Legal Risks and Liabilities for MSMEs Under the PLI Scheme in India

The PLI Scheme and MSMEs

One of the government's main initiatives to increase exports and domestic manufacturing is the Production Linked Incentive (PLI) Scheme, which was introduced in 2020–21. With a total investment of ₹1.97 lakh crore, it encompasses 14 major industries under the Make-in-India banner, including electronics, pharmaceuticals, food processing, automobiles, solar, and more. Businesses in these industries pledge to meet predetermined production and investment goals; if they do, they get paid for the additional sales.The scheme has already attracted large investments (₹1.46 lakh crore approved) and generated significant output (₹12.5 lakh crore production and ₹4 lakh crore exports by FY2023-24). Critically for MSMEs, PLI is designed to create new supplier networks: official reports note that anchor units in each sector will spur ancillary units (mostly MSMEs) across the supply chain. In fact, hundreds of MSMEs are already beneficiaries for example, 176 MSME applicants have been approved for incentives in sectors like bulk drugs, medical devices, and food processing.

Attracting significant investment and technology, attaining economies of scale, and enhancing Indian manufacturers' competitiveness on a global scale are among PLI's goals. Crucially, PLI recipients are still required to abide by all standard business laws and scheme regulations. With examples from a variety of industries, this article describes the legal requirements that PLI beneficiaries must fulfill as well as the risks and liabilities that they may encounter if they fail to do so. It describes how MSMEs can reduce these legal risks and includes a few case studies.

Key Legal Obligations Under the PLI Scheme

MSME participants in any PLI sector must adhere to detailed scheme conditions, as specified in official guidelines and agreements. In general, a beneficiary’s obligations include:

Investment Commitments: The firm must invest a minimum prescribed amount in new plant & machinery (or contract manufacturing) by set deadlines. For example, PLI rules typically require at least ₹10 crore of incremental capex by an MSME (and ₹100 crore for larger firms) to qualify. In each sector, the exact threshold is specified in the scheme’s annexures. A beneficiary agrkees to make “committed investment” in the product segment for which it was selected. If a company fails to achieve its pledged investment, it may lose eligibility for incentives.

Production/Sales Targets: Companies must achieve specified growth in production or sales of covered products each year. Incentives are paid on incremental sales over a base year, subject to meeting annual growth rates and quality norms. The base year sales and required Compound Annual Growth Rate (CAGR) are fixed in the guidelines. (For MSMEs in innovative segments, eligibility may be based on business plan potential and scalability.) Importantly, all sales must be actual transactions (captive use or intra-group transfers are often disallowed or carefully regulated). The government or its implementing agency audits these claims each year.

Performance Security: Beneficiaries are typically required to furnish a performance bank guarantee (BG) or similar security as a condition of the agreement. For example, in the Advanced Chemistry Cell (ACC) Battery PLI, the beneficiary had to post a BG proportional to its committed capacity – up to ₹75-100 crore for large capacities. This security backs the company’s obligations. If the firm defaults on targets, the government can encash this BG as liquidated damages.

Reporting and Documentation: Firms must maintain full, accurate records of their investments and production. Periodic reports (often quarterly or annual) must be filed with the nodal PLI agency or PMA (Program Management Agency), along with audited financial statements and certification of production/sales. The agency may perform sample verifications, site visits, and cross-check invoices and outputs. Many scheme SOPs require detailed reconciliation of claim data.

Regulatory Compliance: Crucially, PLI support does not exempt any regulatory duty. Beneficiaries must comply with all statutory laws while expanding. This means continuing all ordinary registrations/permits (such as company laws, tax registrations, labor registrations, import-export codes, etc.). For example, applicants and promoters cannot be wilful defaulters or appear on debarred lists. An MSME expanding capacity must still obtain environmental clearances and Pollution Board consents if required, register under labour codes, pay GST/corporate taxes on expanded output, etc. In short, PLI runs alongside India’s full web of labor, environmental, tax and corporate laws – none of these requirements are waived or relaxed.

Contractual Undertakings: Often PLI beneficiaries sign a formal Programme Agreement (PA) or Memorandum of Understanding with the government. This legally-binding contract restates the scheme terms and may add detailed clauses on reporting, audit rights, change-of-ownership restrictions, arbitration, etc. For instance, the ACC Battery PA explicitly obligated the firm “to perform and fulfil all other obligations…including investment of at least INR 225 crore”. The agreement will include conditions precedent (e.g. obtaining all permits), confidentiality clauses, and stipulations that the firm “has complied with Applicable Laws in all material respects”.

Indemnity Bonds: Finally, PLI guidelines require an indemnity bond or deed. The applicant must declare that all information is true and undertake to indemnify the government if any claim or representation is false or misleading. For example, white goods PLI SOP forms include a clause that if an incentive claim is “false or excessive” the company must refund the incentive plus interest.

In short, MSMEs under PLI must not only drive rapid growth but also keep impeccable legal and audit records. They effectively take on heavy compliance responsibilities: under one recent study, a single manufacturing MSME may face ~1,450 regulatory obligations each year. Labour laws alone account for roughly two-thirds of all criminal penalty clauses, highlighting how easily a procedural lapse could turn costly.

