How is the interest on delayed payments to MSME suppliers computed?

September 15, 2025

The High Court has ruled that interest under the Micro Small and Medium Enterprises Development (MSMED) Act is to be calculated on a monthly basis at variable Reserve Bank of India (RBI) rates. This decision emphasizes the legal requirement for award debtors to fulfil their payment obligations, including the full interest accrued.

WHO IS AN AWARD DEBTOR?

An award debtor is a party who is ordered by an arbitral award to take a specific action, such as paying damages or costs. The award debtor complies with the award by satisfying its obligations in accordance with the terms of the award.

RELEVANT PROVISIONS:

• Section 15 of MSMED Act of 2006, if there is a written agreement between the buyer and seller, the buyer must pay within the agreed date or within 45 days of the purchase date, whichever is earlier. If there is no agreement, the buyer must pay within 15 days.
• Section 16 of MSMED Act of 2006 states that if a buyer fails to pay a supplier as required by Section 15, the buyer is liable to pay compound interest on the amount owed:
  • The interest rate is three times the bank rate notified by the Reserve Bank of India (RBI).
  • The interest is compounded monthly. b) The interest is payable from the appointed day or the date following the agreed upon date.
• As per Sec 2(b) of the Micro, Small and Medium Enterprises Development Act, 2006, Appointed day is the day after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services, by a buyer, from a supplier.

CASE REFERENCE:

The parties of the case - V.K. Patel & Co vs Simplex Infrastructure Ltd

The Petition was filed for enforcement of a money- award rendered in favour of V.K.Patel &Co, (award holder) a partnership firm, registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). High Court (HC) directed the Simplex Infrastructure Ltd (award debtor) to pay award money along with interest as per Sec16 of MSMED Act,2006.

The mere reference to Sec16, becomes an arguable fact as to whether the bank rate would be variable or fixed.

For the interest calculation , the award-holder argues that the rate of interest directed to be paid should be calculated on the basis of the bank rate fixed by the Reserve Bank of India (RBI) as on the 'appointed date' whereas the award-debtor contends that the interest should be calculated on the basis of the fluctuating rates at different points of time as notified by the RBI from the appointed date till the date of payment.

High Court Judgment: The High Court ruled in favour of Simplex Infrastructure Ltd, interpreting Section 16 to mean that interest is payable at three times the RBI-notified rate at each monthly interval. This results in a variable interest rate, compounded monthly, ensuring interest reflects prevailing economic conditions.

MSME Delayed Payment Interest Calculation

Appointed Day:1st March 2025

Principal Amount: ₹10,00,000

Payment Made On: 1st July 2025

The payment is made on 1st July 2025, the award-debtor (Simplex Infrastructure Ltd) must pay ₹10,68,849.34 to the award-holder (V.K. Patel & Co).

Implications of the Judgement:

• For MSMEs: This judgment strengthens the financial rights of MSMEs by ensuring that they receive the full amount due, including interest.
• For Award Debtors: Businesses and entities that owe payments to MSMEs must be aware of their legal obligations and the consequences of delayed payments.
• For the Financial Ecosystem: Reinforcing strict adherence to MSMED Act provisions can enhance financial discipline and support the growth of the MSME sector.

Conclusion:

The High Court's ruling underscores the importance of strict compliance with the MSMED Act, ensuring that MSMEs receive their payments, including interest, without undue delay. Entities dealing with MSMEs must take proactive measures to avoid legal and financial repercussions associated with delayed payments.

Note:

Regulatory Compliance:

From April 1, 2025, companies delaying payments beyond 45 days must also:

• File half-yearly returns with the Ministry of Corporate Affairs (MCA) disclosing outstanding dues and reasons for delay via Form MSME-15.
• Non-compliance may lead to further scrutiny and penalties under the MSMED Act and the Companies Act,2013.

Penalty for non-compliance or delayed filing of MSME Forms under the Companies Act, 2013