Policy and purpose for MSMEs
- Section 2 declares the policy of the State to promote, support, strengthen, and encourage the growth and development of MSMEs in all productive sectors, particularly rural/agri-based enterprises.
- The State shall attain countryside industrialization by establishing entrepreneurship support and assistance, ensuring continuing viability and growth, and building a feedback and evaluation mechanism to monitor economic contributions, bottlenecks, and environmental effects (Section 2).
- The policy includes expanding entrepreneurship training and skills development (Section 2).
- The policy includes facilitating MSMEs’ access to sources of funds and assuring a fair share of government contracts and related incentives/preferences (Section 2).
- The policy includes doing away with stringent and burdensome collateral requirements and instituting safeguards for the protection and stability of the credit delivery system (Section 2).
MSME definitions and beneficiary coverage
- Section 3 defines MSMEs as any business activity or enterprise engaged in industry, agribusiness and/or services (including single proprietorship, cooperative, partnership, or corporation) whose total assets (inclusive of assets arising from loans but excluding the land where the office, plant and equipment are situated) fall under the following categories:
- micro: not more than P3,000,000
- small: P3,000,001 - 15,000,000
- medium: P15,000,001 - P1000,000,000
- Section 3 requires that MSME definitions be reviewed and adjusted by the MSMED Council under Section 6, or upon recommendation of sectoral organizations concerned, taking into account inflation and other economic indicators.
- The MSMED Council may use other variables such as number of employees, equity capital, and assets size (Section 3).
- Section 3 requires implementation of plans and programs varied and distinct by sector, including encouraging MSMEs to graduate from one category to the next or to a higher category.
Eligibility for government assistance
- To qualify for assistance, counseling, incentives, and promotion under the Act, an enterprise must meet all requirements under Section 4.
- Registration requirement: the business must be duly registered with appropriate agencies as presently provided by law; for micro enterprises, registration with the office of the municipal or city treasurer is deemed sufficient compliance (Section 4(a)).
- Filipino ownership requirement: the enterprise must be 100% owned and capitalized by Filipino citizens (single proprietorship or partnership), or if a juridical entity, at least 60% of capital or outstanding stock must be owned by Filipino citizens (Section 4(b)).
- Major sectors requirement: the business activity must fall within industry, trade, services (including practice of one’s profession), operation of tourism-related establishments, and agri-business defined for purposes of the Act as any business activity involving manufacturing, processing, and/or production of agricultural produce (Section 4(c)).
- Not a large-enterprise branch: it must not be a branch, subsidiary, or division of a large scale enterprise (Section 4(d)).
- MSMEs are allowed to accept subcontracts and enter franchise partnership with large enterprises and join in cooperative activities with other MSMEs despite the “branch/subsidiary/division” requirement (Section 4).
- Exclusion for fraud/misrepresentation: any MSME, its directors, officers, or agents found to have committed fraud or misrepresentation to avail of benefits under the Act is immediately disqualified as a beneficiary, without prejudice to administrative, criminal, or civil liability under existing laws (Section 4).
- Government procurement share: eligible MSMEs are entitled to a share of at least 10% of the total procurement value of goods and services supplied to the Government (its bureaus, offices, and agencies) annually (Section 4).
- The Department of Budget and Management must monitor compliance by government agencies on required MSME procurement and submit reports to the MSMED Council on a semestral basis and to Congress through appropriate committees on a yearly basis (Section 4).
- The Act directs that the SB Corporation programs in subsequent provisions shall be exclusively delivered and directed to bonafide MSMEs (Section 4).
MSMED Council creation and structure
- The existing Small and Medium Enterprise Development Council created under Republic Act No. 6977 and amended by Republic Act No. 6977 and Republic Act No. 8289 is strengthened and renamed the Micro, Small and Medium Enterprise Development (MSMED) Council (Section 7).
- The MSMED Council is attached to the Department of Trade and Industry and must be constituted within 60 days after approval of the Act (Section 7).
Council composition and operating rules
- The MSMED Council is headed by the Secretary of Trade and Industry as Chairman; it may elect a Vice-chairman to preside in the Chairman’s absence (Section 7-A).
