REPUBLIC ACT NO.

6977

AN ACT TO PROMOTE, DEVELOP AND ASSIST SMALL AND MEDIUM SCALE

ENTERPRISES THROUGH THE CREATION OF A SMALL AND MEDIUM
ENTERPRISE DEVELOPMENT (SMED) COUNCIL, AND THE RATIONALIZATION OF
GOVERNMENT ASSISTANCE PROGRAMS AND AGENCIES CONCERNED WITH
THE DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES, AND FOR OTHER
PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in

Congress assembled:

CHAPTER I

SECTION 1. Title.—This Act shall be known as the “Magna Carta for Small
Enterprises.”

SEC. 2. Declaration of Policy.—Recognizing that small and medium scale enterprises

have the potential for more employment generation and economic growth and therefore
can help provide a self-sufficient industrial foundation for the country, it is hereby
declared the policy of the State to promote, support, strengthen and encourage the
growth and development of small and medium enterprises in all productive sectors of
the economy particularly rural/agri-based enterprises. To this end, the State shall
undertake to spur the growth and development of small and medium enterprises
throughout the country and thereby attain countryside industrialization:

a) By assuring, through the establishment of adequate support structure, and the

creation and promotion of an environment conducive to the viability of these enterprises,
establishment of mechanisms, the access and transfer of appropriate technology
needed by small and medium enterprises;

b) By intensifying and expanding programs for training in entrepreneurship and for skills
development for labor;

c) By facilitating their access to sources of funds;

d) By assuring to them access to a fair share of government contracts and related

incentives and preferences;

e) By complementing and supplementing financing programs for small and medium

enterprises and doing away with stringent and burdensome collateral requirements that
small entrepreneurs invariably find extreme difficulty complying with;

f) By instituting safeguards for the protection and stability of the credit delivery system;

g) By raising government efficiency and effectiveness in providing assistance to small

and medium enterprises throughout the country, at the least cost;

h) By promoting linkages between large and small enterprises, and by encouraging the
establishment of common service facilities;
i) By making the private sector a partner in the task of building up small and medium
enterprises through the promotion and participation of private voluntary organizations,
viable industry associations, and cooperatives; and

j) By assuring a balanced and sustainable development through the establishment of a

feedback and evaluation mechanism that will monitor the economic contributions as well
as bottlenecks and environmental effects of the development of small and medium
scale enterprises.

SEC. 3. Small and Medium Enterprises as Beneficiaries.—”Small and medium

enterprise” shall be defined as any business activity or enterprise engaged in industry,
agribusiness and/or services, whether single proprietorship, cooperative, partnership or
corporation whose total assets, inclusive of those arising from loans but exclusive of the
land on which the particular business entity’s office, plant and equipment are situated,
must have value falling under the following categories:

micro: less than

cottage: P50,001
small: P500,001
medium: P5,000,001

In a generic sense, all enterprises with total assets of Five million pesos (P5,000,000)
and below shall be called small enterprises.

The above definitions shall be subject to review and adjustment by the said Council as
deemed necessary, taking into account inflation and other economic factors.

SEC. 4. Eligibility for Government Assistance.—To qualify for assistance, counseling,

incentives and promotion under this Act, businesses falling under the above definition
must be:

a) Duly registered with the appropriate agencies as presently provided by law: Provided,
That, in the case of micro enterprises as defined herein, registration with the office of
the municipal or city treasurer shall be deemed sufficient compliance with this
requirement;

b) One hundred percent (100%) owned and capitalized by Filipino citizens if single
proprietorship or partnership. If the enterprise is a juridical entity at least 60% of its
capital or outstanding stocks must be owned by Filipino citizens;

c) Primarily engaged in manufacturing, processing, and/or production excluding farm

level agricultural/crop production; and

d) It must not be a branch, subsidiary or division of a large scale enterprise nor may its
policies be determined by a large scale enterprise or by persons who are not owners or
employees of the enterprise.

However, this requirement shall not preclude a small and medium enterprise from
accepting subcontracts from large enterprises or firms joining in cooperative activities
with other small and medium enterprises.
Programs of the financing corporation as provided in subsequent sections of this Act
shall be exclusively targeted to small, cottage and micro-sized enterprises. Financing
from the Philippine National Bank, Development Bank of the Philippines, Land Bank of
the Philippine and other financial institutions shall be made available to medium
enterprises.

Medium enterprises, however, shall be entitled to avail of the other incentives, programs
and services as provided for in this Act.

