Wednesday, February 06, 2013

SMALL BUSINESSES: EQUITY ACCESS

The lack of capital is a serious blot on India’s entrepreneurial growth story. Small and medium enterprises have a very faint idea about organised sources of finance, leave banks. It’s time for the establishment to look into this in an extremely urgent manner

The primary reason is the fear of getting exposed to currency fluctuation issues and accounting issues related to overseas transactions. Most small companies would prefer looking to institutions set up by the government (like SIDBI) than an outside source. Many analysts like C. G. Srividya, Partner, Special Advisory Services, Grant Thornton, support such a hypothesis in their discussions with B&E.

One figure that supports this theory is that the credit offtake by the government to SMEs has increased phenomenally from Rs.860 billion in 2004 to Rs.2.46 trillion in 2008. But it has hardly been adequate, as at least 95% of SMEs still don’t have access to any institutional credit mechanism. In the US around 60% of priority sector lending goes to small businesses; so there is a strong case for increasing the proportion in India. One man in the midst of this issue is Rajeev Karwal, Founder Director and CEO, Milagrow, who argues that at least 20% of priority sector lending should be diverted to SMEs, just like agriculture. Another line of thought portends that as the lending rate uses the PLR as a benchmark, that should be changed – as in, lowered for the benefit of the SMEs. One does accept that the government and the RBI have created a special window of Rs.70 billion for augmenting credit flow to SMEs. But two key issues that still need to be addressed is the promotion of these schemes (as many small business owners aren’t even aware) and procedural delays, which can discourage most companies. Private banks, in turn, have been particularly conservative about lending. Paritosh Kashyap, Executive VP-Equity, Kotak Mahindra Bank, commented to B&E, “As far as capital raising is concerend one needs to understand that capital raising is an issue of risk. The credit quality of the borrower is of utmost importance while lending; which one needs to verify.”

A strong case can ergo be made for raising the equity component and making it available for more and more SMEs in particular. If you consider the domestic equity trend in 2009, 17 IPOs were brought up in 2009. In dollar terms, $3.34 billion was raised compared to $4.51 billion in 2008, led by NHPC’s IPO of $1.34 billion. And 66% of that money was raised via power and energy. Jagannadham Thunuguntla, Equity Head, SMC Capital Ltd, tells B&E, “The interesting trend is that the subscription levels at the time of IPOs are heavily skewed towards QIBs (Qualified Institutional Buyers).


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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