MSME Definitions

Definitions of Micro, Small & Medium Enterprises In accordance with the provision
of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small
and Medium Enterprises (MSME) are classified in two Classes:
1) Manufacturing Enterprises-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) or employing plant and machinery in the
process of value addition to the final product having a distinct name or character or
use. The Manufacturing Enterprise are defined in terms of investment in Plant &
Machinery.
2) Service Enterprises:-The enterprises engaged in providing or rendering of services
and are defined in terms of investment in equipment..

Classification of SSI

1. Manufacturing industries – These are industries which produce complete articles for
direct consumption, and processing industries
2. Feeder industries – These are industries specialized in certain type of products or
services. E.g. casting, welding, electro-plating, etc
3. Servicing industries – They include light repair shops necessary to maintain
mechanical equipments
4. Ancillary industries – These are industries producing parts and components necessary
for large industries and rendering services to them.
5. Mining and quarrying industries
Another mode of classification of the SSIs is mentioned below:

a) Urban-based modern small industries

b) Agro-based industries in semi-urban areas
c) Rural artisans – They include carpenters, blacksmiths, weavers, etc who utilize the
primitive means of production & their markets are highly localized
d) Rural handicrafts – They possess traditional skills and produce goods of excellence
and artistic value, without the aid of modern technology
Objectives of SSIs

i. To provide large scale employment with relatively low investment

 ii. To improve the standard of living of the people of the country
iii. To promote the industrial development of backward and tribal areas of the country
iv. To promote balanced regional development of the country
v. To ensure a more equitable distribution of income and wealth
vi. To encourage dispersal of industries in rural areas, villages, small towns, and other
economically lagging regions
vii. To stimulate the growth of industrial entrepreneurship
viii. To facilitate an effective mobilization of resources of capital and skill which might
otherwise remain unutilized
ix. To make significant progress in quality upgradation and standardization through the
adoption of modern techniques
x. To attain self-reliance

Characteristics of SSIs

1. They require only less capital

2. They are labour intensive & provide more employment opportunities for a given level
of management
3. They are skill light & require only simple technology usually handled manually. They
can be run and managed by any person with some basic training
4. Value addition is greater in SSI units than in large units. Value addition refers to the
amount of wealth generated by a business unit in its operation.
5. They are quick yielding in nature since their gestation period is less
6. They utilize the local resources which leads to wider distribution of industries and
further balanced regional development of the nation
7. They are more flexible than LSI units as they are more susceptible to changes and
highly reactive and receptive to socio-economic conditions. They are more flexible to
adapt changes like introduction of new products, new methods of production, new
markets, new forms of organization, etc.
8. They generally cater to the needs of local and regional demands
9. There is a personal touch between the employer and employees and between the
owner and customers, suppliers, etc.
10. SSI can be set up throughout the country as against the concentration of major
industries in certain areas, thereby reducing the regional imbalances in economic
growth and development.

Steps for setting up a SSI unit

1) Selection of the product & preparation of product profiles – An innovative

entrepreneur can either design a new product, or as an adoptive entrepreneur, he can
adopt the innovations of others. While selecting a product, the economic viability of
the product must be analysed. For this purpose, he must collect information’s
regarding the following by conducting market surveys and also from the publications
of various developmental agencies:
a. Volume of existing demand in both domestic and foreign market
b. Volume of aggregate existing demand in all market
c. Volume of potential demand
d. Degree of import substitution and substitution of an existing product
e. Demand of ancillary products by big units
 2) Selection of form of ownership – He must select the most appropriate form of
ownership for his business i.e. either sole proprietorship or family ownership or
partnership or private limited company. While selecting the form of organization, he
must consider the economic viability and the barriers associated with any particular
form of organisation
3) Selection of site or plot for factory or shed – He can select a suitable site from among
the following:
a. Select plots in industrial areas or estates developed by govt. or governmental
agencies
b. Choose plots in private industrial estates developed by private agencies
c. Purchase land and develop it for his own industry
d. Select a site available in free trade zone (FTZ). For this purpose, he must also
obtain permission from the district collector or his subordinate officers for
starting the business in the selected areas
While selecting a site an entrepreneur has to take into consideration the following
factors (discussed later)

4) Designing capital structure (refer sources of finance)

5) Acquisition of technical know-how from govt. research laboratories, R&D divisions
of industries and also individual consultants, etc.
6) Agreement with foreign collaborators, if required
7) Obtaining letter of intent/DGTD registration or provisional SSI registration
8) Obtaining foreign collaboration approval from the govt. of India
9) Preparation of project report
10) Obtaining import license
11) Applying for power connection to KSEB
12) Obtaining municipal license from local authority
13) Obtaining letter of credit for importing machinery and equipments, if any
14) Selection of administrative and technical personnel for running the industrial unit
15) Placement of orders for supply of local machinery
16) Completion of civil works
17) Delivery of imported and local machinery and equipment
18) Erection of machinery and equipment
19) Obtaining clearance from pollution control board
20) Trial run and commissioning of plant
21) Start of commercial production
22) Arrangement for sale of products
23) Obtain industrial license/DGTD re-validation or permanent SSI registration

Factors to be determined while selecting the location of SSI units (Ideal location)

