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
- 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.
- For non-MSE industrial undertakings manufacturing reserved items, ensure prior FIPB approval for FDI exceeding 24% of paid-up capital.
- 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.
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
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.