- The Council members include:
- Secretary of Agriculture (Section 7-A(a))
- Secretary of the Interior and Local Government (Section 7-A(b))
- Secretary of Science and Technology (Section 7-A(c))
- Secretary of Tourism (Section 7-A(d))
- Chairman of Small Business Corporation (Section 7-A(e))
- Three (3) MSME sector representatives representing Luzon, Visayas, and Mindanao (Section 7-A(f))
- One (1) labor sector representative nominated by accredited labor groups (Section 7-A(g))
- One (1) private banking sector representative serving alternately among the Chamber of Thrift Banks, the Rural Bankers' Association of the Philippines (RBAP), and the Bankersa Association of the Philippines (BAP) (Section 7-A(h))
- All appointed members (except ex officio members) serve a term of three (3) years, and replacements serve only the unexpired portion (Section 7-A).
- Private sector members receive PHP 2,000 per meeting for a maximum of 24 meetings per year, and the per diem may be adjusted by the MSMED Council (Section 7-A).
- The Council may call upon participation of any national or local government agency, association of local government officials, or private sector organization in deliberations (Section 7-A).
- The Council may create an Executive Committee of five (5) members, with at least two (2) private sector members, authorized to act during intervals between meetings within the specific authority granted by the Council (Section 7-A).
MSME development plan and council duties
- The President shall approve a six-year MSMEDP prepared by the Department of Trade and Industry (DTI), forming part of the Medium Term Philippine Development Plan (MTPDP) (Section 6).
- The MSMEDP must be formulated in consultation with the private sector and validated and updated semestrally, and must include a component on a micro credit financing scheme (Section 6).
- The MSMED Council shall have powers, duties, and functions including:
- creating an environment and opportunities for MSME growth and development (Section 7-B(a))
- recommending policy matters affecting MSMEs to the President and Congress (Section 7-B(b))
- coordinating and integrating government and private sector activities on MSME development (Section 7-B(c))
- reviewing policies of government agencies affecting MSMEs and recommending changes to the President and Congress through Senate’s Committee on Economic Affairs and House’s Committee on Small Business and Entrepreneurship Development, including efforts to simplify rules and regulations, and including results in an annual Congress report (Section 7-B(d))
- monitoring and determining progress of agencies geared towards MSME development, including development oversight in coordination with local government units and DILG and private sector groups/associations (Section 7-B(e))
- providing policy and coordinative framework (with NEDA and the Coordinating Council for the Philippine Assistance Program, when necessary) in tapping local and foreign funds for MSME development (Section 7-B(g))
- promoting productivity and viability by directing and/or assisting agencies to provide enumerated training, guidance, quality/product development support, technology adoption support, marketing/distribution support (including common service facilities), access to credit programs (including leasing, venture capital, credit guarantee systems, credit records and information systems, and decentralization of loan approval mechanisms), and other measures listed in Section 7-B(h) (items 1 to 12)
- The MSMED Council must submit to the President and Congress through the OVERSIGHT Committee defined under the Act a yearly report on the status of MSMEs, including progress and impact of relevant policies, programs, and legislation and private sector activities (Section 7-B(g) as renumbered in the text).
- The MSMED Council must coordinate, monitor, and assess implementation of the MSMEDP and institute adjustments when necessary in light of domestic and international conditions (Section 7-B(h) as renumbered in the text).
- The MSMED Council must generally exercise all powers and functions necessary to meet the Act’s objectives and purposes (Section 7-B(i) as renumbered in the text).
Bureau as Council Secretariat; funding and rationalization
- The Bureau of Micro, Small and Medium Enterprise Development (BMSMED) is designated to act as the Council Secretariat (Section 8).
- The Council must have a separate annual appropriation approved by DTI, provided in the General Appropriations Act starting in the fiscal year immediately following approval of the Act, to finance its activities and operational expenses, and it may accept contributions from the private sector (Section 9).
- The MSMED Council must conduct continuing review of government programs for MSMEs and submit to Congress and the President a report with its policy recommendations (Section 10).
SB Corporation creation and powers
- Section 11 creates a body corporate known as the Small Business Guarantee and Finance Corporation (SB Corporation), tasked with implementing comprehensive policies and programs to assist MSMEs in all areas including finance and information services, training, and marketing.
- The SB Corporation is vested with corporate powers in a Board of Directors composed of 11 members (Section 11 [new subsection inserted after Section 11]):
- Secretary of Trade and Industry (Section 11. board composition)
- Secretary of Finance (Section 11. board composition)
- one private sector representative appointed by the President upon recommendation of the MSMED Council (Section 11. board composition)
- seven (7) representatives of SB Corporation common stock shareholders elected proportionally in accordance with Section 24 of the Corporation Code (Section 11. board composition)
- the President of the SB Corporation as ex-officio member and Vice-chairman (Section 11. board composition)
- The President appoints the chairman of the Board from among its members (Section 11).
