Micro, Small and Medium Enterprises (MSMEs) are the heartbeat of India’s industry and one of the key drivers of our economy. Not only do they contribute 1/3rd to the GDP of the country, they are also key providers of employment to a large segment of the population, particularly amongst the non-formal sector. They contribute significantly to the socio-economic development of the country by providing employment opportunities to the most economically challenged segments of the society.
Also, in a country like India, which is more a services hub than manufacturing, MSMEs have always played a key role in ensuring some competitive intensity between domestic products and imported ones. With the current emphasis on using local products, the value of such MSMEs has come even more to the fore.
Impact of COVID:
The COVID pandemic has been a challenging time for all of us, personally as well as professionally. However, it has been a particularly difficult time for MSMEs. Businesses were forced to down shutters for more than a month as saving lives by preventing the spread of COVID became key. MSMEs that were already facing liquidity crunch due to the overall economic slowdown and pending dues from other debtors, saw a complete shutdown of the liquidity tap as demand petered out. This has already forced some businesses to close forever while many others are still struggling for survival. To that effect, the government has taken some strong, effective measures in providing a liquidity line to these MSMEs.
There is definitely scope to do more, especially since the smallest of MSMEs, which are also the most affected, don’t have direct access to the banking system and rely on NBFCs and MFIs for their financing needs, which themselves don’t have free access to liquidity today. While a black swan event like COVID could not have been predicted in advance, it does bring into question, what could have been done to prevent such a situation in the first place? One significant aspect has been the over-reliance on debt financing and the relative unwillingness to tap equity-related solutions. Most MSMEs start largely as family-owned enterprises and prefer to keep it that way, not realizing the significant upside an equity investor can bring in, especially in terms of operational and technical expertise when this investor is of the strategic kind. Besides that, there is obviously the perennial capital shortage problem for MSMEs which this can solve.
Capital Crunch:
One of the biggest deterrents to the growth of MSMEs is the lack of capital. As per a recent IFC report, the credit gap for the MSME sector is more than INR 16 trillion! And part of the reason this gap has come in is that most MSMEs still rely largely on debt financing from banks and NBFCs. Since MSMEs are largely non-formal, it becomes difficult to underwrite and provide financing to them, even for new-age NBFCs. The absence of certifiable financial information makes it even more difficult to see a financial track record. Hence, we see a significant gap between the demand for funding and the availability of funding. That is not to say that these MSMEs are not fundable.
In fact, these MSME units of today are the pre-cursor to potentially large corporates of tomorrow and provide a good investment opportunity. Hence, it is imperative that MSMEs explore options around tapping the capital markets, both on the debt and equity side to become truly ‘Atmanirbhar’.
MSMEs in Capital Markets:
Capital markets have not usually been a favoured mechanism of fundraising for MSMEs. Part of the reason is the absence of an enabling ecosystem earlier where MSMEs could easily raise capital from the markets. Typically, an MSME would look for a few specific things –
– Timeframe of funding – MSMEs typically have immediate financing requirements, especially on the debt side since a lot of their requirements are to fulfill working capital requirements
– Procedural simplicity – MSMEs will usually not have a defined compliance team and other related support staff to handle any complex procedural requirements for tapping capital markets. Hence, procedural activities pertaining to this should be simpler and not cost intensive
Despite the recent steps taken, the participation of MSMEs in the exchange has been going down. Listing of new MSMEs in the exchange has seen a recent downturn after a rapid rise in last few years – this could also be a function of the subdued market environment. However, on an overall basis, there is still some scope to do more work to make a more enabling ecosystem for MSMEs in the capital markets.
Creating the Enabling Ecosystem:
The most significant concern for most potential investors is the lack of available information for MSMEs that are planning to raise money in the capital markets. However, this might not be a problem which an MSME can solve on its own since they typically do not have resources to be capital-markets ready on their own. Therefore, it is important that the government creates an independent body that can advise and provide consultancy to MSMEs for this at a nominal cost, which can be subsidised by the government. This will also help enhance trust in MSMEs as the data would be typically vetted by a quasi-governmental body.
Secondly, there needs to be some incentivisation on the investor side as well. This could be in the form of tax exemption for investment in these issuances. MSME investments can typically turn out to be high risk- high return investments and hence, are shied away from by most investors, as should be the case for the inexperienced investor. However, a combination of investor awareness through education initiatives as well as incentivisation on the investor should help boost the interest in this segment, making it more mainstream than what it is today.
A larger investor pool will also help increase volumes and help in efficient price discovery, liquidity for investors in MSMEs IPOs continues to be a big concern. Less than 50% of the companies listed since the inception of the exchanges are being actively traded on the two premier exchanges in India. As a result, secondary trades are few and far between, reducing the overall desirability of these stocks. Hence, a larger investor pool will help drive the liquidity and provide comfort to both MSMEs and investors
Lastly, India’s bond markets are now starting to take shape. There is a good amount of appetite for high yield bonds, particularly from large investors and HNIs. Promotion of SME bond issuances can provide a fillip to debt capital markets participation of MSMEs. While such issuances will provide lower interest rates for MSMEs than other financial intermediaries charge they will also be a viable high yield instrument for informed and educated investors operating in the bond market.
Looking Ahead:
MSMEs are the backbone of a resilient national economy and will define a significant course of our economic destiny. Their ability to stimulate demand, create jobs, drive innovation, and establish competition make them an integral part of the economic construct. Therefore, prioritizing their development is critical to the future of the country.
The government has also identified and the recent announcement to provide 15% equity investment in listing of new MSMEs through a government pool is a step in the right direction. We need more such measures to show that the MSMEs in India have the full-fledged backing of the government.
Especially in the current environment, government’s push to MSMEs and capital markets can play an important role in providing capital to the productive segments of the economy. An increased reliance on capital market funding will ensure that in the long-term, MSME growth is not constrained due to any short-term setbacks and the growth momentum can be sustained for a long period of time.
The author is Co-Chair, FICCI National Committee on Capital Markets Executive Director & Group COO, Edelweiss Financial Services Limited
