INTRODUCTION:
Micro, Small, and Medium Enterprises (MSMEs) contribute significantly to fostering well-rounded, inclusive, and fair economic growth and development. They achieve this by creating job opportunities and aiding in poverty alleviation, as recognized by the Organization for Economic Cooperation and Development (OECD) in 2004. MSMEs also help mitigate rural-urban migration by offering employment prospects in rural areas while promoting indigenous technologies. They accommodate occupational mobility and contribute to the industrialization in remote regions, thereby reducing regional disparities and fostering equitable distribution of income. Furthermore, MSMEs serve as valuable complements to large industries as ancillary units, underscoring their indispensable role in a country’s socioeconomic advancement. The basic understanding is that MSMEs are prone to falling into the trap set by the other big players in the market as they are largely unorganised and vulnerable to the dynamic external business environment.
The Micro, Small and Medium Enterprises (MSME) sector is the backbone of any economy generating employment across all sectors of the economy with limited capital and technology. It is estimated that India’s 63 million MSMEs contribute over 30% of India’s GDP and 45% of India’s exports, while employing around 111 million people. MSME entrepreneurs are not only job creators but also drive economic activities across the value chain.
To promote the growth of Micro, Small and Medium enterprises, the Ministry of Micro, Small and Medium Enterprises has formed National Small Industries Corporation (NSIC), which is a government of India enterprise providing support services such as marketing, finance, technology, and other services. NSIC also facilitates various schemes to enhance the competitiveness of these enterprises. Certain categories of wholesale and retail trades by MSMEs have been excluded from the requirement of pre-registration of UdyogAadhar registration under the MSMED Act, 2006.
DEFINITION:
MSME, which stands for Micro, Small and Medium Enterprises, are self-explanatory in their full form. They refer to small and medium-sized entities within our society that operate on a minor scale in laissez-faire capitalism, i.e. free market economy, thereby representing the most significant group of undertakings.
The criteria for categorizing small and medium enterprises (SMEs) vary from one economy to another. Many countries do not distinguish between micro and small enterprises, focusing instead on differentiation among small, medium, and large enterprises. Those that do make distinctions often use specific factors such as employee count, annual sales, turnover, or investment in machinery and equipment.
In India, the classification of Micro, Small, and Medium Enterprises (MSMEs) was established under Section 7 of the MSME Development Act of 2006. However, in response to the COVID-19 pandemic, the Cabinet Committee approved a revised definition of MSMEs via a notification on June 1, 2020. Under this new definition in India, both investment and turnover are employed as standardized criteria for classifying MSMEs.
PRE 2020:
Classification | Micro | Small | Medium |
Manufacturing enterprise | Investment < 25 lakh | Investment < 5 crore | Investment < 10 crore |
Service enterprise | Investment < 10 lakh | Investment < 2 crore | Investment < 5 crore |
POST 2020:
Classification | Micro | Small | Medium |
Manufacturing and service | Investment < 1 crore and turnover < 5 crore | Investment < 10 crore and turnover < 50 crore | Investment < 20 crore and turnover < 100 crore |
IMPORTANCE OF COMPETITION LAW FOR MSMEs:
The Competition Commission of India has the power to govern these enterprises, whereby they are vested with the power to prevent anti-competitive agreements and practices and abusive market conduct by dominant players in the relevant market. The Act majorly focuses on providing an equal playing field in the market for every enterprise and industry irrespective of their size and financial position thereby ensuring equal opportunities to take part in the economic growth. While the Act does indeed protect economic opportunities for SMEs, it is essential to acknowledge that SMEs are also bound by its regulations and provisions. The Competition Act of India applies to both large industries as well as SMEs, making them equally accountable for any actions that hinder fair competition.
MSMEs by virtue of their size are vulnerable to market abuses by larger enterprises enjoying greater market power. Market abuses could either be in the form of strategies to eliminate smaller competitors from the market or creating unfair conditions/prices imposed by a dominant buyer or a supplier. Further, they may also fall victim to offences such as cartelization. For instance, cartelization between large producers of raw materials such as steel, cement etc could affect the prices and/or supplies of inputs required by MSMEs. In addition, in the absence of adequate knowledge about the prevailing laws, including the competition law, makes MSMEs vulnerable to abuse of dominance by either the large suppliers of inputs or large customers/buyers.
Competition Act, 2002 lists down four overarching objectives it strives to achieve that is-
o To prevent practices having adverse effect on competition.
o To promote and sustain competition in markets.
o To protect the interests of consumers and
o To ensure freedom of trade carried on by other participants in markets.
