org/sites/default/files/analysis%20note.pdf.
[7] 294th Report on Micro Small and Medium Enterprises Development (Amendment) Bill 2018, Standing Committee on Industry, Rajya Sabha, December 2018, https://rajyasabha.nic.in/rsnew/Committee_site/Committee_File/ReportFile/17/111/294_2019_3_15.pdf.
[8] Enterprises with Udyog Aadhaar Number, National Portal for Registration of Micro, Small & Medium Enterprises, Ministry of Micro, Small and Medium Enterprises, https://udyogaadhaar.gov.in/UA/Reports/StateBasedReport_R3.aspx.
[9] Credit Guarantee Fund Scheme for Micro and Small Enterprises, Ministry of Micro, Small and Medium Enterprises, http://www.dcmsme.gov.in/schemes/sccrguarn.htm.
[10] Annual Report 2018-19, Ministry of Micro, Small and Medium Enterprises, https://msme.gov.in/sites/default/files/Annualrprt.pdf.
[11] "Finance Minister announce measures for relief and credit support related to businesses, especially MSMEs to support Indian Economy’s fight against COVID-19", Press Information Bureau, Ministry of Finance, May 13, 2020.
[12] "Cabinet approves additional funding of up to Rupees three lakh crore through introduction of Emergency Credit Line Guarantee Scheme (ECLGS)", Press Information Bureau, Ministry of Finance, May 20, 2020.
