MSME Defence Against SARFAESI Proceedings

I. Introduction: What Exactly Is the Entitlement?

It is convenient to state at the outset what the entitlement is not. It is not an immunity from recovery. It is not a moratorium. It is not a right to have a debt written down. It does not confer on an enterprise any vested right to a particular resolution outcome, and it certainly does not operate as a bar to the invocation of Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

What the Framework confers is a right to a process. Specifically, a Micro, Small or Medium Enterprise whose credit facilities are showing signs of distress is entitled to have the stress in its account examined by a duly constituted Committee for Stressed Micro, Small and Medium Enterprises, in accordance with prescribed timelines, before the lender proceeds to treat the account as irretrievably lost and moves to recovery. The Committee is obliged to consider, in a stated sequence, whether the account can be rectified, whether it can be restructured, and only if neither is feasible, whether recovery is to be resorted to. The enterprise is entitled to be heard, to place its liabilities on record, to be notified of the decision, and to seek review of a decision to proceed to recovery.

That is a procedural entitlement of real substance. Where it is denied, the denial is capable of vitiating the classification of the account as a Non-Performing Asset, and with it the demand notice under Section 13(2) and everything that follows. But — and this is where most borrower-side pleas fail — the entitlement is not self-executing. It has to be claimed, and it has to be claimed at the right time and with the right material.

II. The Statutory Foundation

A. Section 9 of the MSMED Act, 2006

Section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 empowers the Central Government to issue instructions, by way of notification, for the purposes of facilitating the promotion and development, and enhancing the competitiveness, of micro, small and medium enterprises. The provision is a delegation of legislative power to the Central Government, and instructions issued under it are subordinate legislation, not executive advice.

This characterisation is the load-bearing element of the entire edifice. It is because the Framework is traceable to a statutory power of delegation that it acquires binding force, and it is the failure of the Bombay High Court to appreciate this that the Supreme Court corrected in Pro Knits.

B. The Gazette Notification dated 29 May 2015

In exercise of the power under Section 9, the Ministry of Micro, Small and Medium Enterprises, Government of India, notified in the Gazette on 29 May 2015 the “Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises”. This is the parent instrument. It set out, for the first time in a consolidated form, a structured mechanism for identifying incipient stress in MSME loan accounts and resolving it through a committee-based corrective action plan.

C. The RBI Circular dated 17 March 2016

The framework as originally notified was not fully compatible with the Reserve Bank of India’s prudential architecture on Income Recognition, Asset Classification and Provisioning. Certain changes were accordingly carried out in consultation with the Ministry of MSME, and the revised Framework, together with detailed operating instructions, was issued by the Reserve Bank of India to all Scheduled Commercial Banks (excluding Regional Rural Banks) by circular:

RBI/2015-16/338, FIDD.MSME & NFS.BC.No.21/06.02.31/2015-16, dated 17 March 2016 — “Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs)”.

The circular required every bank to put in place a Board-approved policy to operationalise the Framework not later than 30 June 2016, and to furnish an Action Taken Report by 31 July 2016. It expressly superseded the earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises issued by circular RPCD.CO.MSME & NFS.BC.40/06.02.31/2012-13 dated 1 November 2012, save for the provisions of that circular relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement, which were preserved.

The instructions were issued under Sections 21 and 35A of the Banking Regulation Act, 1949. Section 21 empowers the Reserve Bank to control advances by banking companies and to give directions as to the purposes for which advances may or may not be made, the margins to be maintained, the rate of interest and other terms and conditions, and the maximum amount of advances. Section 35A empowers the Reserve Bank to issue directions in the public interest, in the interest of banking policy, or to prevent the affairs of a banking company being conducted in a manner detrimental to the interests of depositors or of the banking company itself. Both provisions make compliance obligatory in terms, and Section 35A(2) requires banking companies to comply with directions issued thereunder.

D. Incorporation into the Master Directions

The Framework was thereafter incorporated into the Reserve Bank’s consolidated instructions on lending to the MSME sector by the Master Directions issued on 21 July 2016, and has been carried forward in successive updates of the Master Direction on Lending to the MSME Sector. It is this chain that Section 9 notification of 29 May 2015, as revised by the RBI circular of 17 March 2016, as incorporated in the Master Directions of 21 July 2016, that the Supreme Court identified in Pro Knits as the instrument whose binding character fell for determination.

E. Prudential norms are not displaced

Paragraph 2 of the covering circular is important and is habitually overlooked in argument. It records that the prudential norms on Income Recognition, Asset Classification and Provisioning continue to be governed by the Master Circular on IRAC Norms as updated from time to time; the Framework governs only the revival and rehabilitation of MSMEs with loan limits up to ₹25 crore.

The consequence is that the Framework does not create an independent code of asset classification. Paragraph 10.4 of the Framework itself states that the extant asset classification and provisioning norms apply to restructuring under the Framework. What the Framework does is to insert a mandatory procedural stage ahead of NPA classification, it does not alter the arithmetic of what constitutes an NPA under the IRAC Directions once that stage has been passed.

Paragraph 4 of the circular separately preserves the obligation to report credit information and SMA status of all accounts above the cut-off exposure of ₹5 crore to the Central Repository for Information on Large Credit.

III. The Threshold Question: Who Is an MSME?

Before any question of entitlement arises, the enterprise must in fact be an MSME. Two distinct issues arise: the substantive classification criteria, and the evidentiary question of registration.

