Amendment to Magna Carta for SMEs

Legal basis and amendment of RA 6977

Republic Act No. 8289 amends Republic Act No. 6977 (the “Magna Carta for Small Enterprises”).
Section 1 amends Section 3 of Republic Act No. 6977.
Section 2 amends Section 4 of Republic Act No. 6977.
Sections 3 to 10 amend Sections 5, 6, 7, 9, 10, 11, 13, and 14 of Republic Act No. 6977.
Sections 11 to 12 include a separability clause and a repealing clause.

Policy guiding principles and institutional mandate

Section 5 directs the State to guide small and medium enterprise development using principles of minimal regulation and simplified procedures.
Section 5 encourages private sector participation in implementing programs for small and medium enterprises strictly in accordance with law, and it authorizes the SMED Council to recommend simplified procedures and localized incentives to small enterprises.
Section 5 requires coordination of government efforts through appropriate offices under multiple departments and central agencies to support small and medium enterprises.
Section 5 accelerates decentralization by establishing regional and provincial offices and requiring substantial delegation of authority for decisions on registration, qualification for benefits, accreditation, and resolution of complaints.
Section 6 creates the Small and Medium Enterprise Development (SMED) Council as the primary agency responsible for promotion, growth, and development of small and medium enterprises.

Definitions and eligibility limits

Section 1 defines a “Small and Medium Enterprise” as a business activity or enterprise engaged in industry, agribusiness and/or services, including these enterprise forms: single proprietorship, cooperative, partnership, or corporation.
Section 1 sets the asset-based size thresholds as follows:
- Micro: less than P1,500,001
- Small: P1,500,001 - P15,000,000
- Medium: P15,000,001 - P60,000,000
Section 1 requires that the computation of total assets be inclusive of those arising from loans, but exclusive of the land where the business entity’s office, plant, and equipment are situated.
Section 1 subjects the definitions to review and adjustment by the SMED Council motu proprio or upon recommendation of sectoral organizations, considering inflation and other economic indicators, and authorizes use of variables including number of employees, equity capital, and assets size.
Section 2 requires that businesses seeking eligibility for assistance, counseling, incentives, and promotion must be duly registered with appropriate agencies as required by law, with a special rule for micro enterprises: registration with the office of the municipal or city treasurer is deemed sufficient compliance.
Section 2 requires ownership rules:
- 100% owned and capitalized by Filipino citizens for single proprietorship or partnership; and
- for a juridical entity, at least 60% of capital or outstanding stocks must be owned by Filipino citizens.
Section 2 limits covered business activities to major sectors: industry, services (including practice of one’s profession), operation of tourism-related establishments, and agri-business defined for purposes of the Act as manufacturing, processing, and/or production of agricultural produce, excluding farm level agricultural/crop production.
Section 2 excludes enterprises that are branches, subsidiaries, or divisions of a large scale enterprise, and excludes cases where policies are determined by a large scale enterprise or by persons who are not owners or employees of the enterprise.
Section 2 allows SMEs to accept subcontracts from large enterprises or to join in cooperative activities with other SMEs.
Section 2 provides that financing corporation programs under later sections are exclusively targeted to medium, small, and micro-sized enterprises.
Section 2 entitles registered small enterprises to at least 10% share of total procurement value of goods and services supplied to the Government, its bureaus, offices, and agencies annually, provided that prices and quality of goods offered are competitive.

State guiding mechanism: SMED Council creation and role

Section 6 creates the SMED Council to spur growth and development of small and medium enterprises nationwide and to carry out the declared policy.
Section 6 provides that the SMED Council is attached to the Department of Trade and Industry.
Section 6 mandates the SMED Council to be constituted within sixty (60) days after approval of Republic Act No. 8289.
Section 6 makes the SMED Council the primary agency for promotion, growth, and development by facilitating and closely coordinating national efforts.
Section 6 authorizes the SMED Council to assist relevant agencies in tapping local and foreign funds for small and medium enterprise development and to promote use of existing programs and maximize use of labor resources.

