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Fund of Funds Scheme for MSMEs by the Government

By Finserv MARKETS - May 20,2020
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Fund of Funds Scheme for MSMEs by the Government

Micro, small and medium enterprises (MSMEs) received an equity infusion worth Rs. 50,000 crore from the government of India on May 13. The infusion of funds for MSMEs was part of the 20 lakh crore stimulus package announced by the Prime Minister, Narendra Modi on May 12.

Owing to the  induced nationwide lockdown, Indian businesses have faced massive disruption, forcing lakhs of people out of jobs. The MSME sector alone employs over 120 million people. The package comes as India crossed 50 days under the lockdown.

According to the Finance Minister of India, Nirmala Sitharaman, a “fund of funds” (FoF) will be set up with a corpus of Rs. 10,000 crore. “The Fund of Funds will be operated through a mother fund and a few daughter funds. The government will provide equity funding for MSMEs with growth potential and viability,” said Sitharaman as quoted by Moneycontrol.

The fund will aim to help MSME’s expand their size and capacity, enabling them to get listed on the exchanges. The FoF scheme which also proposes to purchase up to 15 per cent equity in MSME’s with high credit rating, was first announced in the Union Budget on February 1, 2020, based on the recommendations of the UK Sinha Committee.

Besides, the government also announced Rs. 3 lakh crore automatic collateral-free loans for MSME and Rs. 20,000 crore subordinated debt for stressed businesses.

Definition of MSME Changed

In a bid to provide an impetus to the sector, FM Nirmala Sitharaman also changed the definition of an MSME enterprise. She announced that the new definition of MSMEs does not differentiate between a manufacturing enterprise and a service sector enterprise.

The revised definition says that a company with an investment of up to Rs. 1 crore and a turnover of Rs. 5 crore will be a micro company. Prior to the changes, a service sector company with an investment of up to Rs. 10 Lakhs and a manufacturing company with an investment of Rs. 25 Lakhs was called a micro-enterprise.

Similarly, a company with an investment of up to Rs. 10 crore and a turnover of Rs. 50 crore will now be categorised as a small company. A macro enterprise will be defined as one with an investment of up to Rs. 20 crore and a turnover of Rs. 100 crore has been defined as a medium company.

Among other relief measures announced, the government also disallowed global tenders for government procurement of up to Rs. 200 crore.

Importance of MSME

As expected, the government announced a stimulus package for the MSME sector as it was one of the worst-hit by the pandemic induced lockdown. According to experts, the sector was already struggling. Pandemicmade the situation worse as companies that constitute the MSME sector usually do not have excess cash to stay afloat and get past a crisis such as this.

Some surveys had also suggested that less than 10% of the MSMEs will be able to survive the crises. That aside, the stimulus was also necessary because of the shortage of labour. The movement of labourers away from the cities may also put the restarting of this sector in a doubt.

Since the MSME funding comes mostly from informal sources, RBI has also made several announcements to boost the sector

How will Government Steps help MSMEs?

The government decided against announcing a direct bailout package. Instead, it chose to take over the credit risk of MSMEs. Due to the higher credit risk associated with MSMEs, it was difficult for them to get loans. Therefore a credit guarantee announced by the government will help companies secure loans during the crises. For example, if the government gives a cent per cent credit guarantee up to Rs. 1 crore to a firm, it would mean that the government will repay the loan amount if the company fails to do so.

Other moves to support MSME

Apart from the fund of fund scheme, FM Nirmala Sitharaman announced a collateral-free loan of Rs. 3 lakh crore for MSMEs. Experts say that this move will enable 45 lakh units to restart work and save lakhs of jobs. Subordinate debt provision of Rs. 20,000 crore for 2 lakh stressed MSMEs has also been made.

The fund of funds scheme whereby the government aims to infuse Rs. 50,000 crore equity infusion via mother fund-daughter fund for MSMEs which may the sector come back on its feet

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Read more about CIBIL MSME Rank

Also look for govt guaranteed business loan schemes only at Finserv MARKETS

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