A. The classification criteria

Section 7 of the MSMED Act empowers the Central Government to classify enterprises. Under the notification dated 26 June 2020 (S.O. 2119(E)), which took effect on 1 July 2020, the earlier bifurcation between manufacturing and service enterprises was abolished and a composite criterion of investment in plant and machinery or equipment together with turnover was adopted. By notification S.O. 1364(E) dated 21 March 2025, with effect from 1 April 2025, those thresholds were revised upwards — investment limits by 2.5 times and turnover limits by 2 times.

Both limbs must be satisfied concurrently. Breach of either limb takes the enterprise out of the category. Exports are excluded from the computation of turnover. The classification applies uniformly to manufacturing and service enterprises.

Paragraph 8(6) of the 2020 notification, which survives, provides that on reverse-graduation — whether by reclassification or by an actual change in investment or turnover — an enterprise continues in its existing category until the close of the financial year, and takes the benefit of the changed status only from 1 April of the following financial year. This has a practical bearing on any enterprise seeking to bring itself within the Framework on the strength of the 2025 revision, and the argument as to whether the benefit accrued on 1 April 2025 or only on 1 April 2026 is one that has been raised and remains worth watching.

B. Registration and the evidentiary burden

Section 8 of the MSMED Act provides for filing of a memorandum, now operationalised through Udyam Registration. The question whether registration is constitutive of status or merely declaratory of it has considerable practical significance in the SARFAESI context, but it is, in litigation terms, largely academic. What decides cases is not the theoretical status of registration but the evidentiary question: what did the borrower place before the bank, and when?

The Supreme Court in Pro Knits, and every judgment since, has laid stress on this. The Kerala High Court in Irine Agro Spices dismissed a challenge to recovery proceedings substantially on the footing that the borrower had not disclosed its MSME status at the time of availing the credit facilities in 2022, had not produced a valid MSME certificate, and had not responded to the demand notice under Section 13(2). Status not asserted and not proved is, for practical purposes, status that does not exist.

IV. Eligibility and Scope of the Framework

Paragraph 1 of the Framework states the eligibility rule: the provisions apply to MSMEs having loan limits up to ₹25 crore, including accounts under a consortium or multiple banking arrangement.

Three refinements follow from the body of the Framework:

1. Accounts with aggregate loan limits above ₹10 lakh are to be forwarded to the Committee for Stressed MSMEs. This is the principal channel.
2. Accounts with aggregate loan limits up to ₹10 lakh identified as SMA-2 are mandatorily examined for a corrective action plan by the branch itself, under the authority of the branch manager or such other designated official as the bank’s Board-approved policy provides. The other terms and conditions applicable to Committee cases — time limits and procedures — apply equally to the branch manager. Where, however, the branch manager or designated official decides on recovery rather than rectification or restructuring, the case must be referred to the Committee for concurrence.
3. Consortium and multiple banking arrangements: the consortium leader, or the bank with the largest exposure under a multiple banking arrangement, refers the case to its Committee if the account is reported as stressed by the borrower or by any lender. That Committee also coordinates between lenders.

Accounts with exposure above ₹25 crore fall outside the Framework and are dealt with under the general restructuring architecture. This is a threshold that borrower-side counsel must check first: a plea founded on the Framework in respect of an exposure exceeding ₹25 crore is, on the terms of paragraph 1, unsustainable.

V. Identification of Incipient Stress

A. The three Special Mention Account sub-categories

Paragraph 2.1 is the provision on which the entire borrower-side argument rests. It provides that before a loan account of an MSME turns into a Non-Performing Asset, banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account category:

On the basis of these early warning signals, the branch maintaining the account is to consider forwarding stressed accounts with aggregate loan limits above ₹10 lakh to the Committee within five working days for a suitable corrective action plan. Forwarding is expressly mandatory in the case of accounts reported as SMA-2.

The branch manager or designated official is also to examine accounts reported as SMA-0 and SMA-1 where deemed necessary. For SMA-0 and SMA-1 the reference is thus discretionary; for SMA-2 it is obligatory. This distinction repays close attention in drafting: a borrower whose account was in SMA-2 and was never referred has a materially stronger case than one who was only ever in SMA-0.

B. Annex-I: the illustrative signs of stress for SMA-0

Annex-I to the Framework sets out an illustrative list of signs of stress warranting SMA-0 categorisation. Because SMA-0 turns on qualitative indicators rather than the arithmetic of days past due, this list is the operative content of the category and is set out in full:

1. Delay of 90 days or more in submission of stock statements or other stipulated operating control statements; or in credit monitoring or financial statements; or non-renewal of facilities based on audited financials.
2. Actual sales or operating profits falling short of the projections accepted at the time of sanction by 40% or more; or a single event of non-cooperation with or prevention of a stock audit by the bank; or reduction of Drawing Power by 20% or more after a stock audit; or evidence of diversion of funds for an unapproved purpose; or a drop in internal risk rating by two or more notches in a single review.
3. Return of three or more cheques or electronic debit instructions issued by the borrower within 30 days on grounds of non-availability of balance or drawing power; or return of three or more bills or cheques discounted or sent under collection by the borrower.
4. Devolvement of Deferred Payment Guarantee instalments or Letters of Credit, or invocation of Bank Guarantees, and non-payment within 30 days.
5. A third request for extension of time either for creation or perfection of securities beyond the time specified in the original sanction terms, or for compliance with any other term or condition of sanction.
6. Increase in the frequency of overdrafts in current accounts.
7. The borrower reporting stress in its business and financials.
8. Promoters pledging or selling their shares in the borrower company on account of financial stress.