SMED Council composition and operating provisions

Section 5 (amending Section 7) establishes that the SMED Council is headed by the Secretary of Trade and Industry as Chairman.
Section 5 authorizes the Council to elect a Vice-chairman from among its members to preside in the absence of the Chairman.
Section 5 enumerates Council members including:
- the Director General of the National Economic and Development Authority;
- the Secretary of Agriculture;
- the Secretary of Labor and Employment;
- the Secretary of Environment and Natural Resources;
- the Secretary of Science and Technology;
- the Secretary of Tourism;
- the Chairman of the Monetary Board;
- the Chairman of Small Business Guarantee and Finance Corporation;
- the Chairman of the small and medium enterprises promotion body to be undertaken by the President under the Act;
- three (3) private sector representatives, all Filipino citizens, representing Luzon, Visayas and Mindanao, plus one (1) private sector representative from the small and medium enterprise sector to be appointed by the President; and
- a representative from the private banking sector to serve alternately among the Chamber of Thrift Banks, the Rural Bankers' Association of the Philippines (RBAP), and the Bankers' Association of the Philippines (BAP).
Section 5 provides that cabinet-rank ex officio members designate an undersecretary or assistant secretary, and the Chairman of the Monetary Board or representative, as permanent representatives if they fail to attend meetings.
Section 5 grants private sector members per diem of One thousand pesos (P1,000) per meeting for a maximum of twenty-four (24) meetings per year, and authorizes Council adjustment with effect upon approval of the President.
Section 5 requires the Department of Trade and Industry to allocate Five million pesos (P5,000,000) out of its savings for initial operating expenses of the Council, after which the Council’s budget is included in the annual appropriation of the Department of Trade and Industry.
Section 5 authorizes the SMED Council to call upon participation of any concerned government agency or association of local government officials in deliberations affecting small and medium enterprise growth in particular areas.
Section 5 allows the SMED Council to create an Executive Committee of five (5) members, with at least two (2) representing the private sector, empowered to act for and on behalf of the Council during intervals of meetings and within the authority granted.

Council Secretariat duties

Section 6 (amending Section 9) designates the Bureau of Small and Medium Business Development as the Council Secretariat.
Section 6 requires the Secretariat to prepare and recommend annual and medium-term small and medium enterprise development plans for approval by the Council, in coordination with local government units and/or associations of local government officials.
Section 6 requires the Secretariat to coordinate preparation of position papers and background materials for Council meetings.
Section 6 tasks the Secretariat to assist the Council in coordinating and monitoring small and medium enterprise policies and programs and activities of all government agencies.
Section 6 requires the Secretariat to prepare, collate, and integrate inputs for the Council’s yearly report on the status of small and medium enterprises.
Section 6 requires periodic reports to the Council on progress and accomplishments of work programs and authorizes ad hoc functions as authorized by the Council.

Promotion body and rationalization of programs

Section 7 (amending Section 10) requires the SMED Council to conduct continuing review of government programs for small and medium enterprises and to submit to Congress and the President a report with policy recommendations.
Section 7 empowers the President to establish a small and medium enterprise promotion body as the principal agency that formulates, implements, coordinates, and monitors all non-financing government programs, including fee-based services, to support and promote micro, small and medium enterprises.
Section 7 provides that the promotion body is attached to the Department of Trade and Industry and is under the policy, program, and administrative supervision of the SMED Council.
Section 7 provides that the promotion body receives no less than fifty percent (50%) of the assets and budgetary allocations of agencies for promotion, development, and financing of small and medium enterprises that may be dissolved/abolished and absorbed into the SMED Council.

