This article is divided into these key points:
- Key definitions in this article
- How will MSMEs recover?
- Benefits to Distressed/ NPA MSMEs
- Benefits to profitable MSMEs
- Benefits to India and the Indian Government
A. Key definitions in this article:
Equity (share of ownership): In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of an asset.
Infusion: Infusion means adding something new.
Equity Infusion: In easy words, if you’re a private firm, some investor comes in and buy equity in your firm, this is equity infusion. It is just another word for Equity investment.
Criteria to be declared as MSMEs (Micro, Small and Medium Enterprise) (new i.e. Released on June 1, 2020, and will take effect on July 1, 2020):
Insurer: An individual who will give insurance to the investor for his money (in this case up to 75% of the investment).
Distressed Assets/ Non-Performing Assets (NPAs): An asset becomes distressed asset/ NPA/ liability when the following points are met:
- Loan interest and principle is overdue for up to 90 days.
- Company is sinking day by day or have already sunk.
- Lost all the money of the bank’s loan and investments in the company.
- Further, banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
- Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
- Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
- Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
Seed Funding: In easy words, it’s an initial investment in a company to initiate or grow. It may take up to 6 months to grow seed funding for the newly started venture.
Profitable MSMEs: Those companies which are generating profits and paying taxes at the time. The Gross Revenue of these MSMEs will only count the revenue that is being generated inside India. The export Revenue will be not be added into conditional Revenue (i.e. the limit to the revenue imposed by govt. guidelines).
Distressed MSMEs: Those companies which can’t pay back loans, have or soon to be shut down and are unable to pay taxes.
B. How will MSMEs recover?
- No more loans.
- From equity money, they’ll pay off their bad debt previous loans and become assets again.
- They’ll have access to more market capital.
- Even if their company’s some equity is going to be owned by some investor, the real owner will have enough money to revive from the 0 again.
- Government is backing up these NPA MSMEs so there is a good chance they may recover in near future.
- Profitable MSMEs will be backed by govt. as Govt. of India will buy some amount of these MSMEs shares, at face value, and list them in the Indian Stock market (Dalal Street of Mumbai).
- MSMEs which needs Seed Funding doesn’t have to go for loans, rather govt. will invest in equity infusion.
C. Benefits to Distressed/ NPA MSMEs:
The story goes like this, assume that owner of MSME “ABC” initially invested Rs. 100. Then, he took the loan of Rs.20 from the bank to invest in the company. Now, assume for some reason “ABC” collapse. The problem arose for him as now he is in debt of Rs. 20 to the bank.
This makes him Non-Performing Asset (NPA)/Depressed asset. Now, to the depressed asset, it’ll be entirely right to say that the bank won’t allow another loan to him as his previous credit is not clear.
This will keep in a hell hole and makes it nearly impossible to revive until or unless some close one helps him or there comes to some magical backup money that his forefathers left him.
So, to restructure this, Indian Govt. took a step to come further with a strategy of Equity Infusion. Some investor will come into the picture and buy the equity of the distressed company. The company, then, take this money and clear its bad debt and with the remaining money (if there is) or taking another loan or selling some more equity (less than 40% of the total worth of the company), go for the growth.
Now, the limit of buying the equity is either 15% of the initial investment by the owner or Rs. 75 Lakhs, whichever is higher.
In this case, the investor may buy Rs. 25 of equity, and wait till the company has increased some of its value to sell them at then-current face value.
Situation: What if the company continues to fail? What will happen to the investors’ money?
Solution: Indian Govt. has taken care of this too. They planned to set up an Insurance company of this.
Investor, after he has bought some company’s equity, will go to this Insurance company. He’ll ask the insurer to give him the insurance of the invested money, in case it crashes again. The investor has to pay 1.5%, of whatever amount he has invested in the company, to the insurer.
But, here, the insurer will only give the insurance of 75% (at most) of his total investment. Means if the company crashes again, the insurer will pay him 75% of his invested money.
Que: What about the remaining 25% of the invested money?
Ans: For this, the Govt. of India had declared in May-June 2020 that they’ve set an Rs. 4000 crores debt platform. They’ll pay back the investor, the remaining 25% of his invested money, from this budget.
This gives the necessary security to the investors’ money and gives them the confidence to invest in these destressed MSMEs as there’ a very low risk to be taken.
This way investor will have very little risk and, if possible, very high upside.
D. Benefits to profitable MSMEs:
To grow, these profitable MSMEs have to take loans which lead to more interest payout. So, to control this high-interest payout, the equity has been set a way to help the growth of these MSMEs.
For that, the Indian Govt. have set up another budget of Rs. 10,000 crores, which they have a goal to expand it to Rs.50,000 crores. They’ll buy some 20-40% (govt. may decide for the amount) of equity of this well-performing MSMEs at face value.
These MSMEs must have a good track record, paying taxes and are continuing to be profiting.
They, then, will list them to the Indian stock market. If the company continues to develop, as it is now, then in the future there’s a high chance that the face value of the company will rise.
Let’s take an example:
Govt. bought 100 shares at Rs.5 per share, whatever the face value, (i.e. Rs. 500)
=> List the company in the stock market
=> Wait, for some time. Assume now the company’s single share is at Rs. 10. Now, the govt. will sell their shares in the open market (now worth Rs. 1000).
=> Again, for that Rs. 1000, Govt. will buy the equity in another profiting MSME, list it in the stock market, sell them when the face value has increased and done this again and again.
=> Govt. have assumed that if the analysis of firm and calculations go on a well-predicted path, those Rs. 10,000 crores may turn into Rs. 2 lakh crores in some 4-5 years.
This way the company is growing as well as the govt’s money.
E. Benefits to India and the Indian Government:
- Self-perpetuating money which is increasing over time.
- Recovery of distressed Assets.
- This will give MSMEs access to a higher amount of market capitalization. This will also help the economy as more of the market capital will be circulating the companies and this will help them to grow further.
- Very little risk to take (as they’re going to invest only in profiting and growing MSMEs)
- Growing companies will lead to a higher need of man-force i.e. more opportunities for job seekers.
- This may also help in raising the GDP of India.
What about Banks?
With this equity infusion, the bad debt will get cleared. So, in the end, the banks will too have their money back.
The Indian Govt. has tried to restructure 6 lakhs of MSMEs during June 2020, and their goal is to restructure ~25 lakh MSMEs by this year’s end.
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