MSME Verification of Vendors in India

Micro, Small & Medium Enterprises (MSME) verification is essential to a company's effective vendor management process. It helps vendors and the recipient company in multiple contexts, including mitigating risks and strengthening business relations. This article discusses the need for MSME vendor verification and explains how to verify MSME vendors individually and in bulk. 

What is MSME vendor verification?

MSME verification is a compliance-related task that a company must perform before onboarding a vendor and, after that, at regular intervals. It involves cross-checking with government portals regarding the validity of vendors' registration as MSMEs, investment and turnover data they have filed, the number of people they employ, etc. 

Need for MSME verification of vendors in India

MSMEs are crucial for employment, income generation, and the promotion of innovations and entrepreneurship in any economy. Hence, they receive special attention and support from the central and state governments. Such support may include subsidised loans, industrial promotional support, government assurance on timely payment by their buyers, etc. Governments sometimes also mandate large companies working on public-funded projects to source (at least a portion) from companies officially registered as MSMEs. Failure to comply with such mandates may result in penalties and project cancellation. So, companies are required to verify, validate and document the MSME status of their vendors. 

Besides government policy-related regulatory compliance, MSME verification is essential for buyer companies to avoid vendor fraud and malpractices. For example, a buyer company floats a Request For Information (RFI). Several suppliers submit their quotations with the best rates they can offer. One supplier quotes abnormally low rates to secure the order without having sufficient investment or capacity to meet the same. Accepting such a vendor can make the buyer vulnerable to supply disruption. MSME verification before vendor onboarding can help buyers investigate and accurately assess the business potential of a vendor.     

Finally, a vendor and buyer maintain a mutually beneficial business relationship whose foundation lies in trust and reliability. Accurate MSME verification in the vendor management process helps to establish trust based on verifiable business intelligence.  

How to verify MSME vendors? 

Depending on the purposes, a buyer can verify MSME vendors in multiple ways. 

For compliance with government mandate—To fulfil the mandatory obligation of sourcing from MSME vendors, a buyer must check the UDYAM registration portal with MSME-specific details, like PAN, AADHAAR number, etc. Once the portal verifies the details, the buyer can document it as proof of MSME verification.  

To avoid vendor fraud and malpractices - Verification in the UDYAM portal can validate the registration of a company or business as an MSME and provide basic information on investments, employee numbers, and the type of business filed by the business. However, this may not be sufficient to prevent vendor fraud or malpractice. For that, a buyer company needs help from third-party vendor verification service providers. They actively collect, research and maintain detailed vendor-specific databases, including 

• Financial health
• Business operations, 
• Regulatory compliance
• Illegal activities 
• Creditworthiness
• Ownership background 

Some third-party vendor verification service providers also maintain industry-specific databases of verified vendors that buyers can use to find trusted and reliable suppliers for their ventures. 

Documents required for MSME vendor verification

The documents that a buyer may require to verify the MSME registration of a supplier are:

• UDYAM registration number 
• Aadhaar 
• PAN 

However, the UDYAM portal requires only a UDYAN registration number or reference number for UDYAM registration. Usually, a vendor mentions such information in their invoice or RFI. 

Challenges in MSME vendor verification

Some of the common challenges buyers face while verifying MSME vendors are:

• Self-reported data—The MSME portal requires companies or businesses registering as MSMEs to self-report their business data. The absence of documentary verification and validation makes information unreliable for in-depth vendor verification. 
• Irregular data updation —Once registered, suppliers are not required to update information mandatorily. So, information on the MSME portal can be outdated as business intelligence.   
• Frequent changes in business scale—The scale of business in the MSME sector fluctuates frequently. It is difficult to keep track of such fluctuations through government-backed portals. 
• Lack of data integration between platforms—Government departments have different portals for collecting and maintaining AADHAR, income tax, GST, and similar databases. The MSME portal does not have a way to integrate these databases related to MSME. 

Best practices for MSME vendor verification

Verifying the UDYAM portal and documenting the verification result is sufficient to comply with government policies on mandatory sourcing from registered MSMEs. However, to avoid vendor fraud and malpractices and mitigate supplier-related risks, buyer companies should follow standardised MSME vendor verification practices. 

• Collect vendor-specific details 
• Check UDYAM portal 
• Verify vendor's GSTIN 
• Validate vendor's PAN
• Search previous and existing legal disputes (if any)  
• Research on owners' and directors' background
• Check creditworthiness 

However, collecting all of this information may not be simple for an individual company, so buyers often use third-party vendor verification services.  

MSME Vendor Verification Solution 

Clear Finance Cloud is a centralised platform for managing vendor compliance, tax filings, and invoice accuracy. We enable MSME status verification for suppliers, invoice accuracy and ensure vendor and tax compliance through our supply chain suite by initiating tax automation directly from the general ledger.

Clear Finance Cloud for Supply Chain will help you: 

• Reduce vendor onboarding time by up to 75% with 100% vendor compliance assurance.
• Experience up to 2.5x faster invoice processing with 100% accuracy for e-invoices and > 90% accuracy for other invoices.
• Achieve 2-5x higher annualised returns with reduced DPO through optimised cash flow and early payment programs.
• 100% on-time payments and zero late payment penalties especially for MSME payments.
• Get government infrastructure connectors (Clear is one of the only 4 IRPs in India) to ensure automatic compliance checks, keeping you up-to-date with the latest regulations.