MSME Development (Amendment) Act, 2026 - Addressing Cash Crunch and Dispute Resolution

The MSME Development (Amendment Act) 2026 was recently passed by the Parliament in August 2026. The Amendment brings some much needed reliefs for the MSMEs whose role has increased exponentially, driving the growth metrics of the country. As per the Economic Survey 2025-2026, MSMEs account for 31.1% of GDP, 35.4% of manufacturing output and 48.58% of exports, employing about 40 crore people.

As a result, the legal framework established by the MSME Act, 2006 required a major overhaul owing to the rapid growth of MSMEs and start-up ecosystem in India, aligning with the changing needs of the sector.

The key amendments brought by the Act are as follows:

1. Revised timeline for disputes: Once a dispute is referred for mediation by the MSME Facilitation Council, the mediation has to conclude within 90 days from the first appearance. If the mediation is unsuccessful, the dispute shall be referred to arbitration within 30 days. The arbitral award shall be made within 90 days from the date of completion of pleadings.

   Prior to the amendment, the time limit was governed by the Arbitration and Conciliation Act, 1996 which provides that the arbitration shall conclude within 12 months from the date of completion of pleadings.

   
   

2. Deposit of amount during pendency of Appeal: Under the MSME Act, 2006, if a party files an application for setting aside the Arbitral Award, such party shall deposit 75% of the awarded amount in the Court. The amendment goes a step further by providing that the Court may direct that a reasonable portion of the deposited amount may be paid to the Award Holder.

   The amendment further provides that if the appeal remains pending for more than six months, such payment must be 50% of the awarded amount.

3. Decriminalisation of Offences: The amendment has decriminalised the offence of non-filing of registration or non-supply of information which earlier attracted a conviction and a fine. Further, the amendment provides that offences such as furnishing incorrect information and non-disclosure of unpaid dues by buyers would attract a warning on the first instance and may be penalised for subsequent violations.

   
   

4. Payments from PSEs through TReDS: The Amendment mandates that all Central Public Sector Enterprises (PSUs) shall settle the invoices for goods and services procured from MSMEs through the Trade Receivables Discounting System (TReDS). TReDS is an RBI led mechanism which enables the MSMEs to convert or discount the unpaid bills into immediate cash for utilisation, without waiting for the actual payment.

   The States may opt for the use of TReDS for its Public Sector Enterprises but it is not mandatory.

5. Classification: Earlier, the MSMEs were classified on the basis of ‘plant and machinery in manufacturing and equipment in services’. The Amendment provides that the MSME shall be classified on the basis of ‘investment in plant and machinery or equipment and turnover’.

The government has taken a much needed step towards the strengthening of MSME sector, especially with respect to dispute resolution. MSMEs often face a cash crunch owing to the delayed payments and an even longer delay in dispute resolution. Some disputes may even take years to recover the due amount which severely hampers the business of the MSMEs. On this front, mandating a period of 90 days for completion of arbitration proceedings and subsequent release of the amount during pendency of the appeal is bound to improve the liquidity in the sector.