SMEs 'Catch Them Young' To Reap The Benefits

SMEs are crucial for any economy. Especially, for a developing country like India, the SME sector serves as a growth engine. Shohini Nath finds out how the listed SME companies have performed on the bourses and reasons out why investing in SMEs cannot be ignored anymore. Read on...


The global GDP growth is witnessing a slowdown and, according to the World Bank Group statistics, it is projected at 2.6 per cent in 2019 which is below previous projections. However, it is expected to gradually rise to 2.7 per cent by 2020. In comparison to the global growth, India’s GDP growth is projected at 7.5 per cent by 2020. India remains as one of the fastest growing economies even though the global economic problems such as rising trade barriers and the piling of government debt has been dampening the spirits, India is in a sweet spot. One of the major reasons that has helped India to retain its position and remain in the top 5 growing economies is the strong presence and major contribution of the micro, small and medium enterprises (MSMEs) to the GDP.

The structural definition of MSMEs might however differ across nations, but the common and accepted truth is that the MSMEs play a vital role in the growth and development of a country. MSMEs traditionally constitute the largest portion of the employment base and hire the biggest number of new employees. They produce a major chunk of a country’s goods and services, which in-turn adds to the GDP of a country. The small and medium enterprises (SMEs) is a category placed between the micro enterprises and the large corporations.

In India, according to the Ministry of Micro Small and Medium Enterprises, MSMEs are categorised into two classes, namely, manufacturing enterprises and service enterprises.




Now that we have established the accurate definition of MSMEs in India, let us tell you how and why these enterprises are important when it comes to the growth of the economy. The government of almost every economy encourages the growth of small businesses and India is one of the countries that is focused on pushing the MSMEs into the limelight. Economic development starts from the smallest corners of the nations and these small businesses contribute to the local economies through generation of employment and give shape to innovative ideas in the community. Small businesses hire local people who know their community the best and thereby play an important role in the growth of the businesses. Most of these people may not be employed by larger organisations, and thus, the MSMEs are best utilising the human resources of the local areas. Some of the government initiatives like ‘Make In India’ and the financial inclusion programmes act as ladders to hasten the growth process of the sector. With the 'Make in India' initiative, both domestic and foreign companies have been investing in the small businesses and the flow of capital has resulted in a substantial growth of the MSME sector. With this, the smaller businesses have been able to produce the right product accompanied with right quality at a competitive price, both in the domestic and foreign markets. In short, MSMEs contribute substantially to the nation’s GDP, provide employment and also add to the exports of the country.


According to KPMG’s report on MSMEs in India, the share of MSMEs to the economy stood at 8 per cent compared to Brazil’s MSME share of 27 per cent, Russia’s 35 per cent and Argentina’s 25 per cent to the GDP of their respective countries. Surprisingly, the contribution of the MSMEs to Indian GDP was the lowest compared to the other countries, which reported the MSMEs contribution in the range of 25-60 per cent.

Presence of MSMEs in India It is seen that 31 per cent of MSMEs were found to be engaged in manufacturing activities, 36 per cent were engaged in trade and the remaining 33 per cent in other services. Again, out of 633.88 lakh estimated number of MSMEs, 324.88 lakh MSMEs (51.25%) were in the rural areas and 309 lakh MSMEs (48.75%) were in the urban areas.


However, the Government of India needs to focus more on this sector as it has the potential to contribute further to the GDP. The MSME sector needs a boost in innovation and technology and also embolden women entrepreneurs to take initiatives. In India, the MSMEs are diverse in the nature of business and are spread across geographies. There are still many informal MSMEs that are not yet registered with the formal structure of the MSMEs. Many small businesses fail at the nascent stages due to the challenges that SMEs face. A few of these challenges include low flow of credit, high cost of credit, cut-throat competition, compliance-related bottlenecks, limited resources and heavy corruption at local levels.

What MSMEs Need Today

Easy Availability of Loans : Every business needs huge capital investment, and for small entrepreneurs, the availability of loans is of great significance. There is a reduction in the public sector banks’ share in money lending to the MSME sector and also the start-ups fail to get timely loans and thus suffer financially. On the bright side, the government has announced an easy loan access by launching an online portal through which one can get loan sanctioned up to Rs.1 crore within an hour. This is what the small scale sector needs from the government to grow economically.

Digital India :
With digitisation happening in every part of India, importance should be placed in the promotion of MSMEs’ service and manufacturing capabilities in information and communications technology (ICT) sector to boost their identity.

