What are the compliance challenges faced by SMEs

What are the compliance challenges faced by SMEs

Legal & Compliance

Team LexComply

Team LexComply

350 week ago — 11 min read

Micro, Small and Medium Enterprises (MSMEs) in India are creating employment for over 7.5 crore through 4.2 crores of enterprises, the largest generator of employment in the Indian economy.  They produce 45% of India’s total manufacturing output and account for 40% of exports. Hence, MSMEs qualify as the backbone of Indian economy. However MSMEs only contribute around 17% of the country’s GDP. This is largely because MSMEs are extremely unorganised and have not evolved  to meet the world class standards. A study shows that MSMEs across the world especially in US start as MSMEs but expand and grow. However, MSMES in India tend to stay smaller or even shrink in size owing to their struggle with the unfriendly regulatory ecosystem in India. Most of these firms stay small to avoid taxes and regulations. The stringent labor laws, inflexible compliance and regulatory statuettes make it impossible for MSMEs to advocate their financial and functional issues, unlike their larger counterparts. 

Roadblocks to compliance in MSMEs 

MSMEs constantly struggle for the ease of business and are inadvertently met with roadblocks like:

Ambiguous and limited legal know how

Every Micro, Small or Medium enterprise has various regulations to comply with which include regulations, taxes, environmental and certain sector specific regulatory laws and licenses. MSMEs can set up units anywhere in the country but are subject to local restrictions. There are several clearances required e.g. a milk or dairy or a food production unit would require clearance from Agriculture and Food Processing Industries Department and someone in electrical appliance production would have to get authorization from Bureau of Indian Standards (BIS). In order to encourage the MSMEs, the Indian government has provisions for some exemptions. Not all small scale units require licensing except some product groups which fall under compulsory licensing. Environmental and Pollution clearances are also mandatory for most of the manufacturing units.  Most of the MSMEs’ do not have a clue on the all the relevant Statutes applicable on them except a few common applicable statutes. 

With so many to dos’ and exemptions and in the absence of proper centralized information centers, it becomes difficult for the MSMEs to comprehend the complexity. Laws evolve every now and then  wherein the statutes (Central, State or Local) are changing on day to day basis. Employees working in MSMEs usually get updated about these regulatory changes through their peers in the industry  or newspapers and other media sources. Hence there is no structured process of flow of updates to the MSMEs and whatever they get to know is through unofficial resources and often delayed. Though industrial associations and other professionals associated with the MSME’s are playing a significant role to fill the knowledge gap but there is plenty that needs to be done. 

Thin budgets

MSMEs in India are mainly classified as manufacturing, trading and service enterprises. As the name suggests,  MSME’s are business enterprises wherein the investments in plant and machinery are ranging from Rs. 25 lacs to Rs. 10 crores only. Such enterprises are mostly self funded or additionally funded by the Banks. Significant part of the budgets are allocated towards funding the capital expenditures and working capital, directly impacting the operations of the enterprise i.e. Plant, machinery, building, stock, interest, wages, electricity etc. Compliance Division is mostly absent in budgetary provisions of MSMEs. Accounts/Finance team is mostly entrusted with task of compliance as their ancillary responsibility. So the team, time and efforts are thin. By and large they are struggling with the notices, inspections or meeting some compliance deadlines or hunting for updates. Though MSMEs have been given window on national stock exchanges to raise funds through simplified mechanism of IPO or lot of investors are keen to invest in MSMEs, yet most of the MSMEs faildue to their compliance status.  Hence the circle is complete, i.e. thin team due to limited money and limited money as they are not fully compliant. 

Technology obsolescence

The rate of change and technology adoption in SMEs is obnoxiously low as compared to the technology advancement in the country in general. With increasing globalization, continuous innovation should have been the prime focus, but SMEs fail to upgrade and improve their efficiency and productivity of manufacturing units. As per a survey by Microsoft, India’s small businesses can boost their revenues by $56 billion and help create over one million new jobs if the latest IT tools and techniques are adopted. It further added that 90% of SMEs in India don’t have access to internet. 