- Board members serve a term of three (3) years without reappointment; replacements serve only the unexpired portion of the term (Section 11).
- The Board is empowered to:
- formulate policies and prescribe/amend/repeal by-laws, rules, and regulations for effective operations (Section 11)
- establish branches, agencies, and subsidiaries (Section 11)
- compromise or release claims or liabilities, including interest, penalties, fees, and/or charges, consistent with its by-laws and BSP rules (Section 11(c))
- fix features on non-voting preferred shares printed on stock certificates (Section 11(d))
- exercise other powers necessary or incidental to SB Corporation purposes (Section 11(e))
- authorize organizational structure and staffing pattern and grant employees similar salaries/allowances/fringe benefits to those of other financial institutions notwithstanding Republic Act No. 6758 and Compensation Circular No. 10, Series of 1989 issued by DBM (Section 11(f)).
Corporate structure and operating functions
- The SB Corporation is administratively attached to DTI and under the MSMED Council’s policy and program supervision (Section 11-B(a)).
- The SB Corporation’s principal offices are in Metro Manila, and it must establish branch offices in provinces when necessary (Section 11-B(b)).
- The SB Corporation exercises general corporate powers under the Corporation Code, including incidental powers necessary to the Act’s objectives (Section 11-B(c)).
- Subject to compliance with rules and regulations issued by the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission, the SB Corporation must have functions including:
- sourcing and adopting development initiatives for globally competitive MSMEs in finance and business technologies (Section 11-B functions)
- extending all forms of financial assistance to eligible MSMEs and engaging in wholesale lending; SB Corporation has two (2) years from the Act’s effectivity to comply (Section 11-B functions)
- guaranteeing loans obtained by qualified MSMEs under SB Corporation board-adopted terms and conditions (Section 11-B functions)
- acquiring and disposing of real and personal property in the normal course of business, including holding, purchasing, leasing, owning, improving, selling, mortgaging, encumbering, or disposing (Section 11-B functions)
- accepting alternative collaterals and implementing alternative loan evaluation models (Section 11-B functions)
- applying for and accepting grants and donations from within and outside the country (Section 11-B functions)
- investing/re-investing in stocks, bonds, treasury bills, debentures, securities and similar government or government-instrumentality debt, or any government financial institution (Section 11-B functions)
Capitalization and dividend limits
- The SB Corporation has authorized capital stock of P10,000,000,000.00 (Section 12).
- Its initial capital of P10,000,000,000.00 comes from equity investment in common stock contributed by:
- Land Bank of the Philippines (LBP): P200,000,000.00
- Development Bank of the Philippines (DBP): P200,000,000.00
- Social Security System (SSS): P200,000,000.00
- Government Service Insurance System (GSIS): P200,000,000.00
- Authorized capital stock is divided into 80,000,000 common shares and 20,000,000 preferred shares with par value of P100.00 per share (Section 12).
- Common shares issued (including those issued against assets of the KKK Guaranty Fund consolidated under the SB Corporation by virtue of Executive Order No. 233, Series of 2000 and Executive Order No. 19, Series of 2001, and including already subscribed shares) form part of capitalization (Section 12).
- Holders of preferred shares issued under Republic Act No. 6977, as amended have the option to convert preferred shares into common shares (Section 12).
- Additional equity may come from trust placements of excess and unused funds of existing government agencies, bilateral and multilateral ODA funds, subscriptions from GOCCs, and investments of private financial institutions and corporations (Section 12).
- Any private sector investment is limited to preferred shares (Section 12).
- The SB Corporation is granted a five (5) year grace period on dividend commitments beginning on the date of effectivity of this amendment (Section 12).
- After the grace period, dividends may be declared only up to 30% of net income; the rest must be retained as retained earnings (Section 12).
Supervision and investment trust funds
- The SB Corporation is subject to BSP supervision and examination, considering its development objectives (Section 13).
- The SB Corporation may set aside money to encourage a venture capital and micro finance trust fund:
- The Venture Capital Fund is used mainly for venture capital finance, especially in technology-oriented industries (Section 14).
- The Micro Finance Trust Fund is used for collateral-free fixed and working capital loans to micro and small enterprises run by emerging out of poverty persons (Section 14).
