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One of the major factors inhibiting the growth of Micro, Small and Medium Enterprises (MSMEs) is the non availability of adequate owners’ capital i.e margin. External equity i.e the PE/ VC investment is also rare due to various issues in MSMEs viz small ticket size, high transaction cost, difficulty in understanding equity related complexities in MSME promoters, valuation and exit issues, lack of preparedness/ willingness in promoters in diluting ownership/ control, etc.
Due to shortfall in meeting margin requirements, MSMEs often languish to get adequate working capital, which is the life and blood of their business. MSMEs also find it difficult to raise loan assistance for other growth requirements viz investments in marketing, brand building, creating distribution network, technical know-how, software purchase, investment in energy efficiency and quality improvement equipments, R&D, etc., mainly as these investments by nature are non-asset creating (i.e. intangible assets) and hence do not provide security comfort to the lenders.
To obviate the aforesaid problems of MSMEs, SIDBI has come out with a scheme “Growth Capital and Equity assistance for MSMEs” (GEMs). Under the scheme, assistance in the form of equity/ quasi-equity is provided to deserving MSMEs.
In India, more than 90% of the MSMEs are constituted as partnership/ proprietorship concerns, where investment in pure equity form is difficult. Further, SIDBI also understands that most of MSME businesses in India are family owned with value built over generations. Due to these reasons, Indian MSMEs find it difficult to dilute large part of ownership and control in favour of an external entity. Looking to this, SIDBI, based on best global practices, has come out with various innovative financial instruments for MSMEs of different sizes and constitutions, including Subordinated debt (SD)/ Optionally Convertible Subordinated Debt (OCSD), which is treated as quasi-equity by SIDBI.
While SIDBI provides Equity/ equity linked assistance for deserving corporatised MSMEs, SD provides quasi equity support to all constitutions of MSMEs. Subordinated capital is a highly popular instrument among MSMEs globally, with minimal equity complexities and simpler documentation and hence quick to deliver and less costly for MSMEs. It is provided on the strength of business/ backing of cash flows rather than asset cover/ collateral security. The initial longer moratorium on principal installments ensures greater chances of success of the ventures.
Apart from direct funding, SIDBI, in order to reach out to a wider segment of MSMEs, will use various delivery channels like VC Funds / NBFCs etc as Channel Partners, Credit Delivery Arrangements with select NBFCs for providing growth capital to MSMEs for their margin and other bonafide growth requirements.
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@ ‘Post project Tangible net worth' would mean Tangible net worth as on date of last audited balance sheet + capital (including share premium) infused after the date of last audited balance sheet till the date of present proposal for assistance + additional capital (including share premium) proposed in the project.
Tangible net worth means Capital + preference shares (excluding that part which is redeemable within 3 years) + Share premium + Reserves and Surplus – Accumulated losses – Revaluation reserves - Misc. exp. not written off – Intangible/ Fictitious assets + capital inducted after date of last audited balance sheet.