Export Contribution: With the 'Make in India' programme, MSMEs could contribute to the exports, but there has to be strong support and development in terms of innovation and skills in the MSME segment to become globally competitive.

Indigenisation:
Incentivise any investments and outputs by large players and their MSME vendors to indigenise and enable import substitution, particularly adapting to research and development, innovation and global technologies. 

Tax reforms : The small businesses need a reduction in the dividend tax and other forms of taxes as many MSME bodies have proposed various incentive schemes. The MSMEs need a reduction in the cost of borrowing, coupled with a better access to credit.

There are various schemes offered by the Indian government that are focused on bringing an all-round development of the MSME sector. Some of the scheme for the upliftment of the MSME sector include Prime Minister Employment Generation Programme and other credit support schemes, development of Khadi, village and coir industries, technology upgradation and quality certification, marketing promotion schemes, entrepreneurship and skill development programme, infrastructure development programme, etc. These schemes could bring about a revolution in the MSME sector which would eventually reflect on our nation’s GDP.

Vijay Kuppa Co–Founder, Orowealth

Investment in listed SMEs or SME IPOs can be considered as an alternate asset class by retail investor but will be dependent on the risk profile of the investor as the investment in SMEs can be categorised as high risk, high return asset class. Also, the retail investor should understand the immense potential of SMEs, considering the growth prospects and the contribution to the nation’s GDP in terms of job creation and support to large-scale industries

Exchanges and SMEs

As mentioned earlier, the small businesses face acute problems of financing. There are many start-ups that need capital for growth and sustenance. For bigger start-ups, they can always tap private equity investors for more capital, but the smaller ones have fewer options to raise capital currently. Providing a platform for them to be listed is a constructive step, not just for the companies, but also for the investors who could be a part of their growth story. The SME platform has emerged as a viable option for start-ups to raise capital. On the other hand, many investors can earn handsome profits by investing in them.

It was back in 2008 when the Securities Exchange Board of India (SEBI) propagated the idea of an SME exchange. Then again, in 2010, the report by the Prime Minister's Task Force on MSMEs recommended setting up of SME exchanges to promote inflow of equity capital into this sector.

Considering the SME IPO listing data for the last four years, we can see more and more SMEs getting listed on the SME exchange platforms every year. It is evident that the SME platforms are running quite successfully. 



The SME listed stocks can shift to the main board on fulfilling certain conditions respective to each exchange. To move up to the main board, the stocks listed on the SME platform have to ensure ensure that their paid-up capital exceeds `10 crore, but it remains below `25 crore. In case the post-issue paid-up capital is likely to exceed `25 crore, such SME exchange companies migrate to the main board. Until June 2019, 66 companies have migrated to the main board on the BSE and 11 companies have migrated to the main board on the NSE.


Above is the list of companies that are trading on the NSE and as shown, the companies such as Mittal Life Style and Madhav Copper have in a one year period delivered exceptionally on the exchange. The count for upcoming SME IPOs for the year 2019, there are 32 SME companies that are to be listed on the BSE SME and 70 SME companies are lined to be listed on the NSE Emerge.

Conclusion

The MSME sector is ripe for investment and definitely capable of contributing more to the GDP. Although there are some hurdles that the small businesses face in terms of availability of capital, limited resources, etc. which hinder their growth, their impact on the economic development of the country is immense. The various schemes available in India presently to boost the MSME sector could in a few years help the sector to flourish. The SME platforms on the exchanges benefit the companies in multiple ways for example, listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media and provides continuing liquidity to the shareholders. The MSME sector stands as a strong backbone of the Indian economy, playing a big role towards the country's economic development. With a better impetus from the government, the MSME sector would make higher gains and produce even better products and services. As for the listed SME stocks, it would be a good move for the investors to “catch them young” and reap the benefits

Methodology for picking Top 50 SMEs
To come up with a list of ranking of top 50 SME companies, we compiled data for all the SME companies listed on both the BSE as well as NSE based on four crucial parameters. The first includes market capitalisation. The second and third parameters obtained from the Profit & Loss Account include Sales and Net Profit. Lastly, we factored in the returns earned by investors by computing the 1-year simple returns delivered by the stocks. Each parameter was then ranked by awarding it a carefully determined weightage based on its significance. This was followed by a consolidated ranking to arrive at the list of Top 50 SME companies. All the raw financial data is sourced from Ace Equity. 

Click Here to Download SMEs Data Bank 

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