Specific Legal Risks and Liabilities

• MSMEs that fail to meet PLI obligations or break rules face serious legal consequences under Indian law and the scheme’s own terms. Key risk areas include:

Non-compliance with Investment/Production Targets: If a beneficiary misses its pledged investments or output targets, it can forfeit incentives and incur penalties. For example, under the ACC Battery PLI, large firms (Ola Electric, Reliance New Energy, Rajesh Exports) were formally issued penalty notices: they face daily fines (₹5 to 12.5 lakh per day) starting from Jan 2025 until they meet their commitments. Any accumulated fines would be deducted from future subsidy payments. More generally, PLI agreements impose liquidated damages: the government deducts a fixed percentage of the security for each day of delay in achieving capacity or value-addition. If a beneficiary persistently defaults (e.g. six straight quarters of shortfall), the scheme may allow the government to terminate the agreement and forfeit the performance bank guarantee. In practice, failure to meet targets typically means no incentive payment for that period, and possible clawback of past incentives. Thus, missing milestones can lead to a loss of incentives and financial penalties.

Misrepresentation or Fraudulent Claims: Falsifying data to claim higher incentives is expressly prohibited. PLI rules demand truthful claims, and breaches trigger severe penalties. As noted, companies must sign indemnity bonds vowing that all incentive claims are “true and accurate”. If an incentive claim is later found to be “false or excessive,” the company must refund the entire incentive paid, with interest (typically calculated at a high SBI MCLR rate). In effect, this imposes a heavy financial penalty far beyond just losing the wrongfully claimed sum. Moreover, intentional fraud could expose directors to criminal liability under the Indian Penal Code (e.g. for cheating or fraud), or even anti-corruption laws if government funds are involved. (Though we are not aware of public cases of PLI fraud prosecutions yet, the legal basis for action is clear.) In any event, a false claim in the scheme’s eyes is a debt owed to the government, enforceable by civil and criminal processes.

Environmental and Labour Law Compliance: Expanding production capacity under PLI does not waive normal environmental or labor clearances. Any new plant or expansion typically requires environmental clearance (EC) under India’s EIA Notification, and “consent” from State Pollution Control Boards under the Water and Air Acts. Crucially, project construction can only begin after EC is granted. Failure to obtain required clearances can lead to show-cause notices, fines, or even closure orders by environmental authorities or the National Green Tribunal. (Notably, the Ministry of Environment issued a 2021 SOP and 2022 order penalizing projects that expanded without EC, though this is currently under judicial stay, it underscores the risk.) On the labor side, new factories and jobs must comply with India’s labor codes. The MSME must register under applicable laws (e.g. Factories Act, Employment Provident Fund Act, etc.), maintain worker records, pay wages/benefits on time, and observe safety norms. Labor regulators conduct frequent inspections (the typical MSME may face dozens of different inspectors annually), and many labor law violations carry criminal penalties. Indeed, about 66% of all imprisonment clauses in business laws relate to labour statutes. An MSME expanding rapidly must be especially vigilant on this front. If, for example, it fails to compensate workers properly or violates industrial safety norms, it could be penalized by labor courts or regulators even jailed for directors in extreme cases, completely apart from the PLI itself. Any such violation can also jeopardize the company’s good standing under the PLI contract (which often requires compliance with all laws).

Breach of Contractual Obligations: The PLI Programme Agreement is a binding contract. It typically contains broad obligations and remedies. For example, the ACC Battery PLI agreement states the firm must “perform and fulfil all…obligations…including investment of at least INR 225 crore”. It also provides that failure to meet “Committed Capacity” or “Committed Value Addition” triggers penalties and allows contract termination. In concrete terms, most PLI agreements allow the government to levy damages for delays (often 0.1% of the performance security per day) and to appropriate (forfeit) the performance guarantee in case of default. If a beneficiary does not replenish the security or cure the breach in time, the agreement can be terminated. Moreover, many PAs include clauses barring any change in ownership or major corporate restructuring without consent; violating these can also trigger defaults. In short, failure to abide by any material term of the PLI contract whether on output targets, reporting, ownership change, or provision of information can legally free the government from further obligations and lead to enforcement of the company’s penalties under the contract.

Sectoral Examples

• Different sectors pose specific compliance nuances under PLI:

Electronics & Telecom: MSMEs in electronics (e.g. component suppliers, PCB assemblers) must meet product-specific quality standards (BIS certifications, telecom licenses, etc.) even as they boost output. For instance, mobile phone makers under PLI had to source a minimum percentage of components domestically; an MSME supplier must then ensure its imports vs local purchases comply. If it wrongly claims parts as “domestic” to garner incentives, the excess incentive would be clawed back. Also, factories making electronic goods emit pollutants (e.g. soldering fumes); thus they must secure air/water consents, failing which they could face fines or shutdown independent of the PLI.

