Group B_ VC for SME

7/27/2019 Group B_ VC for SME

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Venture Capital for

Sick Units and SMEs

₹ Rucha Asolkar

₹ Devika Bharadwaj

₹ Rahul Chawla

₹ Sanket Dave₹ Ankita Chandan

₹ Jayashree Iyer



“It is a great source of frustration for me, okay, when I see the unwillingness of

the donor community and other players in development to support SMEs

[small and medium-sized enterprises]. Why? Because small and medium-sizedenterprises are a critical part in the development process.”

-Malik Fal, Managing Director, Omidyar Network Africa



Scope of Presentation

₹ SMEs

₹ Sick Units

₹ VC for Sick Units and SMEs

₹ Case Studies



SME’s (Small and Medium Scale

Enterprises

Companies whose personnel numbers fall

below certain limits.

SME’s significance

Responsible for driving innovation and

competition in many economic sector

Unemployment can be significantly

reduced with the help of SME’s

Contributes 9% of GDP and most crucial

link between India's economic growth and

socio-economic progress

India’s most successful SME’s

* Vadodara-based Ankur Scientific

Energy Technologies (revenue below Rs

50 crore) small-scale category

*Delhi based-DFM Foods-(Rs 50- Rs 200

crore) medium-scale category.



Definition of SME’s

Manufacturing Enterprises –

Investment in Plant & Machinery

Description INR

MicroEnterprises

upto Rs. 25Lakh

Small

Enterprises

above Rs. 25 Lakh &

upto Rs. 5 Crore

Medium

Enterprises

above Rs. 5 Crore &

upto Rs. 10 Crore

Service Enterprises – Investment in

Equipments

Description INR

MicroEnterprises

upto Rs. 10Lakh

Small

Enterprises

above Rs. 10 Lakh &

upto Rs. 2 Crore

Medium

Enterprises

above Rs. 2 Crore &

upto Rs. 5 Crore



SME Overview

29.8 Million MSME’s in India

Provide employment to 69 million people

MSME Sector accounts for 45% of the Indian Industrial Output

MSME Sector accounts for 40% of the Exports

94% of MSME’s are unregistered



Challenges to SME Sector

₹ SMEs face a number of problems

– absence of adequate and timely banking finance,

– limited capital and knowledge

– non-availability of suitable technology – low production capacity

– ineffective marketing strategy

– identification of new markets

–

constraints on modernisation & expansions – non availability of highly skilled labour at affordable cost

– Follow up with various government agencies to resolve problems



Sick Units

₹ A SME unit is considered sick when:

a) If any of the borrowal accounts of the unit remains substandard for more than six

months i.e. principal or interest, in respect of any of its borrowal accounts has

remained overdue for a period exceeding 1 year. The requirement of overdue

period exceeding one year will remain unchanged even if the present period for

classification of an account as sub‐standard is reduced in due course;

b) There is erosion in the net worth due to accumulated cash losses to the extent of 50

per cent of its net worth during the previous accounting year; and

c) The unit has been in commercial production for at least 2 years.



₹ Viability

The decision on viability of the unit should be taken at the earliest but not

later than 3 months of becoming sick under any circumstances.

₹ Procedure to be adopted by the banks before declaring any unit as

unviable:

– viability status is evidenced by a viability study.

– not feasible to conduct viability study in very small units

– For micro (manufacturing) enterprises, having investment in plant and

machinery up to Rs.5 lakh and micro (service) enterprises having investment in

equipment up to Rs. 2 lakh, the Branch Manager may take a decision.

Applicability of Sick unit definition



Guidelines for Rehabilitation of Sick

Micro & Small Enterprises

₹ Approval of the next higher authority/ present sanctioning authority for both micro and

small units is necessary.

₹ Opportunity should be given to the unit to present the case before the next higher

authority.

₹ Decision should be taken only after giving an opportunity to the promoters of the unit to

present their case.

₹ A committee approach comprising of senior officials of the bank is needed for sick units

declared unviable, with credit facilities of Rs.1 crore and above.

₹ The above process should be completed in a time bound manner not later than 3 months.

₹ The banks are subjected to exception in cases of malfeasance or fraud

₹ Banks may decide on the reliefs and concessions for rehabilitation of viable/potentially

viable units



VC for Sick Units, SMEs



Emergence of VC

• SMEs dependence on Bank finance for expansion and working capital

requirements.

• Bankers curtailed lending to SMEs due to the greater risk of non-

performing assets (NPAs)

•

Difficulty in getting finance for their projects• Concept of venture capital emerged to provide financial support

• Venture capital is a means of equity financing for rapidly-growing private

companies.

• Venture capitalists comprise of professionals.

• Funds are provided after careful scrutiny

• Main aim is to earn higher returns on their investments

• Active part in the management of the company



Venture Capital for MSME in India

• Venture Capitalists reluctant to invest in MSE’s

• Change in VC scenario

• Expansion in reach in sectors such as clean energy,

healthcare, pharmaceuticals, retail, media.

• Induct fund at low cost, share the risk and provide

management and technology upgradation support

• The Small Industries Development Bank of India - main public

financial institution in VC funding

• SIDBI Venture Capital Limited





What do VCs look for

• Higher return on their investment. Business must fit theirinvestment criteria

• Differing operating approaches - location , size , stage of the

company, specialization , structure and involvement

• Information concerning the product or service, the marketanalysis, company operations, the investment required and

financial projections and management team

• A good business plan is a pre-requisite.



