REIT-like structures, loans against GST filings can help solve MSME fundraising problems: Assocham

March 9, 2023

  • MSMEs hold immense potential in supporting India’s ambitious vision of a $40 trillion economy by 2047, says industry body Assocham.
  • Banks can fund MSME working capital requirements against GST filings, suggests Assocham.
  • Another suggestion is to come up with a similar structure of REITs and InVITs, an investment trust that lends specifically to MSMEs via pooling.

The micro, small and medium enterprises (MSME) sector has played a meaningful role in India’s growth. The sector holds immense potential in supporting India’s ambitious vision of a $40 trillion economy by 2047, says a report by industry body Assocham.

However, the real struggle for small businesses lies in fundraising for future growth. The report highlighted challenges faced by MSMEs in terms of fundraising and recommended ways to solve the problem.

“An April 2022 report by the Standing Committee on Finance estimated the credit gap in the MSME sector to the tune of ₹20-25 trillion. Therefore, funding via alternative sources apart from bank credit needs to be augmented for the MSME segment,” said the report.

Given that nearly 60% of MSMEs raise funds through informal sources, formalization of the sector is necessary to facilitate growth, the industry body says.

“To this end, banks could fund working capital requirements against GST filings, which are more reliable quantitatively, as compared to collateralized loans. This would not only enable MSMEs easy access to funds but also spur formalization through GST registrations,” Assocham said.

Another suggestion is to come up with a similar structure of real estate investment trusts (REITs) and infrastructure investment trusts (InVITs). The industry body says that an investment trust that lends specifically to MSMEs via pooling – can be created.

Disclosures a challenge with SME IPOs
Apart from credit, small businesses also find it tough to raise equity. Raising funds by going public via SME IPO is also a challenge due to strict disclosure requirements.

BSE SME Exchange was launched in 2012 while NSE launched SME Emerge platform and Nifty SME EMERGE Index in 2017 to encourage MSME companies to get public.

“In November 2021, BSE also collaborated with the All-India MSME Association (AIMA) to encourage and promote the listing of MSMEs and start-ups through the SME platform. Although these steps helped overall resource mobilization in the initial years, evident from the gradual rise in number of MSMEs that have moved to the main board, we have not seen equity emerge as a source of MSME financing in a big way,” said the report.

While tough disclosure remains a challenge, data shows that SME IPOs have witnessed good growth with hundreds of companies launching their issues with stellar performances.

In 2022, 108 SME IPOs were launched, as against 60 the year before.

A net worth between ₹1 crore and ₹25 crore is one of the listing requirements for SME IPOs on BSE, as per BSE Stock Exchange. The minimum investment amount for an SME IPOs is quite large compared to regular IPOs – ₹1 lakh for SME IPOs versus nearly ₹15,000 for regular IPOs.

The report also revealed that the Department for Promotion of Industry and Internal Trade (DPIIT) is in process of finalizing the new industrial policy, which amongst other things, encourages MSMEs to choose the corporate bond market.

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