C. Distinguishing the Framework SMA categories from the IRAC SMA categories

A recurring source of confusion, is that the expression “SMA” also appears in the Reserve Bank’s prudential framework on Income Recognition and Asset Classification, and in the CRILC reporting architecture, where the categories are defined by days past due alone. The two are related but not identical, and the Framework categories exist for the discrete purpose of triggering the revival machinery. When arguing non-compliance, it is prudent to plead by reference to paragraph 2.1 of the Framework, and to the SMA status actually recorded in the bank’s own system, rather than to conflate the two regimes.

VI. The Borrower’s Right of Self-Initiation

Paragraph 2.3 confers a distinct and independent right on the enterprise. It provides that any MSME borrower may voluntarily initiate proceedings under the Framework if the enterprise:

• reasonably apprehends failure of its business; or
• reasonably apprehends its inability or likely inability to pay its debts; or
• has suffered erosion in net worth due to accumulated losses to the extent of 50% of its net worth during the previous accounting year.

The application may be made to the branch or directly to the Committee. Where such a request is received, an account with aggregate loan limits above ₹10 lakh must be referred to the Committee, and the Committee must convene its meeting at the earliest and in any event not later than five working days from receipt of the application, to examine the account for a suitable corrective action plan. Accounts with aggregate loan limits up to ₹10 lakh may be dealt with by the branch manager or designated official.

Two points deserve emphasis. First, the net worth erosion limb is a threshold, not a precondition to the other two limbs — an enterprise apprehending inability to pay may invoke the Framework whether or not half its net worth has been eroded. Second, and this is the point which the Supreme Court fastened upon in Shri Shri Swami Samarth Construction, self-initiation must occur before matters have gone too far. The Court there read the Framework as contemplating that the enterprise apply while it still has something to preserve, supported by an affidavit and by documents.

It follows that paragraph 2.3 is the provision which converts the Framework from a supervisory instruction addressed to banks into a right exercisable by the enterprise. It is also the provision whose non-exercise is now routinely fatal to borrower-side challenges.

VII. The Committee for Stressed Micro, Small and Medium Enterprises

A. Constitution

Paragraph 3.1 requires every bank having exposure to the MSME sector to constitute a Committee at each District where it is present, or at Division level or Regional Office level, depending on the number of MSME units financed in the region. These are Standing Committees, not ad hoc bodies, and they resolve the reported stress of MSME accounts of the branches falling within their jurisdiction.

B. Composition

Paragraph 3.3 prescribes the composition of the Committee:

The requirement of an independent external expert and of a State Government representative is not decorative. A Committee constituted without them is not a Committee within the meaning of paragraph 3.3, and a corrective action plan decided by such a body is open to challenge on that footing.

C. Functioning

Paragraph 3.4 requires banks, with the approval of their Boards, to frame a policy on the composition of the Committee, the terms of appointment of members, the manner of filling vacancies, and the procedure to be followed. Decisions are by simple majority, with the Chairperson having a casting vote in the event of a tie. In consortium and multiple banking cases, lenders are to sign an Inter-Creditor Agreement on the lines of a Joint Lenders’ Forum agreement. Banks are required to put in place suitable arrangements, including dedicated manpower, to ensure smooth functioning of the Committee and adherence to the stipulated timelines.

Paragraph 3.5 states, in terms which are close to a declaration of right, that all eligible stressed MSMEs shall have access to the Committee for resolving the stress in their accounts in accordance with the regulations prescribed in the Framework.

Paragraph 3.6 provides that where the Committee decides that recovery is to be made as part of the corrective action plan, the manner and method of recovery is to be in accordance with the existing policies approved by the Board of the bank which extended the credit facilities, subject to any regulations prescribed by the Reserve Bank and to extant statutory requirements. This is the doorway through which SARFAESI enters the Framework: recovery under the Framework is recovery under the ordinary law, including Section 13.

VIII. Application to the Committee and the Corrective Action Plan Procedure

A. Making the application

Under paragraph 4.1, any lender on identifying an MSME account as SMA-2, or as otherwise suitable for consideration under the Framework, or on receipt of an application from the stressed enterprise, must forward cases having aggregate loan limits above ₹10 lakh to the Committee for immediate convening of a meeting and a decision on a corrective action plan. A stressed enterprise having aggregate loan limits above ₹10 lakh may itself file an application directly with the Committee, or with the largest lender for onward submission under advice to all its lenders.

The Indian Banks’ Association was authorised to prescribe application formats. The Framework specifies that the application should include, inter alia:

• the latest audited accounts of the enterprise, including its net worth;
• details of all liabilities of the enterprise, including liabilities owed to the State or Central Government and to unsecured creditors, if any;
• the nature of the stress faced by the enterprise; and
• suggested remedial actions.

The last of these is significant in practice. An application which merely asserts distress without proposing a remedy invites the Committee to conclude that neither rectification nor restructuring is feasible. A borrower-side application should carry a concrete, costed proposal.

B. Notice to the enterprise and to statutory creditors

Where the application is filed by a bank or lender and admitted by the Committee, paragraph 4.2 requires the Committee to notify the enterprise within five working days and to require it to respond or make a representation, and to disclose the details of all its liabilities, including liabilities owed to the State or Central Government and to unsecured creditors, within fifteen working days of receipt of the notice. If the enterprise does not respond within that period, the Committee may proceed ex parte.

