Home › Circulars › RBI/2013-14/498

FDI Rules for MSEs and Reserved Items Updated

Current · Source: Reserve Bank of India · RBI/2013-14/498 · issued 20 Feb 2014 · ~2 min read
Quick answerRBI revised FDI norms for MSEs (formerly SSIs) aligning with MSMED Act 2006. MSEs not in Annex A can issue shares/debentures to foreign investors per Annex B limits and entry routes. Non-MSE units with industrial licenses for reserved items need FIPB approval for FDI above 24%.
The rule, in the simplest words
How it plays out — a real example

A forex & trade-finance officer in Indore is reviewing a loan application from a small engineering firm that wants to bring in foreign money. The officer checks the firm's investment in machines—₹3 crore—and sees it qualifies as a small enterprise under the MSMED Act. Since the firm is not in Annex A and follows Annex B limits, the officer approves the FDI without needing extra government approval, making the process smooth for the customer.

What changed

The circular replaces the old SSI framework with the MSMED Act 2006 definitions for micro and small enterprises. It clarifies that MSEs can now issue shares or convertible debentures to foreign investors subject to Annex B limits and entry routes, without the earlier 24% cap. Non-MSE industrial undertakings manufacturing reserved items can exceed 24% FDI only with FIPB approval.

What it means for you

Banks must update their compliance checks for FDI proposals from MSEs, using the MSMED Act investment thresholds (plant & machinery up to ₹25 lakh for micro, ₹5 crore for small; equipment up to ₹10 lakh for micro, ₹2 crore for small). Lenders should verify that MSEs are not in Annex A activities and that any FDI above 24% by non-MSE units in reserved items has FIPB clearance. This streamlines FDI processing for small enterprises but adds a layer of scrutiny for reserved-sector units.

What you must do

Who it affects

Category-I Authorised Dealer Banks, Micro and Small Enterprises (MSEs) seeking FDI, Industrial undertakings manufacturing items reserved for MSE sector, Foreign investors in Indian MSEs

❓ Common questions

What are the new investment thresholds for MSEs under MSMED Act?

For manufacturing: micro enterprise investment in plant & machinery up to ₹25 lakh; small enterprise between ₹25 lakh and ₹5 crore. For services: micro enterprise equipment investment up to ₹10 lakh; small enterprise between ₹10 lakh and ₹2 crore.

Can an MSE issue shares to foreign investors beyond 24% of paid-up capital?

Yes, if it complies with Annex B limits and entry routes, and is not engaged in Annex A activities. The earlier 24% cap is replaced by the general FDI policy limits.

What approval is needed for a non-MSE unit manufacturing reserved items to get FDI above 24%?

Prior approval from the Foreign Investment Promotion Board (FIPB) of the Government of India is required.