Location is an important factor determining the ultimate success or failure of a SSI

unit. Ideal location is one which has maximum facilities at minimum cost. It should permit
the lowest unit cost in the production and distribution of a product or service. Following are
the important factors to be considered while determining an ideal location:

a) Easy availability of raw material from nearby sources of supply in case of bulky or
heavy raw materials to reduce transportation costs
 b) Easy accessibility to markets – For the following purposes, it will be better to have
industries located near the market:
i. If processing leads to increase in the weight of the product
ii. Producing fragile and perishable products
iii. Comparative cost of finished products is greater than that of raw materials
iv. Ancillary units can be set up near the parent units
c) Minimum cost and availability of transportation and communication facilities which
depends upon the nature of raw materials and finished products
d) Availability of power and fuel supply on timely and uninterrupted basis and on
concessional rates
e) Effluents disposal
f) Availability of skilled labour at cheaper rates
g) Land – The following factors must be considered before selecting the land
i. It must be comparatively cheap
ii. It should be a non-agricultural area approved for industrial use
iii. It should be suitable for civil construction and for installation of P&M
proposed
iv. There should be sufficient area for possible future expansions
h) Political patronage
i) Availability of communal infrastructure such as housing, hospitals, educational
institutions, cultural centre, recreational facilities, etc
j) Incentives and disincentives given by central and state govts.
k) Momentum of an early start
l) R&D facilities
m) Suitability of climate
n) Existence of complementary and competing industries
o) Religious and social ties
p) Less possibility of flood, drought, cyclones, earthquakes, etc
q) Sufficient scope for future expansion
r) Integration of the enterprise with the economic, social, religious and cultural traits of
the community of the region
s) Banking facilities

STEPS IN ESTABLISHING A MSME

The following steps are involved in process of setting up a new business enterprise:
1. Identification of business opportunity.
2. Generation of business idea.
3. Feasibility Study.
4. Preparation of a business plan.
5. Launching the enterprise.

Step1. Identification of business opportunity:

This is the first step in setting up a business unit. Entrepreneur is an opportunity seeker. As
observed by Albert Einstein “In the middle of every difficulty lies opportunity”. He perceives
an opportunity and strives to translate the opportunity into an idea.
Opportunities do not come suddenly. The entrepreneur must show alertness to grab
opportunities when they come. The opportunities must be carefully scrutinised and evaluated.
The process of identifying opportunity involves identifying the needs and wants of the
customers, scanning the environment, understanding the competitor’s policy etc.
To identify the right business opportunity, an entrepreneur needs to consider the following :
● Identify Market Inefficiencies
● Remove Key Hassles
● Customers Desire to Experience Something New
● Pick a Growing Sector/Industry
● Product Differentiation
● Cash Flow Considerations
● Listen to your potential clients and past leads.

Step 2. Preparation of plan of action

Entrepreneurs will have to prepare a plan of action after the selection of a particular product.
The following aspects to be considered-
● Nature of business
● Selection of product
● Selection of organisation
● Location of enterprise
● Arrangements of finance.
● Apply for power and water connection
● Procurement of raw materials etc.

Step 3: Selection of an appropriate form of a Business organisation

An enterprise can be owned by one person or many persons jointly. This decision is
important. There are different form of ownership such as - sole proprietorship, partnership,
company, co-operative society, Joint Hindu family business. Factors to be considered -
● Process of starting a business enterprise
● Availability of financial, managerial, technical and other resources.
● Business risk
● Liability of members
● Stability of business
● Area of operation
● Govt. Regulations

Step 4: Location of Business

The location of the place of business is decided by entrepreneurs after the selection of nature
and suitable form of business. The following factors to be followed-
● Availability of transportation facilities
● Availability of banking, insurance, warehousing facilities
● Adequate power and water supply
● Availability of labour
● Facilities to dispose waste
● Social and political factors etc.

Step 5 : Identify and arrange the required resources

Entrepreneurs have to identify and arrange the resources needed to establish a business unit
after deciding the line of business, form of organisation, and location of business. The main
resources needed for any type of business are men, money, material and physical facilities
like plant, machinery, land and building
● Manpower planning
 ● Financing of business
● Cash requirements
● Relationship with banks
These are to be considered while arranging the resources.

Step 6 : Registration of SSI unit

The registration of an SSI unit is done with the Department of industries and
commerce is purely voluntary and there is no statutory obligation on the part of entrepreneurs
to do so. But it is necessary to avail various facilities, incentives and concessions offered by
the state and central govts. The regn. Procedure of SSI includes two stages, viz.

1) Provisional regn. – Provisional regn. Certificate will be issued on submission of duly

filled in application form with regn. fee at the taluk industries office (TIO) or assistant
district industries officer (ADIO). This is valid for one year in the first instance and
thereafter may be renewed by a period of 2 or more years in 6 monthly extension by
the designated authority on submission of satisfactory proof that the party is working.
It will lapse automatically at the end of 3 years. It is needed for the following:
a. To arrange finance from financial institutions
b. To obtain scarce and controlled raw materials
c. To obtain power connection
d. To obtain statutory licenses
e. To apply for margin money
f. To obtain plots, sheds, etc in industrial estates
g. To get clearance from local bodies
h. To get telephone connection
2) Permanent regn. – When the unit start production, the validity of provisional regn.
comes to an end. Then, the entrepreneur has to apply for permanent regn. It is issued
by the general manager of district industries centres (DICs) when application is made
in the prescribed form through the TIO/ADIO. It is needed for the following:
a. Availing itself of various subsidies and incentives
b. Exemption from sales tax or VAT
c. Exemptions from electricity duty, higher electricity tariff, power-cuts, etc
d. Exemptions from earnest money deposit and security deposit
e. Applying for bank finance
f. Applying for financial aid from other institutions
g. Obtaining the licenses and clearances from local bodies in time
h. Getting price preference