This is the provision that defeats the argument, sometimes advanced, that a borrower who was never heard was necessarily denied natural justice. The Framework itself contemplates ex parte proceedings on default. What the borrower must establish is not merely that it was not heard, but that it was not notified.

Paragraph 4.3 permits the Committee, on receipt of information as to liabilities, to send notice to such statutory creditors as the enterprise has disclosed, and to permit them to make representations regarding their claims within fifteen working days. The Framework clarifies that this information is required for determining the total liability of the enterprise in order to arrive at a suitable corrective action plan, and not for payment of those liabilities by the lenders.

C. The prescribed timelines

The timelines are the most litigable feature of the Framework, because they are precise and because non-adherence is capable of proof from the bank’s own records. They are consolidated below.

Paragraph 10.3 adds discipline to these periods. It requires the Committee to optimally utilise the specified time periods so that the aggregate time limit is not breached under any mode of restructuring, and permits the Committee, where it takes less time than prescribed for one activity, to use the saved time for another, provided the aggregate limit is not exceeded. Any restructuring under the Framework must be completed within the specified periods.

D. Position of the enterprise during the pendency of an application

Paragraph 4.7 provides that where an application has been admitted, the enterprise shall continue to perform contracts essential to its survival, though the Committee may impose such restrictions as it deems fit for the future revival of the enterprise. Paragraph 5.2 provides that during the period of operation of the corrective action plan the enterprise shall be allowed to avail both secured and unsecured credit for its business operations as envisaged under the terms of the plan. Paragraph 4.8 requires the Committee to make suitable provision in the plan for payment of tax and other statutory dues, and requires the enterprise to submit the plan to the concerned authority and obtain approval of the payment plan.

IX. The Corrective Action Plan: The Three Options

Paragraph 5.1 requires the Committee to explore various options to resolve the stress in the account. It expressly provides that the Committee shall not endeavour to encourage any particular resolution option, and may decide the plan according to the specific requirements and position of each case. Where the aggregate exposure is ₹10 crore and above, the Committee is to conduct a detailed Techno-Economic Viability study before finalising the plan; below that threshold, techno-economic viability is to be decided by the concerned lender or lenders before restructuring is considered.

A. Rectification — paragraph 5.3(a)

Rectification consists of obtaining a commitment from the borrower, specifying actions and timelines, to regularise the account so that it comes out of Special Mention Account status or does not slip into the Non-Performing Asset category. The commitment must be supported by identifiable cash flows within the required period, and must not involve any loss or sacrifice on the part of the existing lenders. The process is to be primarily borrower-driven.

The Committee may nevertheless consider need-based additional finance as part of rectification, subject to strict conditions:

• such additional finance is intended only for meeting, in exceptional cases, an unavoidable increase in working capital requirement;
• in all cases of additional finance for working capital, any diversion of funds renders the account a Non-Performing Asset;
• such additional finance should ordinarily be an ad hoc facility to be repaid or regularised within a maximum period of six months;
• additional finance for any other purpose, any roll-over of existing facilities, or funding not complying with these conditions, amounts to restructuring;
• repeated rectification with funding within the space of one year is treated as restructuring; and
• no additional finance is to be sanctioned under a corrective action plan where the account has been reported as fraud by any lender.

B. Restructuring — paragraph 5.3(b)

Restructuring is to be considered where the account is prima facie viable and the borrower is not a wilful defaulter, that is, where there is no diversion of funds, fraud or malfeasance. The Committee may obtain from promoters a commitment to extend personal guarantees, together with a net worth statement supported by copies of legal titles to assets, and a declaration that they will not undertake any transaction alienating assets without the permission of the Committee. Any deviation from that commitment affecting the security or recoverability of the loan is a valid factor for initiating the recovery process.

The lenders in the Committee may execute an Inter-Creditor Agreement, and may require the borrower to execute a Debtor-Creditor Agreement, which provides the legal basis for the restructuring. A stand-still clause, as defined in the extant guidelines on restructuring of advances, may be stipulated in the Debtor-Creditor Agreement to enable a smooth process. The Framework clarifies that the stand-still clause does not preclude the borrower from making payments to the lenders. The Inter-Creditor Agreement may also stipulate that both secured and unsecured creditors must agree to the final resolution.

C. Recovery — paragraph 5.3(c)

Recovery is expressly the residual option. It is available only “once the first two options are seen as not feasible”. The Committee may then decide the best recovery process among the various legal and other options available, with a view to optimising efforts and results.

D. Voting and binding effect

Paragraph 6 provides that decisions agreed upon by a majority of creditors — 75% by value and 50% by number — in the Committee are the basis for proceeding with restructuring, and are binding on all lenders under the terms of the Inter-Creditor Agreement. Where the Committee decides to proceed with recovery, the minimum criteria for a binding decision, if any, under the relevant laws apply.

X. Additional Finance, Restructuring Conditions and Review

A. Additional finance — paragraph 8

Where the Committee decides that the enterprise requires financial resources to restructure or revive, it may draw up a plan for provision of such finance. Any additional finance must be matched by a contribution from the promoters in appropriate proportion, not less than the proportion at the time of the original sanction. Additional funding provided under restructuring or rectification as part of the corrective action plan has priority in repayment over the existing debt, so that instalments of the additional funding falling due for repayment rank ahead of repayment obligations on the existing debt. Where the existing promoters are unable to bring in additional funds, the Committee may allow the enterprise to raise secured or unsecured loans, and with the consent of all recognised creditors may accord such loans higher priority than any existing debt.