Mandatory MSME credit allocation (10 years)
- For a period of ten (10) years from the date of effectivity of this amendatory Act, all lending institutions as defined under BSP rules must set aside at least 8% for micro and small enterprises of their total loan portfolio based on their balance sheet as of the end of the previous quarter and make it available for MSME credit as contemplated by the Act (Section 15).
- Compliance is satisfied through any of the following:
- actual extension of loans to eligible MSMEs (Section 15(a))
- actual subscription of preferred shares of SB Corporation (Section 15(b))
- wholesale lending to Participating Financial Institutions (PFIs) for on-lending to MSMEs (Section 15(c))
- purchase/discount of MSMEs receivables (Section 15(d))
- loans granted to export, import, and domestic traders subject to compliance with Section 3 of the Act (Section 15(e))
- subscribed/purchase of liability instruments offered by SB Corporation (Section 15(f))
- BSP must formulate rules for effective implementation (Section 15).
- Purchase of government notes, securities, and other negotiable instruments is not deemed compliance with the mandatory credit allocation requirement (Section 15).
- BSP must establish an incentive program to encourage lending to micro, small and medium industries beyond the mandatory credit allocation, including possible reduction in bank’s reserve requirement (Section 15).
- The MSMED Council must set up systems to monitor all loan applications of MSMEs to account for the MSME sector’s absorptive capacity (Section 15).
- BSP must furnish to the MSMED Council quarterly comprehensive reports on banks’ compliance, noncompliance, and penalties under the mandatory credit allocation provisions (Section 15).
Foreclosure participation and transfer limits
- Lending institutions that are not qualified to acquire or hold lands of the public domain may bid and take part in sales of mortgaged real property in case of judicial or extra-judicial foreclosure, and may avail of receivership, enforcement, and other proceedings solely upon borrower default (Section 15).
- Any such participation is limited to a period not exceeding five (5) years from actual possession (Section 15).
- Title to the property shall never be transferred to the lending institution (Section 15).
- If the lending institution is the winning bidder, it may transfer its rights to a qualified Philippine national during the five (5) year period, without prejudice to a borrower’s rights under applicable laws (Section 15).
MSME events, awards, and oversight committee
- The second week of July each year is declared the “Micro, Small, and Medium Enterprise Development Week” and is organized jointly by the MSMED Council, the Department of Trade and Industry, and SB Corporation (Section 16).
- Presidential awards for outstanding MSMEs and good MSME practices, consisting of rewards in cash or in kind, shall be granted to one hundred percent (100%) Filipino-owned companies and development partners during MSME development week (Section 17).
- A Congressional Oversight Committee on Micro, Small and Medium Enterprise Development (COC-MSMED) is created to monitor and oversee implementation of the Act (Section 18).
- The COC-MSMED consists of:
- chairpersons of Senate Committee on Economic Affairs and House Committee on Small Business and Entrepreneurship Development as chairperson and co-chairperson, respectively (Section 18)
- five (5) members from the Senate and five (5) members from the House, including chairpersons of specified related committees (Section 18)
- two (2) senators and two (2) House members are nominated by the respective minority leaders (Section 18)
- The COC-MSMED must set guidelines and overall framework for monitoring and adopt its internal rules of procedure; its secretariat must be drawn from existing personnel of the Senate and House committees constituting the COC-MSMED (Section 18).
Penalty allocation rule
- Penalties collected for noncompliance must be allocated as follows:
- 90% goes to the MSMED Council Fund
- 10% goes to the BSP to cover administrative expenses (Section 19 as amended).
Implementing Rules and effectivity timeline
- DTI, through the Bureau of Micro, Small and Medium Business Development, shall formulate the Implementing Rules and Regulations (IRR) necessary to implement the Act in consultation with other concerned government agencies, non-government organizations, and private sector involved in MSME promotion (Section 20).
- The IRR must be issued within 90 days from approval of the Act (Section 20).
- IRR takes effect 30 days after publication in a national newspaper of general circulation (Section 20).
- The Act takes effect within 15 days from publication in at least two (2) national newspapers of general circulation (Section 24).
Separability and repealing provisions
- Provisions of the Act are separable; if any provision is held unconstitutional, the remainder remains in full force and effect (Section 22).
- All laws, executive orders, rules and regulations, or parts thereof, inconsistent with the Act are repealed or modified accordingly (Section 23).