Lack of compliance culture in MSMEs

All of the challenges mentioned above do not let compliance come naturally to most of the MSMEs because: 

  1. Absence of Compliance from the Master Plan: For most of the MSMEs, compliance is never a part of the master plan because of lack of budget or ignorance. This leads to complete disregard of regulatory statuettes from the very beginning. Hence no process or internal controls are ever laid to meet the regulatory guidelines.

  2. Dearth of Skill Sets: With ever changing guidelines and laws, there is a dearth of trained staff that has complete and inclusive knowledge of the ever evolving laws and statuettes thus leading to an ever increasing gap. 

The above factors lead to complete absence of training to the staff and nonexistence of compliance hierarchy in the organization and leading the MSME to the troubled waters of being non-compliant. 

How MSMEs can become compliant 

Compliance is all about the knowledge of rules that regulate your kind of business and complying with them. Owing to little knowledge and complexity of applicable statuettes, owners of MSMEs shy away from it thus missing on a very important management tool that ensures security, quality and the potential expansion of the business. 

Indian Central and State government has lately been trying to simplify things for MSMEs so that projects like ‘Make in India’ are a success. ‘Start-up India’ initiative, One Person Company (OPC), Goods and Sales Tax (GST), online registration platforms like ebiz.com are some steps to ease the effort of running a business in India. However looking at the diversity of MSMEs, their magnitude and the distinct environment to operate and quaint inputs required, it’s necessary that focused measures are taken. 

Specialised Support Services 

The support agencies for MSMEs are largely state owned presently and have a blanket approach which is not suitable to the diverse nature of MSMEs. Hence, there is a pressing need for creating a community of practicing professionals who can mentor the MSMEs teams in-house. These practicing professionals are no third parties but the Chartered Accounts, Company Secretaries, Labour Law experts, Fire and safety experts etc already working with the MSMEs. These mentors can help MSMEs to identify the applicable Statutes that they have to abide as per the nature of their business and sensitise them about the compliances relating to licenses, approvals, returns records/registers, statutory dues and other compliances.    Additionally also motivate to lay down strong internal controls and processes that ensure that MSMEs meet not only the national standards but also comply to the International standards of quality and security, thus, opening various new avenues of growth and expansion. 

Adoption of Technology 

Compliance is a crucial function where MSMEs should integrate technology. Visualize an automated compliance management system that identifies the applicable and relevant compliances, assigns the due tasks, tracks and monitors the progress of the pending tasks and reports the status of all due compliance tasks. Compliance Management tools take the ease of compliance to another level by building comprehensive library of acts and laws and complete repository of the required documents that compliance becomes simple and efficient.

Compliance Management tools with the mentoring of existing Practicing Professionals attached with the enterprises can help in providing a platform to integrate the community of practicing professionals and MSMEs by way of: 

  1. Creating a compliance hierarchy
  2. Standardisation of statue wise compliance check list
  3. Reminding the due/upcoming compliances
  4. Task management 
  5. Training of in-house team


Practicing professionals of various subjects and expertise can mentor enterprises and improve the skill set of team members much more effectively and efficiently using  such compliance management tools. 

These tools are cost effective as it does not require any Capex on the server or creating library. These tools can be accessed 24X7 from anywhere.  

So if MSMEs use such tools and make an effective integration of external professionals and in-house team, then it will certainly help in improving compliance environment with minor changes in budgets. If an enterprise is adhering product related regulations like Food Safety, BIS, Legal metrology  etc then their products are more acceptable not only in domestic but also in international market segment. So is an enterprise diligent on labour laws will have improved HR relations and reduces cost of strikes, lockouts or high staff turnover. MSMEs also have the opportunity to acts a job workers to big brands or be deemed exporters provided they not only maintain high product quality standards but also are sensitive towards regulatory compliances. A compliant enterprise if in right market segment will have numerous alternative means of increasing the business and having access to funds.

Presently compliance is complex for MSMEs. But this disadvantage can be turned around and changed into an opportunity by having the bird’s eye view of the whole tangle of regulations and adopting focused measures. The tech-savvy MSMEs can make compliance a key differentiator in improving their efficiencies, reducing costs, gaining insights to strengthen their credentials, products and more importantly positioning themselves strategically in new geographic markets. 

Compliance management enables to “GROW” not just sustain. 


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