B. Eligibility for restructuring — paragraph 10.1

• Restructuring is taken up only in respect of assets reported as Standard, Special Mention Account or Sub-Standard by one or more lenders in the Committee.
• The Committee may nevertheless consider restructuring where the account is doubtful with one or two lenders but Standard or Sub-Standard in the books of the majority of other lenders by value.
• Wilful defaulters are not eligible. The Committee may, however, review the reasons for classification as a wilful defaulter and satisfy itself that the borrower is in a position to rectify the wilful default; a decision to restructure in such a case requires the approval of the Board of the bank within the Committee which classified the borrower as a wilful defaulter.
• Cases of fraud and malfeasance are ineligible. Where, however, the existing promoters are replaced by new promoters and the borrower company is wholly delinked from the erstwhile promoters and management, banks and the Committee may take a view on restructuring based on viability, without prejudice to the continuance of criminal action against the erstwhile promoters and management. Such accounts may also be eligible for asset classification benefits available on refinancing after change in ownership, where the change is carried out under the applicable prudential norms on change in ownership of borrowing entities.

C. Viability — paragraph 10.2

Viability is to be determined by the Committee on acceptable viability benchmarks determined by it. The parameters may include, inter alia, the debt-equity ratio, the debt service coverage ratio, and the liquidity or current ratio. Because the benchmarks are Committee-determined rather than prescribed, a borrower challenging a finding of non-viability must ordinarily attack the reasoning rather than the standard.

D. Conditions relating to restructuring — paragraph 10.3

The restructuring package must stipulate a timeline within which viability milestones, such as improvement in specified financial ratios after a period of six months, are to be achieved. The Committee is to review the account periodically for achievement or non-achievement of milestones and to consider initiating suitable measures, including recovery, as appropriate.

The general principle of restructuring is that the stakeholders bear the first loss of the enterprise rather than the lenders. In the case of a company, the Committee may consider transferring equity from the promoters to the lenders to compensate for their sacrifices; promoters infusing more equity; or transfer of the promoters’ holdings to a security trustee or escrow arrangement until turnaround, to enable a change in management control if the lenders favour it.

Where the borrower has undertaken diversification or expansion which has caused stress on the core business of the group, a clause for sale of non-core assets or other assets may be stipulated as a condition of restructuring, where the Techno-Economic Viability study shows that the account is likely to become viable on hiving off non-core activities.

For listed companies, lenders may be compensated ab initio for their loss or sacrifice — the diminution in fair value in net present value terms — by upfront issuance of equity, subject to extant regulations. Where the sacrifice is not fully compensated by equity, a right of recompense clause may be incorporated to the extent of the shortfall.

To distinguish the differential security interest available to secured, partially secured and unsecured lenders, the Committee may consider prior agreement in the Inter-Creditor Agreement regarding repayments; a structured agreement stipulating the priority of secured creditors; or appropriation of repayment proceeds among the classes in a pre-agreed proportion.

Paragraph 10.3(11) confers an information right: the Committee shall, on request by the enterprise or by any creditor recognised under paragraph 4.3, provide information relating to the proceeding as requested.

E. Review — paragraph 11

Where the Committee decides that recovery action is to be initiated, the enterprise may request a review of that decision within ten working days from the date of receipt of the decision. The request must be founded on one of two grounds:

• a mistake or error apparent on the face of the record; or
• discovery of a new and relevant fact or information which could not, despite the exercise of due diligence by the enterprise, have been produced before the Committee earlier.

The review application must be decided within thirty days of filing. If, in consequence of the review, the Committee decides to pursue a fresh corrective action plan, it may do so.

XI. The Legal Character of the Framework

Until August 2024, the question whether the Framework was mandatory or merely facilitative had produced divergent High Court authority.

A. The earlier Kerala view: Abdul Nazer

In Abdul Nazer v. Union Bank of India, 2023 (5) KHC 543, a learned Single Judge of the Kerala High Court held, on a reading of clause (1) of the Framework issued under the MSMED Act, that it was only an optional framework available to the bank and the borrower. The reasoning proceeded substantially from the absence of any consequence for non-compliance: the terms of the notification, it was held, that the SARFAESI act will prevail over notifications issued under S.9 of MSME Act, 2006.

The Bombay High Court took a parallel view in M/s A. Navinchandra Steels Pvt. Ltd. v. Union of India, holding that banks and non-banking financial companies were not obliged to adopt the restructuring process contemplated by the notification of their own motion, in the absence of an application by the MSME.

B. Pro Knits: the Supreme Court corrects course

In M/s Pro Knits v. The Board of Directors of Canara Bank & Ors., 2024 INSC 565, [2024] 8 SCR 140, decided on 1 August 2024 by a Bench of Bela M. Trivedi and R. Mahadevan, JJ. (judgment authored by Trivedi, J.), the Supreme Court set aside the common order of the Bombay High Court dated 11 January 2024 in Writ Petition (L) No. 20100 of 2023 and connected matters.

The appellants were a batch of enterprises claiming registration under the MSMED Act whose loan accounts had been classified as Non-Performing Assets and against whom SARFAESI measures had been taken. Their case was that the banks were bound, before such classification, to identify incipient stress in the account by creating the three SMA sub-categories, and to explore the resolution options contemplated by the Framework; and that non-observance rendered all subsequent action under the SARFAESI Act illegal and void ab initio.