VC funding SME’s- scenario in India

Popular Venture capitalists funding SME’s in India

• SIDBI Venture Capital Limited (SVCL)

• Helion Venture Partners

• Erasmic Venture Fund(Accel India Venture Fund),

•

SeedFund• Upstream Ventures

Benefits of Venture Capital to SME’s

• Injection of Long Term equity Finance

•

VC-a business partner, sharing risks and rewards• VC-provides assistance and practical advice to the company

• VC-leverages his networks and contacts to add value to thecompany



How Does it all work………????



How does an SME approach a VC

for funding?

SME submits the business plan in a format given in the

website and Management Profile to the VC’s email id. Based

on a preliminary assessment of the business plan, the VCgets in touch with the SME

Expectations of the VC of an SME? • The Company should have high growth potential -scale

up sufficiently within 3 - 5 years of investment

• Provide a profitable exit to investors by way an IPO,

Strategic Sale, Mergers & Acquisition, etc

• The Company at the time of investment should beunlisted.

What are the key investment

criteria for VC?

• A strong committed management team, established

performance record and a high degree on integrity

• Sustainable competitive advantage

• Scalability of operations

•Potential for above average profitability leading toattractive returns on investment

• Subscription to equity/ equity type instruments

• Unlisted companies preferably in small scale/ small scale

graduating to medium scale

• Availability of exit route for Venture Capital investment

SIDBI-Funds Issue Process



What is the project

evaluation process

followed by VC?

• Scrutiny of business plan

• Detailed due diligence including visit to existing facilities/

operation site

• Reference check

• Feedback form clients etc.

• All proposals are reviewed by an Investment Committee (IC)

which also involves a presentation by the promoters.

How long does it take

VC to make an

investment or

participation decision?

On an average it should be possible to complete the full cycle

of processing of the proposal including due diligence, sanction,

documentation etc. between 8 - 12 weeks.

What are the

instruments of finance

by which VC investmentis made?

Investment is made by way of equity and equity type

instruments. A VC also co-invests with other VC funds.

What is VC’s role after

an investment is made?

• Provides networking and management support

• Assists investee companies to attract investment from other

venture capitalists in subsequent rounds of financing.



Strategies Adopted by the Units for

Revival

₹ Diversification

− Some units change the product line since demand for the existing product

was inadequate. For this kind of diversification, existing resources

(machineries, materials and workforce) are often utilized.

− The other type of diversification is of shifting from manufacturing activities

to job-work. This need is felt necessary when, the manufacturing as an

activity, is found uneconomical.

− Units can diversify their attention from exports market to local market or

vice versa if they feel that the demand for either is declining.



₹ Technical Aspects

- Rejection of finished goods was on the higher side. It was decided to

modernise machineries.

- The required machinery was not made available in time. Consequently, the

unit became sick but the entrepreneur decided to go in for a second hand

machinery.

- In one unit, cost of production was on the higher side. With the

introduction of improved technology, the cost reduced.



₹ Change of Management

- Change of management as well as ownership is inevitable on the death of

an entrepreneur.

- Often, family members taking the entrepreneur's place can help revive the

units, if the incoming entrepreneur is highly competent and adopted

modern methods of management.

Or, professionals can be introduced to revive the units.

- In one case, a newly inducted management decided not to accept anyremuneration from it until bank loans were fully repaid.

- Bank filed the court case for the recovery since the management was not

competent. But, when the management was changed, bank withdrew the

case from the court and rehabilitated the same. There was a positive

response to the efforts put in by the new management. Thus, the unit wasrevived.



₹ Labour

- Workers went on strike for a long time due to unsatisfactory attitude of the

entrepreneur. His son adopted a different approach.

- Productivity of the workers was very low. The entrepreneur rightly decided

to offer incentives on the basis of output. Consequently, the productivity of

workers improved significantly.

- In the same case, the concerned court authorities granted retrenchment of

workers which also proved to be a useful remedy for revival.

- Eg. Revival of Hindustan Antibiotics Ltd.

₹ Finance

- Borrowal of funds from friends and relatives to overcome sickness due to

shortage of funds.



Examples/ Cases



Case Study: Aavishkar

• Aims to harness the entrepreneurial spirit at the bottom of the

pyramid to create inclusive economic development

• Moto: Micro equity investments to create scalable small

entrepreneurs with significant social impact

• Objectives

–

Impact on local communities through boosting local production

– Creating livelihood opportunities

– Attractive commercial returns



Case: Shree Kamdhenu Electronics

Private Limited

• Location: Vallabh, Vidyanagar, Gujarat

• Established in 1996

•

Develops products and systems that helpbridge the technology gap in the dairy

industry

• Helps in improvement of effectiveness and

efficiency of milk collection and processing



• Problems: Saturation, Debt Ridden

• AAVISHKAAR’S ROLE

–

April 2003 invested of 18 lakhs to gain 26.62% equity

– Improving financial discipline and cost control

– Improvement of Management, Systems and processes

•

Outcome: Akashganga Process, Reduction in Risk, OverallGrowth

Case: Shree Kamdhenu Electronics

Private Limited (cont'd)



Conclusion

₹ Mere introduction of rehabilitation scheme / package of concessions will not

assure successful revival of a sick unit

₹ Sick companies should look at rehabilitation as ‘one time opportunity’ and, a high

degree of commitment and professional approach is needed to regain loststrength.

₹ When these expectations are fulfilled, the present rate of success in rehabilitation

can be enhanced effectively.

₹ There are already many success stories in this regard.

₹ Strive to revive each eligible sick unit as early as possible to make our industrial

economy more healthy.



Thank you!

Questions?

Documents

Group B_ VC for SME