Competition law in India does not carve out any exemption for MSMEs. Being a new law with severe consequences for breach, this makes MSMEs vulnerable. The application of the Competition act is size neutral, i.e., the turnover of the enterprise or the investment made in the plant and machinery is not a relevant factor for the applicationof section 3 of the act.
Section 4 of the Act prohibits abuse of dominant position but having a dominant position in the market by itself is not prohibited. Abuse of dominance takes several forms like imposing unfair and/or discriminatory terms, price discrimination, margin squeezing and predatory pricing, denial of market access to new players etc. However, before establishing abuse, it is necessary to establish dominance. Enterprises practicing the said conducts but not having a dominant position in the market do not face the competition scrutiny. It is very rare to come across instances where a MSME would be a dominant player in the relevant market and hence it is very unlikely that MSMEs would be found guilty of abusing their dominant position.
One of the primary objectives of a competition agency is to prohibit cartels since they injure customers by raising prices and restricting supply, thus making goods and services completely unavailable to some purchasers and unnecessarily expensive for others.
MSMEs face stiff competition from big players and margin for error in their business activity becomes minimum and therefore the survival of MSMEs becomes critical when big players start abusing their prevalent market position. It is observed that MSMEs working together have a thin line to cross which may place them as indulging in anti–competitive formation of cartel. The same can be construed for their existence in the market.
However, keeping in mind, the policy and practices governing MSMEs, the role of competition law cannot be diffused. Therefore, the relation between MSMEs and competition law is indispensable.
MSMEs: ALWAYS A VICTIM?
The MSME sector in India exhibits significant diversity concerning the enterprise size, technological levels and the range of products and services that are being offered. A notable portion of Indian SMEs operate in sectors such as retail trade, machinery, leather and textiles, often coexisting with larger enterprises. However, smaller businesses engaged in the production of goods suitable for mass production face a considerable challenge, as larger firms can manufacture such products more efficiently by benefitting from economies of scale. In situations where size confers advantages in purchasing, production, marketing, and distribution, MSMEs find themselves at a disadvantage compared to larger counterparts.
The interaction between SMEs and large corporations can occur at different points along the supply chain. On one hand, SMEs serve as suppliers to large enterprises, providing items like automotive components. On the other hand, they rely on large corporations for their input materials or raw materials. Frequently, SMEs feel that, as suppliers, they are mistreated by large corporations, which often delay payments for supplies beyond agreed contract terms. Since SMEs depend on these large corporations for their survival, they sometimes reluctantly accept unfair terms. When they act as buyers of products from large enterprises, these smaller firms incur high costs due to their limited negotiating and bargaining power. Consequently, these small enterprises contend that their size puts them at a disadvantage.
CASE LAW:
In the Auto Parts case, the CCI held 14 car companies liable for abusing their dominant position in the relevant market of supply of spare parts and imposed a hefty amount of penalty amounting to INR 2544.65 Crores. OEMs were found to be indulging in restrictive trade practices by not providing their original spare parts in the open market and also did not furnish other relevant information related to tools and technology required for carrying out repair. Therefore, it led to the denial of market access to the independent repairers, who are operating in the open market of servicing and spare parts.
In re: Faridabad Industries Association (FIA) v. M/s Adani Gas Limited, CCI found that that small firms are sometimes served with unconscionable terms and their position compels them to accept the adversarial offers as they don’t have option other than dealing with the dominant player. Moreover, in case of non-performance MSMEs are often subject to various unreasonable penalty clauses but the same high penalty clauses do not apply to the dominant player. Due to lack of bargaining power MSMEs in the downstream market left with no alternative other than accepting one sided terms of the contract viz unreasonably high prices, tie-in, bundling and to maintain minimum retail price.
CONCLUSION:
As per the recent widespread news regarding the plan of the Central Government to establish a training center worth Rs. 200 Crores in Goa in order to support the working of MSMEs, this statement was in itself expressed by the Chief Minister of the State in the NITI Aayog’s workshop on women-development. Therefore, it is to be understood that even though it is well established that MSMEs are at a vulnerable position to the abuse rendered by the larger players in the market, they are not always the victims, but they do tend to misuse the vulnerability against others. Henceforth, while making any allowance relating to MSMEs, the legislature or the Central Government should keep in mind the repercussions it might hold, considering the fact that MSMEs are capable of abusing their vulnerability.
BIBLIOGRAPHY
Written By,
Ishika Fatnani,
Intern, Chanchlani Law World
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