SEC. 5. Guiding Principles.—To set the pace for small and medium enterprise
development, the State shall be guided by the following principles:

a) Minimal set of rides and simplification of procedures and requirements. All

government agencies having to do with small enterprises shall pursue the principles of
minimum regulation to ensure stability of rules and to encourage entrepreneurial spirit
among the citizenry. The agencies shall see to it that procedural rules and
requirements, within their respective offices and in coordination with other agencies, are
minimized in the act of registration, availment of financing and accessing other
government services and assistance.

b) Role of the private sector. In order to hasten growth and expansion of small and
medium enterprises, the private sector throughout the country shall be encouraged to
assist m the effective implementation of this Act by constantly policing their ranks; and
by participating in government programs for small and medium enterprises strictly in
accordance with law, and consistent with the attainment of the purposes hereof. The
government shall encourage the organization and establishment of small and medium
enterprise industry associations at the local and regional levels preferably unified under
a national federation/association.

c) Coordination of government efforts. Government efforts shall be coordinated to

achieve coherence in objectives. All appropriate offices, particularly those under the
Departments of Trade and Industry, Finance, Budget and Management, Agriculture,
Agrarian Reform, Environment and Natural Resources, Labor and Employment,
Transportation and Communications, Public Works and Highways, Science and
Technology, and Local Government as well as the National Economic and Development
Authority and the Central Bank of the Philippines, through their national, regional and
provincial offices, shall to the best of their effort and in coordination with local
government units, provide the necessary support and assistance to small and medium
enterprises.

d) Decentralization. The State shall accelerate the decentralization process by

establishing regional and provincial offices in order to enhance and attain greater
efficiency in the provision of services to the countryside and the implementation of this
Act, in coordination with local government units. To this end, the government agencies
shall effect a substantial delegation of authority their regional and provincial offices to
make decisions, particularly in the registration of beneficiaries of this law, qualification
for availment of benefits, accreditation of private voluntary organizations, industry
associations and cooperatives, and to resolve complaints for violation of applicable
laws.

CHAPTER II
SEC. 6. Creation of a Small and Medium Enterprise Development Council.—To
effectively spur the growth and development of small and medium enterprises
throughout the country, and to carry out the policy declared in this Act. a Small and
Medium Enterprise Development (SMED) Council is hereby created. The Council shall
be attached to the Department of Trade and Industry and shall be duly constituted
within sixty (60) days after the approval of this Act.

The Council shall be the primary agency responsible for the promotion, growth and
development of small and medium enterprises in the country by way of facilitating and
closely coordinating national efforts to promote the viability and growth of small and
medium enterprises, including assisting relevant agencies in the tapping of local and
foreign funds for small and medium enterprise development, as well as promoting the
use of existing guarantee programs.

SEC. 7. Composition.—The Council shall be headed by the Secretary of Trade and

Industry as Chairman. The members shall be the following:

a) Director General of the National Economic and Development Authority;

b) Secretary of Agriculture;

c) Secretary of Labor and Employment;

d) Secretary of Environment and Natural Resources;

e) Secretary of Science and Technology;

f) Chairman of Small Business Finance and Guarantee Corporation;

g) Chairman of the small and medium enterprises promotion body which the President
shall undertake to establish under this Act; and

h) Three (3) representatives from the private sector, all Filipino citizens, to represent
Luzon, Visayas and Mindanao to be appointed by the President, one of whom shall
come from the banking industry.

Cabinet-rank ex officio members of the Council shall designate an undersecretary or

assistant secretary as their permanent representative in case they fail to attend
meetings of the Council.

The private sector members of the Council shall initially receive per diem of One
thousand pesos (P1,000.00) per meeting.

The Department of Trade and Industry shall allocate Five million pesos (P5,000,000.00)
out of its savings for the initial operating expenses of the Council, after which the
Council’s budget shall be included in the annual appropriation of the Department of
Trade and Industry.

The Council may, from time to time, call upon the participation of any government
agency or association of local government officials in its deliberations especially when
such agency is directly or indirectly concerned with and/or affecting the growth and
development of small and medium enterprises in any particular area or manner.
SEC. 8. Powers and Functions.—The Small and Medium Enterprise Development
(SMED) Council shall have the following powers, duties and functions:

a) To help establish the needed environment and opportunities conducive to the growth
and development of the small and medium enterprise sector;

b) To recommend to the President and the Congress all policy matters affecting small
and medium scale enterprises;

c) To formulate a comprehensive small and medium enterprise development plan to be

integrated into the National Economic and Development Authority Development Plans;

d) To coordinate and integrate various government and private sector activities relating
to small and medium enterprise development;

e) To review existing policies of government agencies that would affect the growth and
development of small and medium enterprises and recommend changes to the
President and/or to the Congress whenever deemed necessary. This shall include
efforts to simplify rules and regulations as well as procedural and documentary
requirements in the registration, financing, and other activities relevant to small and
medium enterprises;

f) To monitor and determine the progress of various agencies geared towards the
development of the sector. This shall include overseeing, in coordination with local
government units and the Department of Local Government as well as private sector
groups/associations, the developments among small and medium enterprises,
particularly the cottage and micro-sized firms;

g) To promulgate implementing guidelines, programs, and operating principles as may

be deemed proper and necessary in the light of government policies and objectives of
this Act;

h) To provide the appropriate policy and coordinative framework in assisting relevant

government agencies, in coordination with the National Economic and Development
Authority and the Coordinating Council for the Philippine Assistance Program, as may
be necessary, in the tapping of local and foreign funds for small and medium enterprise
development;

i) To promote the productivity and viability of small and medium enterprises by way of
directing and/or assisting relevant government agencies and institutions at the national,
regional and provincial levels towards the:

1) Provision of business training courses, technical training for technicians and skilled
laborers and continuing skills upgrading programs;

2) Provision of labor-management guidance, assistance and improvement of the

working conditions of employees in small and medium-sized firms;

3) Provision of guidance and assistance regarding product quality/product development

and product diversification;
4) Provision of guidance and assistance for the adoption of improved production
techniques and commercialization of appropriate technologies for the product
development and for increased utilization of indigenous raw materials;

5) Provision of assistance in marketing and distribution of products of small and medium

scale enterprise through local supply-demand information, industry and provincial
profiles, overseas marketing promotion, domestic market linkaging and the
establishment of common service facilities such as common and/or cooperative bonded
warehouse, grains storage, agro-processing and drying facilities., ice plants,
refrigerated storage, cooperative trucking facilities, etc.;

6) Intensification of assistance and guidance to enable greater access to credit through

a simplified multi-agency financing program; to encourage development of other modes
of financing such as leasing and venture capital activities; to provide effective credit
guarantee systems, and encourage the formation of credit guarantee associations,
including setting up of credit records and information systems and to decentralize loan
approval mechanisms;

7) Provision of concessional interest rates, lower financing fees, which .may include
incentives for prompt credit payments, arrangements tying amortizations to business
cash flows, effective substitution of government guarantee cover on loans for the
borrower’s lack of collateral;

8) Provision of bankruptcy preventive measures through the setting up of a mutual relief

system for distressed enterprises, and the establishment of measures such as
insurance against extraordinary disasters;

9) Intensification of information dissemination campaigns and entrepreneurship

education activities;

10) Easier access to and availment of tax credits and other tax and duty incentives as
provided by the Omnibus Investment Code and other laws;

11) Provision of support for product experimentation and research and development
activities as well as access to information on commercialized technologies; and

12) Provision of more infrastructure facilities and public utilities to support operations of
small and medium enterprises;

j) To submit to the President and the Congress a yearly report on the status of small
and medium enterprises in the country, including the progress and impact of all relevant
government policies, programs and legislation as well as private sector activities;

k) To assist in the establishment of modern industrial estates outside urban centers; and

l) Generally, to exercise all powers and functions necessary for the objectives and
purposes of this Act.

SEC. 9. Designation of the Bureau of Small and Medium Business Development as

Council Secretariat.—The Bureau of Small and Medium Business Development of the
Department of Trade and Industry, in addition to its current activities and functions, is
hereby designated to act as the Council Secretariat. The Secretariat shall have the
following duties and functions:

1) To prepare, in coordination with local government units and/or associations of local

government officials, and recommend annual as well as medium-term small and
medium enterprise development plans for approval of the Council;

2) To coordinate the preparation of position papers and background materials for

discussion or approval during Council meetings;

3) To assist the Council in coordinating and monitoring small and medium enterprise
policies and programs and activities of all government agencies with respect to small
and medium enterprises;

4) To prepare, collate and integrate all inputs to the Council’s yearly report on the status
of small and medium enterprises in the country;

5) To submit periodic reports to the Council on the progress and accomplishment of its
work programs; and

6) To perform ad hoc functions as authorized by the Council.

CHAPTER III

SEC. 10. Rationalization of Existing Small and Medium Enterprise Programs and
Agencies.—The Small and Medium Enterprise Development Council shall within one
hundred eighty (180) days from its establishment, recommend to the President,
measure/s to rationalize and integrate under a unified institutional framework all
government programs for the promotion and development of small and medium
enterprises.

The President is hereby also empowered to establish a small and medium enterprise
promotion body which shall be the principal government agency that will formulate,
implement, coordinate and monitor all non-financing government programs, including
fee-based services, to support and promote micro, small and medium enterprises. It
shall be attached to the Department of Trade and Industry and shall be under the policy,
program and administrative supervision of the SMED Council. The said office shall
receive no less than fifty percent (50%) of the assets, and budgetary allocations of the
agencies for promotion, development and financing of small and medium enterprises
that may be henceforth dissolved and/or abolished and absorbed, incorporated and
integrated into the SMED Council.

