Let experts manage Rs 10k-cr start-up fund: Sanjay Bhatia

Updated: Aug 29 2014, 08:17am hrs
As the government sets the ball rolling on redefining the thresholds of micro, small and medium enterprises, industry chamber Ficci feels that the new definition should be scientific and compatible with global standards. The issue was discussed at length at the recent MSME Summit 2014, held by Ficci-Confederation of Micro, Small and Medium Enterprises (Ficci-CMSME), in New Delhi. FE was the media partner to this event. Sanjay Bhatia, president, Ficci-CMSME and MD, Hindustan Tin Works Ltd, had an interaction with FE after the event. Excerpts:

The government proposes to review the definition of MSMEs. What could be ideal capital ceilings, or should they be based on staff-size, turnover and the like

This has been debated at length at the Ficci-CMSME Summit 2014. It is our considered opinion that a solid policy framework is the need of the times. Attempting to have a redefinition of MSMEs just in relation to its size is just a technical argument. The task of a definition should be to facilitate the smooth working of the MSME units, through appropriate legal and institutional structures. Any policy should provide a supporting framework and an enabling environment. Defining should be geared to foster innovation and growth, and sparking the spirit of enterprise that would catch up as an inclusive phenomenon.

The present system of defining MSMEs is unscientific. The definition should emerge as part of a national policy on the sector. This policy should bring out the criteria of definition, as also the modalities of periodic redefinition. The present system of depending on the MSME Act for a redefinition need to go.

In my view a combination of plant & machinery and turnover-based definition for MSMEs does appear to be a recommended option. We also need to align our definition with the definition followed worldwide as global MSMEs are a lot larger than our MSMEs. Our definition makes it difficult to create linkages between our MSMEs and the MSMEs worldwide.

You have mentioned at the summit that the government should attempt to enhance the ease of doing business for MSMEs What specific proposals you have in this respect

Some of the important ideas we propose are:

Automation of Entrepreneurs Memorandum filingEntrepreneurs memorandum (EM) filing is mandatory for entrepreneurs seeking to register their start-ups (EM-I) and begin operations (EM-II). In most parts of the country, entrepreneurs have no option but to travel to the district industries centres (DICs) to get their EM-I and EM-II forms. Even in states where online registration is available, entrepreneurs have to get the forms stamped at DICs. Much time can be saved if all states allow entrepreneurs to register online and start operations straight away.

Changes in the Companies Act, 2013 The New Companies Act, 2013 is a minefield. The additions and changes made to the previous Act are more stringent and have brought about more constraints than solutions to entrepreneurs. Section 56 of the Act, which pertains to the transfer of shares, mandates the transferor to not only fill up the new share transfer form (SH4) but to also get it stamped, dated and executed!

Change in the governments role Government policy has, for long, focused on the employment generation ability of MSME units and has tended towards adopting a subsidy regime to tend to the lack of competitiveness and the low productivity plaguing the sector. This subsidy regime has proven to be a stumbling block for the nurturing of entrepreneurs and start-ups. The role of the government has to change from providing subsidies to ensuring clarity for the benefit of the entrepreneurs.

Simple laws & proceduresIndian SMEs are literally left with their hands and feet tied down with many antiquated laws. For the ease of doing business, the government should come out with simple laws & procedures with limited documentations. Minimise inspector raj and create easy to understand information packages on regulations and related inspections procedures, and make these easily available.

What are the tax issues that vex MSMEs and start-ups

More than anything, the administrative burden on excise duty is huge on MSMEs. It leads to loss of time and money in litigation. Issues related to service tax is also an area of concern. An increase in the service tax threshold is desirable; the value limit of R10 lakh for exemption could be increased to R20 lakh. Besides, micro & small sectors could be exempted from the purview of service tax for rental for their office/factory/warehouse premises for own use. Also, introduction of rebated income tax for small start-up businesses is recommended. Tax benefits could be further defined for a specified rebate proportion and specific period in order to give the requisite impetus to the sector.

What kind of changes would you suggest in the financial architecture for funding the MSME sector

Timely availability of credit at the right cost is the key expectation of industry from their banks. Some measures in this direction could be:

o Interest subvention: Credit flow to MSMEs has not taken off to the extent of what is needed. Funds generated from the MSME sector itself can be used to create interest subvention. Say, take 10% of indirect tax collected and use it towards interest subvention. Reducing the cost of borrowing will make capital affordable.

o Tax-free bond: Credit guarantees have worked but have a limited reach so far. Allowing either Sidbi or NSIC to float tax-free bonds will help raise money at a relatively lower cost. This will also put a downward pressure on market rates.

o Banks should review the rehabilitation process of sick MSMEs. It is an irony that there is a rehabilitation package for sick & closed MSME units. If banks can fund to rehabilitate a unit when it is sick can't they fund it when it is running

o A sustainable ecosystem should be created for rehabilitation of sick MSMEs. Short-term funding for the long-term revival of MSMEs should be a priority.

o A mechanism should be evolved where financial institutions would provide a second chance to sick units to revive or explore new avenues.

o Proper due diligence should be done before sanctioning a project. Consultants/ experts having practical exposure should be deployed to understand the financial needs of the unit and given the responsibility of due diligence.

o Undertake a high-level review of willful defaulters as well as assets impaired by the economic downturn.

o Set up a government-sponsored specialised institution for the management of stressed assets

The budget has proposed a start-up capital fund of R10,000 crore to act as a catalyst to attract private capital. What are Ficcis suggestions

While the fund was announced by the government in the budget, the agency that would be in charge of the fund was not mentioned. A probable solution would be to set up an institution that caters solely to entrepreneurs, possibly comprising successful and experienced entrepreneurs, venture capitalists or angel investors who have the knowledge and skill to effectively manage and allocate the R10,000 crore to better nurture and develop start-ups and create a world-class entrepreneurial ecosystem.

A wider debate is needed before formulating the structure, framework and eligibility criteria for the use of the start-up fund. Funds should be disbursed for projects in a competitive manner rather than based on a supply-driven first come first served principle. Certain incentives would be needed to create a fair playing field across different social groups, sectors and geographical areas to neutralise the historical disadvantages. However, these should not overwhelm the intention and objective of the fund. Also, exit options need to be built in the framework to ensure that equity support does not end up being another form of subsidy.