How to ease capital raising for India’s 60m MSMEs that contribute 30% to GDP
With a contribution of ~30% to the country’s GDP, employing approximately 110 million people, the 60 million MSMEs in India are a very important constituent of the economy. As many of these MSMEs strive to recover from the severe impact of the pandemic, the capital markets can present them with possible capital raise opportunities, both debt and equity. However, MSMEs are often constrained by the lack of access to credit and by the lack of awareness of various capital markets products.
Working capital requirements for MSMEs
Usually, MSMEs are a part of the larger corporate ecosystem — as a distributor of goods or supplier of raw materials. Discounting the bills of the large corporates forms an integral part of working capital financing of these MSMEs. To facilitate the discounting of invoices of MSMEs from corporate buyers through multiple financiers, the TReDS platform has been set up. This institutionalised mechanism of invoice discounting on TReDS involves three participants – the MSME supplier, the corporate buyer and the financier.
The invoice is uploaded by either the buyer or the supplier, depending on the method of discounting, and is approved by the other party. Once the invoice is approved, the financiers on the platform start to bid on the invoice. The supplier accepts the bid, and the discounted amount is credited in its account on the next day.
With the TReDS system, access to working capital financing has become much simpler. This single platform for sellers, buyers and financiers ensures easy access to funds at competitive discount rate, without much paperwork, in an online mode with seamless data flow.
However, it is important to push for mass adoption of this platform among large companies and MSMEs. The ease of access and understanding of the platform can be enhanced multifold if TReDS is hosted on a stock exchange platform, which is popular and accessed by millions. Of course, the controls around its usage, settlement and repayment mechanisms will have to be thought through.
Capital Raise by MSMEs
Given that MSME is a significant part of the economy, both Bombay Stock Exchange and National Stock Exchange have created an independent platform for capital raise and trading of MSME stock. Sebi has also issued specific listing guidelines for MSMEs. This offers entrepreneurs and investors a more conducive environment with eased regulations. The platform enables listing of MSMEs from the unorganised sector scattered throughout India, into a regulated and organized sector.
Companies with a minimum post issue capital of Rs 1 crore and a maximum of Rs 25 crores are eligible for a MSME IPO in India. The company or the partnership/ proprietorship/ LLP/ firm, which has been converted into the company, should have combined track record of at least three years. In case it has not yet completed operations for 3 years, it should have been funded by banks or financial institutions or central or state government or the group company should have been listed for at least 2 years.
Currently, there are 340 MSMEs listed on the BSE and 200 on NSE. Together, they have raised over Rs 6,600 crore and the current market-cap is more than Rs 29,000 crore. Interestingly, 106 companies have significantly grown and have migrated to the main board exchange.
As evident from the above, these are indeed good platforms available to provide debt and equity funding to MSMEs. Even regulatorily, some part of the financing to MSME by banks is treated as a priority sector lending. This helps availability of credit to MSMEs, thus fulfilling their debt requirements.
Going forward, given the importance of MSMEs in the overall economy, it may be worth considering an extension of the concept of priority sector to the equity segment as well. With the mutual fund industry growing fast and being almost 20% of the banking sector, a similar priority sector concept for mutual funds to invest in MSME stock will help the MSME sector. It would encourage MFs to set up MSME dedicated schemes, significantly increasing the flow of equity funds to the MSME sector.
The MSME sector is an essential part of the economy and apart from various financial support schemes during the pandemic, it will be useful to create innovative institutional mechanisms to continuously support the growth of this sector on a sustained basis.
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