SEC. 11. Creation of Small Business Guarantee and Finance Corporation.—There is

hereby created a body corporate to be known as the Small Business Guarantee and
Finance Corporation, hereinafter referred to as SBGFC, which shall provide, promote,
develop and widen in both scope and service reach various alternative modes of
financing for small enterprises, including, but not limited to, direct and indirect project
lending, venture capital, financial leasing, secondary mortgage and/or rediscounting of
loan papers to small businesses, secondary/regional stock markets: Provided, That crop
production financing shall not be serviced by the Corporation.
The Corporation shall guarantee loans obtained by qualified small enterprises, local
and/or regional associations small enterprises and industries, private voluntary
organizations and/or cooperatives, under such terms and conditions adopted by its
Board. It may guarantee loans up to one hundred percent (100%). It may also provide
second level guarantee (i.e., re-insurance) on the credit and/or investment guarantees
made by credit guarantee associations and other institutions in support of small
entrepreneurs.

The Corporation shall become liable under its guarantees upon proof that the loan has
become past due under such terms and guidelines adopted by its Board and printed on
the contract of guarantee.

The Small Business Guarantee and Finance Corporation shall:

a) Be attached to the Department of Trade and Industry and shall be under the policy,
program and administrative supervision of the SMED Council;

b) Have its principal place of business in Metro Manila and endeavor to have one or
more branch offices in every province of the country;

c) Exercise all the general powers conferred by law upon corporations under the
Corporation Code as are incidental or conducive to the attainment of the objectives of
this Act; and

d) Have a board of directors upon which the powers of the Corporation shall be vested,
to be composed of five (5) members including:

1) Three (3) members from the private sector appointed by the President upon
recommendation of the SMED Council and from among whom the Chairman of the
Board shall be appointed by the President to serve on a full-time basis:

2) The Secretary of Trade and Industry or his Undersecretary; and

3) A representative of the five (5) government financial institutions mandated in this Act
to provide the initial capital of the Corporation, who shall be designated, under
guidelines agreed upon by the Board Chairmen of said institutions.

SEC. 12. Capitalization and Funding.—The Small Business Guarantee and Finance
Corporation shall have an authorized capital stock of Five billion pesos
(P5,000,000,000.00). The initial capital of One billion pesos (P1,000,000,000.00) shall
be established from a pool of funds to be contributed in the form of equity investments
in common stocks by the Land Bank of the Philippines (LBP), the Philippine National
Bank (PNB), the Development Bank of the Philippines (DBP) in the amount of Two
hundred million pesos (P200,000,000.00) each. The Social Security System (SSS) and
the Government Service Insurance System (GSIS) shall also set aside Two hundred
million pesos (P200,000,000.00) each to be placed in preferred stocks of the SBGFC.
Additional funding shall come from trust placements of excess and unused funds of
existing government agencies, bilateral and multilateral official development assistance
funds, subscriptions from government-owned or -controlled corporations, and
investments of private financial institutions and corporations.
SEC. 13. Mandatory Allocation of Credit Resources to Small Enterprises.—All lending
institutions as defined under Central Bank rules, whether public or private, shall set
aside a portion of their total loan portfolio based on their balance sheet as of the end of
the previous quarter, and make it available for small enterprise credit as herein
contemplated. The portion mandated to be so set aside shall at least be, five percent
(5%) by the end of the first year of the effectivity of this Act, ten percent (10%) by the
end of the second year through the end of the fifth year, and five percent (5%) by the
end of sixth year and may come down to zero by the end of the seventh year.

The Central Bank in consultation with the Council, shall formulate rules for the effective
implementation of this provision: Provided, That the purchase of government notes,
securities, and other negotiable instruments, with the exception of such instruments as
may be offered by the SBGFC, shall not be deemed compliance with the foregoing
provision.

The SMED Council shall set up the appropriate systems to monitor all loan applications
of small enterprises in order to account for the absorptive capacity of the small
enterprise sector.

The Central Bank shall furnish to the Small and Medium Development Council on a
semestral basis regular reports on the lending institutions’ compliance with the above
provisions on the mandatory credit allocation for small enterprises.

SEC. 14. Penal Clause.—The Central Bank shall impose administrative sanctions and
other penalties on the lending institutions for non-compliance with provisions of this Act.
In addition, the president, members of boards of directors, and other officers of the
erring lending institutions shall be individually liable for imprisonment of not less than six
(6) months and a fine of not less than Five hundred thousand pesos (P500,000.00)
each.

CHAPTER IV

SEC. 15. Separability Clause.—The provisions of this Act are hereby declared to be
separable. If any provision of this Act shall be held unconstitutional, the remainder of the
Act not otherwise affected shall remain in full force and effect.

SEC. 16. Revealing Clause.—All laws, executive orders, rules and regulations, or parts
thereof, inconsistent herewith are hereby repealed or modified accordingly.

SEC. 17. Effectivity Clause.—This Act shall take effect upon its approval.

Approved, January 24, 1991.

Source: Presidential Museum and Library