Pharmaceuticals (Bulk Drugs and API): Pharmaceutical units under PLI must comply with the Drugs & Cosmetics Act. Any expansion or new facility needs valid manufacturing licenses from the Central Drugs Standard Control Organization (CDSCO/DCGI) and must adhere to Good Manufacturing Practices (GMP). Similarly, pharma MSMEs must observe price control regulations under the National Pharmaceutical Pricing Policy. An example risk: an API maker promising increased output under PLI might face penalties if regulators later find it producing unapproved formulations or exporting without a valid license. (While no specific PLI-related pharma fraud case is public, normal pharma law enforcement would still apply.)

Food Processing: Under the food PLI, incentives are tied to value-added products (ready-to-eat foods, processed fruits/vegetables, etc.). Companies still must comply with the Food Safety and Standards Authority of India (FSSAI) regulations, packaging laws, and export documentation. One notable legal dispute involved a food MSME: Asandas & Sons Pvt. Ltd., a large fries exporter, challenged the Food PLI rules in Delhi High Court. The firm alleged the government retroactively changed the scheme’s incentive cap after it applied. It claimed that originally a company could earn up to 25% of a segment’s outlay in incentives, but this was cut to 8% without consultation. While this is a case about scheme administration (not wrongdoing), it highlights how legal uncertainty can arise over PLI terms. The takeaway for MSMEs: carefully study the approved PLI guidelines and any circulars, and seek written clarifications if terms change.

These examples show that each sector has overlaying regulations and an MSME must manage all of them alongside PLI conditions. Even if the PLI scheme itself does not inspect, other agencies will.

Legal Cases and Government Actions

• A few published cases and actions illustrate PLI-related liabilities:

Asandas & Sons (Food PLI): As noted above, Asandas petitioned Delhi HC in 2022–24 over Food PLI terms. It argued scheme changes violated basic fairness. While this case is still pending, it underscores that MSMEs can resort to the courts if they believe PLI rules are applied unfairly. It also shows the importance of agreements and guidelines: Asandas had to furnish a bank guarantee (3% of its ₹810 crore commitment) under the scheme, and it contested the validity of that demand on procedural grounds. The court’s decision will be instructive on how binding PLI terms are held.
Battery PLI Enforcement (ACC PLI): In March 2025, the Ministry of Heavy Industries formally imposed penalties on battery PLI beneficiaries (Ola Electric, Reliance New Energy, Rajesh Exports) for missing their targets. These are not MSMEs, but the case signals the government’s readiness to use contractual penalties. It shows that PLI enforcement can involve show-cause notices and mandatory fines, rather than just passive withholding of subsidies. Other sectors may follow similar enforcement if large firms default.

Telecom/ Electronics (PLI): (No public court case is known, but the government recently indicated that not all eligible electronics players received payouts under the telecom PLI, implying strict compliance checks.) This suggests routine audits can prevent fraud – even if no legal case is reported.

To date, there are no well-known criminal prosecutions specifically labeled “PLI fraud” in the public domain. However, the above instances highlight that contractual and administrative actions (penalties, injunctions, or court petitions) do occur. MSMEs should treat these as cautionary examples rather than outliers.

Mitigating Legal Risks

• MSMEs can take several steps to minimize liability under PLI:

Due Diligence: Before applying, thoroughly review the PLI guidelines for the sector. Understand exactly what counts as eligible sales, required reports, definitions of investment, and any caps. If in doubt, seek clarifications from the implementing ministry or a legal advisor.

Proper Documentation: Maintain detailed, auditable records of all PLI-related activities. Keep copies of invoices, contracts, manufacturing logs, and bank statements. Have a Chartered Accountant or internal audit verify calculations before submitting incentive claims. Avoid any discrepancies between books and claims.

Legal and Professional Advice: Engage lawyers and compliance consultants (especially for contracts and regulatory matters). Have counsel review any Programme Agreement or MoU before signing. Consider hiring a consultant to guide environmental and labor compliance in expansions.

Conservative Reporting: When reporting sales or investment, err on the side of caution. Never inflate numbers, and factor in that verifications may involve aggressive sampling. Remember that any excess incentive claimed will have to be paid back with interest.

Timely Approvals: Obtain all external clearances before starting new work. Do not begin construction or major projects without environmental consent and local building permits. Similarly, ensure all labor registrations (like EPF/ESI) and factory license processes are in place early. Proactively address any non-issues flagged by regulators.

Performance Security: Arrange the required bank guarantee immediately upon selection. Missing this could delay or void the entire agreement. Be prepared to top up or replace the security if penalties are invoked.

Monitor and Communicate: Keep track of PLI scheme changes through official notifications. If meeting a target becomes doubtful (due to market changes, supply issues, etc.), engage with the department early. Some schemes allow written requests for target extensions or renegotiation, though relief is discretionary.

Avoid Fraud Traps: Educate all management and staff about the importance of compliance. Implement a policy of ‘no false claims’ and have whistleblower channels internally. Any suspicion of error in past claims should be corrected in the next filing, not concealed.

By treating the PLI scheme as a legally binding contract – and by integrating its demands into routine compliance processes an MSME can reduce the risk of disputes. Sound corporate governance (governing e.g. related-party transactions) is also vital, since the scheme scrutiny can extend to supplier arrangements or pricing with group companies.

By: Md Irshad Ahmad, B.Tech(Mechanical), LLB. Advocate, Supreme Court of India