📜 Read the original circular — full text as issued by RBI
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(DIR Series) Circular No.107 February 20, 2014 To All Category – I Authorised Dealer Banks Madam / Sir, Foreign Direct Investment (FDI) into a Small Scale Industrial Undertakings (SSI) / Micro & Small Enterprises (MSE) and in Industrial Undertaking manufacturing items reserved for SSI/MSE Attention of Authorised Dealer Category – I (AD Category-I) banks is invited to Schedule 1 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 notified by the Reserve Bank vide Notification No. FEMA. 20/2000-RB dated 3rd May 2000 , as amended from time to time. 2. In terms of the Schedule 1 of the Notification, ibid, an Indian company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annex A, may issue shares or convertible debentures to a person resident outside India, to the extent of 24% of its paid -up capital provided that such company may issue shares in excess of 24% of its capital if: (a) it has given up its small scale status, (b) it is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, and (c) it complies with the ceilings specified in Annex B to Schedule I of the Notification. 3. With the promulgation of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the extant policy for foreign direct investment (FDI) in Small Scale Industrial unit and in a company which has de-registered its small scale industry status and is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, has since been reviewed and it has been decided that; a company which is reckoned as Micro and Small Enterprises (MSE) (earlier Small Scale Industries) in terms of MSMED Act, 2006 and not engaged in any activity/sector mentioned in Annex A to schedule 1 to the Notification, ibid may issue shares or convertible debentures to a person resident outside India, subject to the limits prescribed in Annex B to schedule 1, in accordance with the entry routes specified therein and the provision of Foreign Direct Investment Policy, as notified by the Ministry of Commerce & Industry, Government of India, from time to time. any Industrial undertaking, with or without FDI, which is not an MSE, having an industrial license under the provisions of the Industries (Development & Regulation) Act, 1951 for manufacturing items reserved for manufacture in the MSE sector may issue shares in excess of 24 per cent of its paid up capital with prior approval of the Foreign Investment Promotion Board of the Government of India. 4. Further, in terms of the provisions of MSMED Act, (i) in the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951, a micro enterprise means where the investment in plant and machinery does not exceed twenty five lakh rupees; a small enterprise means where the investment in plant and machinery is more than twenty five lakh rupees but does not exceed five crore rupees; (ii) in the case of the enterprises engaged in providing or rendering services, a micro enterprise means where the investment in equipment does not exceed ten lakh rupees; a small enterprise means where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees. 5. Copy of Press Note No. 6(2009) dated September 4, 2009 issued by Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India in this regard is enclosed. 6. AD Category - I banks may bring the contents of the circular to the notice of their customers/constituents concerned. 7. Reserve Bank has since amended the Regulations and notified vide Notification No. FEMA. 230/2012-RB dated May 29, 2012 , notified vide. G.S.R. No.797(E) dated October 30, 2012 read with Corrigendum dated September 10, 2013 notified vide. G.S.R. No.624(E) dated September 12, 2013 . 8. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law. 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Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2013-14/498 · issued 20 Feb 2014. The plain-English explanation above is BankPulse’s own independent summary.
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Who does what — compliance checklist
💻 IT / Systems
  • For non-MSE industrial undertakings manufacturing reserved items, ensure prior FIPB approval for FDI exceeding 24% of paid-up capital.
📜 Compliance
  • Update internal FDI processing guidelines to reference MSMED Act 2006 definitions for micro and small enterprises.
  • Verify that MSE clients seeking FDI are not engaged in Annex A activities and comply with Annex B limits and entry routes.
  • Advise customers to maintain documentation proving MSE status as per MSMED Act investment thresholds.
  • Train staff on the revised FDI caps and approval requirements for reserved-sector units.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template

Example: if you are a Compliance officer at a bank this circular applies to (Category-I Authorised Dealer Banks, Micro and Small Enterprises (MSEs) seeking FDI, Industrial undertakings manufacturing items reserved for MSE sector, Foreign investors in Indian MSEs), your first concrete step on “FDI Rules for MSEs and Reserved Items Updated” is: “Update internal FDI processing guidelines to reference MSMED Act 2006 definitions for micro and small enterprises.” (RBI issued this 20 Feb 2014).

  1. Circular: RBI/2013-14/498 -- FDI Rules for MSEs and Reserved Items Updated
  2. Issued: 20 Feb 2014
  3. Action required: Update internal FDI processing guidelines to reference MSMED Act 2006 definitions for micro and small enterprises.
  4. Action required: Verify that MSE clients seeking FDI are not engaged in Annex A activities and comply with Annex B limits and entry routes.
  5. Action required: For non-MSE industrial undertakings manufacturing reserved items, ensure prior FIPB approval for FDI exceeding 24% of paid-up capital.
  6. Action required: Advise customers to maintain documentation proving MSE status as per MSMED Act investment thresholds.
  7. Action required: Train staff on the revised FDI caps and approval requirements for reserved-sector units.
  8. Owner: ____________ Target date: ____________
  9. Board/committee approval needed? Y / N
  10. Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.

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Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8750&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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