The Supreme Court accepted the premise. It held that the findings of the High Court — that the banks were not obliged to adopt the restructuring process on their own, and that the Framework contained in the notification dated 29 May 2015 as revised from time to time was not mandatory — were highly erroneous and could not be countenanced. The Court held that the instructions and directions issued by the Central Government under Section 9 of the MSMED Act, and by the Reserve Bank of India under Sections 21 and 35A of the Banking Regulation Act, 1949, have statutory force and are binding on all banking companies.

Critically, however, the Court did not stop there. It went on to observe that when it is mandatory or obligatory on the part of the banks to follow those instructions and directions, it is equally incumbent on the part of the concerned MSMEs to be vigilant enough to follow the procedure prescribed, in particular, to produce authenticated and verifiable material of their MSME status before the account is classified as a Non-Performing Asset. The obligation was thus held to be reciprocal.

The dual holding is what has driven all subsequent litigation. The first limb gave borrowers a powerful ground; the second limb gave banks an equally powerful answer.

C. Shri Shri Swami Samarth Construction: the Supreme Court clarifies

The tension in Pro Knits was addressed in Shri Shri Swami Samarth Construction & Finance Solution & Anr. v. The Board of Directors of NKGSB Co-operative Bank Ltd. & Ors., 2025 SCC OnLine SC 1566, decided by a Bench of Dipankar Datta and A.G. Masih, JJ., on a petition under Article 32 of the Constitution.

The Court read the Framework harmoniously, so that a right under the MSMED Act is not destroyed by the SARFAESI Act, or vice versa. Its conclusions may be stated as follows:

1. Identification of incipient stress may be made either by the bank or by the enterprise. The Framework does not vest the function exclusively in the lender.
2. The enterprise may voluntarily initiate proceedings if it apprehends failure of its business or inability to pay its debts, and must do so before accumulated losses reach half its net worth. Such initiation requires an affidavit and supporting documents.
3. A lending bank which has no conscious knowledge that the defaulting borrower is an MSME is not prohibited from classifying the account as a Non-Performing Asset, or from issuing a demand notice under Section 13(2) of the SARFAESI Act, without first identifying incipient stress.
4. But if, in response to the demand notice, the borrower asserts MSME status and claims the benefit of the Framework with the necessary details and an affidavit — as it is entitled to do under Section 13(3A) of the SARFAESI Act — the bank is bound to pause further action and consider the claim under the Framework before proceeding.
5. Belated invocation is impermissible. In the case before the Court, the petitioner had not claimed the benefit of the Framework on receipt of the demand notice, but only after proceedings under Section 14 of the SARFAESI Act had advanced. The bona fides of the petitioner were found to be suspect, the writ petition was dismissed, and liberty was granted to pursue the alternate remedy under Section 17.

D. The conflict of statutes

The underlying doctrinal difficulty has not been fully resolved and is worth stating precisely, because it is the point on which the most ambitious borrower-side arguments are built.

Section 35 of the SARFAESI Act contains a non obstante clause giving that Act overriding effect over other laws inconsistent with it. Section 24 of the MSMED Act also confers overriding effect, but only in respect of Sections 15 to 23 — the delayed payment provisions. Section 9, under which the Framework was issued, is not within that protected band. On a purely textual approach, therefore, the Framework does not enjoy statutory precedence over the SARFAESI Act.

Pro Knits did not resolve this by according the Framework overriding force. It resolved it by holding that the Framework has statutory force and is binding on banking companies — which places the obligation on the bank as a matter of banking regulation, rather than subordinating SARFAESI to the MSMED Act. Swami Samarth then harmonised the two by locating the borrower’s claim within Section 13(3A) of the SARFAESI Act itself, which requires the secured creditor to consider a representation or objection made by the borrower and to communicate reasons for non-acceptance within fifteen days.

That is an elegant solution and it is the one that borrower-side counsel should now adopt. The Framework claim is best pleaded not as a competing statutory regime, but as the substance of a Section 13(3A) representation which the secured creditor was bound to consider and to reject with reasons.

XII. The Kerala High Court After Pro Knits

The Kerala High Court has considered the Framework repeatedly since Pro Knits, and a consistent line has emerged. In every reported instance the challenge has failed, and it has failed for reasons of conduct rather than of principle.

A. M.D. Esthappan Infrastructure

In M/s. M.D. Esthappan Infrastructure Pvt. Ltd. & Anr. v. Reserve Bank of India & Ors., W.A. Nos. 481 and 484 of 2025, 2025:KER:45278, a Division Bench considered a challenge founded on the Framework where the writ petitioners had gone to the extent of seeking a declaration that the entire proceedings initiated in violation of the notification dated 29 May 2015 were void ab initio, and that Section 13 of the SARFAESI Act, Section 19 of the RDB Act and Sections 7, 9, 10 and 95 of the Insolvency and Bankruptcy Code were unconstitutional.

The Court traced the Framework from the notification of 29 May 2015 through the RBI circular of 17 March 2016, noting the requirement that a Board-approved policy operationalising the Framework be put in place not later than 30 June 2016. On the facts, it was found that the bank had in fact informed the writ petitioners that their accounts were in the Special Mention Account category and had called upon them to submit proposals, and that no proposals were submitted. The Court observed that at least on receipt of that communication, the petitioners ought to have sought a reference to the Committee constituted under the Framework. Abdul Nazer was noticed in the course of the discussion.

