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Traditional Finance Model for SMEs to Change, August 2011

20 September 2011

Source :  SME World

The Small and Medium Enterprises (SMEs) play a catalytic role in the development process of most economies as they constitute a major part of the industrial activity. This is reflected in the form of their increasing number and rising proportion in the overall product manufacturing, employment, technical innovations and promotion of entrepreneurial skills. The contribution of SMEs in the development of Indian economy has been significant, both in terms of contribution to GDP and creation of employment opportunities. They contribute around 20% of GDP and are the largest generator of employment (approximately 25 million). In India, SME sector is the second largest employer, after agriculture.

An entrepreneurial venture / SME typically start off with bank loans (debt) / personal savings and then receive VC funding or support from angel investors. It is taken over by Private Equity (PE) players once it reaches a certain size and lists on a stock exchange when it reaches the next level.

The cost of raising capital for SMEs is quite high. The current means of financing for SMEs are not adequate as they do not have easy access to funds from Angel Investors, VCs and PE players. Most costs of compliance in raising capital under the existing guidelines are fixed. As a result, the costs become burdensome for smaller issues.

 

Government/market regulator ( I hate calling the word watchdog : sounds derogatory) The Securities and Exchange Board of India (SEBI) were contemplating on these facts from quite an amount of time. The focus was on to provide the SMEs with a framework that would enable them to raise capital quickly and at a low cost. Internationally also, countries have provided for a separate exchange / trading platform to facilitate listing of securities of growth companies/new economy companies / small and medium companies. Some of the examples are the Alternative Investment Market (AIM), London, the Growth Enterprises Market (GEM), Hong Kong and MOTHERS, JAPAN.