Small Business Guarantee and Finance Corporation rules

Section 8 (amending Section 11) creates the Small Business Guarantee and Finance Corporation (SBGFC) as a body corporate.
Section 8 directs SBGFC to source and adopt development initiatives for globally competitive small and medium enterprises in finance, technology, production, management, and business linkages.
Section 8 requires SBGFC to provide, promote, develop, and widen alternative modes of financing for small and medium enterprises, including direct and indirect project lending, venture capital, financial leasing, secondary mortgage, and/or rediscounting of loan papers, and secondary/regional stock markets.
Section 8 prohibits SBGFC from servicing crop production financing.
Section 8 requires SBGFC to guarantee loans obtained by qualified small and medium enterprises, local and/or regional associations’ small enterprises and industries, and private voluntary organizations and/or cooperatives, using terms and conditions adopted by its Board.
Section 8 authorizes SBGFC to guarantee loans up to one hundred percent (100%).
Section 8 authorizes SBGFC to provide a second level guarantee (reinsurance) on the credit and/or investment guarantees made by credit guarantee associations and other institutions supporting small entrepreneurs.
Section 8 makes SBGFC liable under guarantees upon proof that the loan has become past due, subject to terms and guidelines adopted by its Board and printed on the contract of guarantee.
Section 8 attaches SBGFC to the Department of Trade and Industry and places it under the policy, program, and administrative supervision of the SMED Council.
Section 8 sets SBGFC’s principal place of business in Metro Manila and directs it to endeavor to have one or more branch offices in every province.
Section 8 vests SBGFC with all general powers conferred by law upon corporations under the Corporation Code to achieve objectives of the Act.
Section 8 establishes a nine (9)-member Board of Directors composed of:
- three (3) private sector members appointed by the President upon recommendation of the SMED Council, with the Chairman appointed by the President to serve on a full-time basis;
- the Secretary of Trade and Industry or an Undersecretary; and
- a representative from each of five (5) government financial institutions mandated in the Act to provide the initial capital, designated under guidelines agreed upon by Board Chairmen.
Section 8 authorizes the Board of Directors of SBGFC, notwithstanding Republic Act No. 6758 and Compensation Circular No. 10, series of 1989 issued by the Department of Budget and Management, to extend to employees and personnel allowances and fringe benefits similar to those enjoyed by employees and personnel of other government financial institutions.

Mandatory bank credit allocations to SMEs

Section 9 (amending Section 13) mandates that for ten (10) years from the date of effectivity, all lending institutions defined under Bangko Sentral ng Pilipinas rules, whether public or private, must set aside:
- at least six percent (6%) for small and medium enterprises credit; and
- at least two percent (2%) for small and medium enterprises credit.
Section 9 requires the set-aside to be based on the lending institution’s total loan portfolio using its balance sheet as of the end of the previous quarter.
Section 9 requires that the set-aside amounts be made available for small and medium enterprises credit as contemplated in the Act.
Section 9 directs the Bangko Sentral ng Pilipinas, in consultation with the Council, to formulate rules for effective implementation of the mandatory allocation.
Section 9 provides that purchase of government notes, securities and other negotiable instruments (except those offered by the SBGFC that do not pay market rates) does not constitute compliance with the mandatory allocation.
Section 9 requires the Bangko Sentral ng Pilipinas to establish an incentive program to encourage lending to small and medium industries beyond the mandatory credit allocation, including possible reduction in a bank’s reserve requirement.
Section 9 requires the SMED Council to set up systems to monitor all loan applications of small and medium enterprises to account for the sector’s absorptive capacity.
Section 9 requires the Bangko Sentral ng Pilipinas to require covered lending institutions to furnish the SMED Council quarterly reports on compliance.
Section 9 requires the Bangko Sentral ng Pilipinas to expeditiously act on the Council’s reports of non-compliance.

Administrative sanctions and fines

Section 10 (amending Section 14) requires the Bangko Sentral ng Pilipinas to impose administrative sanctions and other penalties on lending institutions for non-compliance with provisions of the Act.
Section 10 provides that the fine for non-compliance is not less than Five hundred thousand pesos (P500,000).

Separability and repealing effect

Section 11 declares all provisions of the Act separable such that if any provision is held unconstitutional, the remainder of the Act remains in full force and effect.
Section 12 repeals or modifies all laws, executive orders, rules and regulations, or parts thereof, inconsistent with Republic Act No. 8289.