The Esthappan litigation continued into later rounds, in which the Court addressed the attempt to re-agitate the same grievance in reformulated proceedings, holding that changing the form of the relief prayed for cannot defeat res judicata and constructive res judicata, and applying the Henderson principle to a party which deliberately withholds claims in one proceeding with the intention of raising them later in litigation disguised as a distinct remedy.

B. Sark Spice Products

In M/s. Sark Spice Products Pvt. Ltd. v. Reserve Bank of India, in WPC 32181/2025 decided on 18 December 2025, the Kerala High Court again considered the Framework and, adopting the reasoning in Pro Knits as to the reciprocal obligation of the MSME, dismissed the writ petition.

C. Irine Agro Spices: the current position

The most recent and most instructive decision is Irine Agro Spices v. The Board of Directors of Axis Bank Ltd., W.A. No. 1192 of 2026, decided on 10 July 2026 by a Division Bench of Soumen Sen, C.J. and Syam Kumar V.M., J.

The appellants, a proprietary concern and its proprietor, had obtained credit facilities from Axis Bank and Karur Vysya Bank, enhanced from time to time to an aggregate limit of ₹26 crore. The accounts were classified as Non-Performing Assets on 22 June 2025 on default, with an aggregate outstanding of approximately ₹26.54 crore, and the banks issued demand notices under Section 13(2) and took symbolic possession of the secured assets.

The borrowers contended that the accounts could not have been classified as Non-Performing Assets, nor SARFAESI proceedings commenced, without first referring the matter to the Committee under the Framework for resolution of stress. They further contended, remarkably, that Pro Knits and Shri Shri Swami Samarth Construction were rendered per incuriam and sub silentio.

The Division Bench rejected the challenge. On the per incuriam contention, the Bench observed that it had pointedly not been pressed before the Single Judge, and held that decisions of the highest court cannot be rejected on the pretext of being sub silentio or per incuriam without explicit reasons, being strictly binding under Article 141 of the Constitution.

On the merits, the Bench elaborated the law laid down in Pro Knits and Shri Shri Swami Samarth Construction and held that while banks are duty bound to detect incipient stress in MSME accounts, it is equally the duty of the MSME borrower to submit authenticated and verifiable documents in support of its case before the account is declared a Non-Performing Asset. Significantly, the Bench held that even where a bank wrongly labels an MSME account as a Non-Performing Asset and issues a notice under Section 13(2), the borrower may claim the benefit of the Framework as part of its reply to that notice.

On the facts, the borrowers had not disclosed their MSME status when availing the facilities in 2022, had produced no valid MSME certificate, had not replied to the Section 13(2) notice, and had raised the MSME plea only after the proceedings had reached the stage of symbolic possession.

Irine Agro Spices is, for present purposes, the most useful Kerala authority available, because it states the rule in the form in which it will be applied. Three propositions may be extracted:

1. The bank’s duty is real. Banks are duty bound to detect incipient stress in MSME accounts. The Court did not resile from this.
2. The borrower’s duty is co-extensive. The MSME must submit authenticated and verifiable documents establishing its status before the account is classified as a Non-Performing Asset.
3. The reply to the Section 13(2) notice is the safety net. Even where the classification was wrong, the borrower can still claim the benefit of the Framework in its reply to the demand notice. Silence at that stage is close to fatal.

XIII. The Operative Rule as It Stands

Synthesising Pro Knits, Shri Shri Swami Samarth Construction and the Kerala line, the position in August 2026 may be stated as follows.

XIV. Practice Notes

A. For borrower-side counsel

The Framework plea succeeds or fails on documents assembled before the litigation begins. The following sequence reflects the current law.

1. Verify eligibility first. Confirm that the aggregate loan limit does not exceed ₹25 crore. An exposure above that threshold takes the account outside paragraph 1 of the Framework altogether, and the plea will fail at the threshold.
2. Establish status contemporaneously. Obtain the Udyam Registration Certificate and confirm that it was valid and subsisting during the relevant period. Registration obtained after the classification of the account as a Non-Performing Asset is of limited value and, on the Kerala authorities, is likely to attract adverse comment on bona fides.
3. Establish knowledge. Collect every communication in which the enterprise identified itself as an MSME to the bank — the loan application, the sanction correspondence, any Udyam certificate furnished at the time of availing facilities, and any subsequent intimation. Under Swami Samarth, the bank’s obligation is triggered by knowledge.
4. Use the seventh limb of Annex-I. A written communication from the enterprise to the branch reporting stress in its business is itself a ground for SMA-0 categorisation. Where such a letter exists, it is direct evidence that the bank was on notice of incipient stress.
5. Reply to the Section 13(2) notice, and reply properly. The reply is now the decisive document. It must assert MSME status in terms; annex the registration certificate and audited financials; invoke the Framework by reference to the notification dated 29 May 2015 and the RBI circular dated 17 March 2016; request a reference to the Committee for Stressed MSMEs; and be supported by an affidavit. Frame the reply expressly as a representation under Section 13(3A).
6. Call for institutional compliance material. Seek production of the bank’s Board-approved policy operationalising the Framework, the constitution of the Committee for the relevant District, the SMA status recorded in the bank’s system for the account across the relevant period, and the minutes of the Committee if any reference was made. Non-constitution of the Committee, or absence of a Board-approved policy, is an independent ground.
7. Plead the timelines with specificity. Identify the date on which the account entered SMA-2, the date on which it ought to have been referred within five working days, the date of actual reference if any, and the date of classification as a Non-Performing Asset. A pleading that merely alleges “non-compliance with the Framework” without this chronology carries little weight.
8. Do not delay. Every reported Kerala decision since Pro Knits has turned on delay. A plea first raised at the stage of Section 14 proceedings or symbolic possession is, on current authority, unlikely to succeed and may attract costs.
9. Choose the right forum. Section 17 before the Debts Recovery Tribunal is the ordinary remedy. Writ jurisdiction should be invoked only where there is a genuine jurisdictional defect and the alternate remedy is demonstrably inadequate.

B. For bank-side counsel

1. Establish the negative on knowledge. The single most effective answer to a Framework plea is that the borrower never disclosed its MSME status. Place on record the loan application, the sanction documents and the KYC file to show the absence of any MSME declaration.
2. Place the demand notice correspondence on record. Where the borrower did not reply to the Section 13(2) notice, or replied without asserting MSME status, that omission is decisive on the current authorities.
3. Demonstrate institutional compliance in any event. Produce the Board-approved policy, the constitution of the District Committee, and the SMA records. Even where the borrower’s plea is belated, positive evidence of compliance forecloses the argument entirely.
4. Where a reference was in fact made, prove the sequence. Establish that the Committee considered rectification and restructuring before deciding on recovery, and that the decision was communicated. Paragraph 5.3 requires the options to be considered in sequence, and a bare decision to recover is vulnerable.
5. Plead the eligibility threshold. Where the aggregate exposure exceeds ₹25 crore, the Framework does not apply, and this should be pleaded as a preliminary objection.
6. Plead conduct. Delay, non-disclosure, absence of a valid certificate and refusal of a reasonable revival opportunity have all been treated by the Kerala High Court as going to bona fides, and have attracted costs.

XV. Questions That Remain Open

Notwithstanding the clarity that Pro Knits and Shri Shri Swami Samarth Construction have brought, several questions are not conclusively settled and can be expected to generate litigation.

1. What constitutes “conscious knowledge”? Swami Samarth exempts a bank which has no conscious knowledge of MSME status. Whether constructive knowledge — for instance, where the sanction file records the nature and scale of the enterprise, or where the bank has itself classified the exposure as priority sector MSME lending for its own regulatory reporting — suffices has not been authoritatively determined. There is an evident tension between a bank reporting an exposure as MSME lending to the Reserve Bank while denying knowledge of MSME status in litigation.
2. The consequence of non-compliance. Pro Knits held the Framework mandatory but did not spell out the consequence of breach in every case. Whether non-compliance renders the classification void ab initio, or merely voidable at the instance of a diligent borrower, or gives rise only to a direction to refer the account to the Committee while preserving the classification, remains to be worked out. The Kerala decisions have not had to reach the question because the challenges failed on conduct.
3. The position of non-banking financial companies and co-operative banks. Sections 21 and 35A of the Banking Regulation Act operate on banking companies. The extent to which the Framework, as an instruction under Section 9 of the MSMED Act, binds secured creditors who are not banking companies within the meaning of that Act merits closer attention than it has received.
4. The effect of the 2025 revision of classification criteria. Enterprises which crossed the pre-2025 thresholds but fall within the revised thresholds may now claim MSME status. Read with paragraph 8(6) of the 2020 notification, the date from which that status and its consequential entitlements accrue is capable of dispute, particularly where the account was classified as a Non-Performing Asset in the intervening period.
5. The ₹25 crore ceiling and inflation. The eligibility threshold in paragraph 1 of the Framework has stood at ₹25 crore since 2016, while the classification thresholds under Section 7 have been revised twice. An enterprise may now comfortably be a medium enterprise and yet have an exposure well outside the Framework. Whether the ceiling will be revised to track the classification criteria is a matter for the regulator, but the mismatch is increasingly significant.

XVI. Conclusion

The Framework for Revival and Rehabilitation of MSMEs is a genuine statutory entitlement and not, as was once thought in this State, an optional facility. That much is settled by Pro Knits, which held in terms that instructions under Section 9 of the MSMED Act and directions under Sections 21 and 35A of the Banking Regulation Act carry statutory force and bind every banking company.

But the entitlement is one of process, and processes must be invoked. The Supreme Court in Shri Shri Swami Samarth Construction, and the Kerala High Court in Esthappan, Sark Spice and Irine Agro Spices, have converged on a single practical rule: the obligation of the lender is activated by knowledge, and the enterprise must furnish that knowledge with authenticated documents, at the latest in its reply to the notice under Section 13(2). An enterprise which does so has a real remedy. An enterprise which stays silent through sanction, through default, through classification and through demand, and then produces a registration certificate when the receiver arrives, will find that the Framework offers it nothing.

For the practitioner, the lesson is one of file management as much as of advocacy. The Framework plea is won in the correspondence and lost in the delay. Advising an MSME client at the first sign of distress — to write to the branch reporting stress, to seek a reference to the Committee, to invoke paragraph 2.3 while there is still net worth to preserve — is worth more than the most carefully drafted Securitisation Application filed after symbolic possession has been taken.

This article reflects observations from practice in banking and SARFAESI litigation and does not constitute legal advice. For specific matters, please consult a qualified advocate.