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Unit III (14 Hours) Small Enterprises & Enterprise Launching Formalities

1. Introduction: 2. Concept: Definition of Small Scale; Rationale; Objective; Scope 3. Role of SME in Economic Development of India 4. SME: Registration; NOC From Pollution Board; Machinery & Equipment Selection First Online Test

5. Project Report: Preparation; Specimen of Project Report 6. Project Planning & Scheduling using Networking Techniques of PERT / CPM 7. Methods of Project Appraisal Second Online Test

In India, the small-scale industrial (SSI) sector has acquired a prominent place in the socio-economic development of the country during the past 50 years. This sector constitutes 95% of the industrial units and contributes 40% to the total industrial output of the country and 35% to direct export. According to the latest statistics, there are about 3.6 million SSI units in India and these employ approximately 19.3 million people, which is second highest next only to agriculture.
This achievement has been possible due to the consistent and sustained policy support from the Government including policy of reservation, investment ceiling for the SSI sector and priority lending. The economic reforms started in 1991 in India provided the opportunity to SSIs to grow big. However, the formation of WTO in 1995 has started posing a major challenge to the SSIs in India. There have been some sweeping changes which have taken place in the SSI sector in the last two years. The hitherto protection of the SSI sector by way of reservations and quantitative restrictions have been removed. More than 160 items which were reserved for the SSI sector have been de-reserved.

Introduction (Contd..)
The higher rate of growth of SSIs during 1991-2000 period, compared to the overall industrial growth rate, does not offer much satisfaction in the immediate future, unless concrete remedial measures are taken. Indian industry does not face any immediate threat from developed countries but faces serious competition from neighbouring countries particularly from Chinese manufacturers where productivity is 60-100% more than the Indian companies. It has been concluded through previous studies on the SSI sector that Indian SSIs should remain competitive in the era of globalisation. These studies have suggested that competitiveness is possible only if there is a technology up-gradation and adoption of new technologies. There is a need to introduce new tools and equipments for production, changes in manufacturing process, improvement in the quality of products and quality assurance, introduction of new designs and diversification, use of new raw materials and usage of modern management and IT tools. There could, however, be other factors besides technology which have impacted the growth of the SSIs.
There have been varied views which have been formed about the growth of the SSI sector post liberalisation and the features which have acted as contributors or inhibitors for the growth. The vulnerable areas as experienced by the SSIs have been cited as low capital base, difficulties in accessing technology, credit constraint, low access to business services, constraint of quality of human resources, low market awareness, low lobbying capacity, Inspector-raj and infrastructural constraints.

Introduction (Contd..)
The factors which have been identified as aiding the growth of SSIs are advancement in generic technology of computers and telecommunications, rise in electronic commerce, multilateral trading rules under agreements of World Trading Organization (WTO), mergers and acquisitions, liberalisation of services/ infrastructure and sourcing out of activities to outside firms.

Definitions of Micro, Small & Medium Enterprises

In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes:
(a) Manufacturing Enterprises- The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951). The Manufacturing Enterprise are defined in terms of investment in Plant & Machinery.

(b) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. The limit for investment in plant and machinery / equipment for manufacturing / service enterprises,

Manufacturing Sector
Enterprises Micro Enterprises Small Enterprises Medium Enterprises Investment in plant & machinery Does not exceed twenty five lakh rupees More than twenty five lakh rupees but does not exceed five crore rupees More than five crore rupees but does not exceed ten crore rupees

Service Sector
Enterprises Micro Enterprises Investment in equipments Does not exceed ten lakh rupees:

Small Enterprises
Medium Enterprises

More than ten lakh rupees but does not exceed two crore rupees
More than two crore rupees but does not exceed five core rupees

Definition: Small Scale Industrial Undertakings

The following requirements are to be complied with by an industrial undertaking to be graded as Small Scale Industrial undertaking w.e.f. 21.12.1999 An industrial undertaking in which the investment in fixed assets in plant and machinery whether held on ownership terms on lease or on hire purchase does not exceed Rs 10 million. (Subject to the condition that the unit is not owned, controlled or subsidiary of any other industrial undertaking

Definition: Ancillary Industrial Undertakings

The following requirements are to be complied with by an industrial undertaking for being regarded as ancillary industrial undertaking: An industrial undertaking which is engaged or is proposed to be engaged in the manufacture or production of parts, components, sub-assemblies, tooling or intermediates, or the rendering of services and the undertaking supplies or renders or proposes to supply or render not less than 50 per cent of its production or services, as the case may be, to one or more other industrial undertakings and whose investment in fixed assets in plant and machinery whether held on ownership terms or on lease or on hire-purchase, does not exceed Rs 10 million.

Definition: Tiny Enterprises

Investment limit in plant and machinery in respect of tiny enterprises is Rs 2.5 million irrespective of location of the unit.


Women Entrepreneurs
A Small Scale Industrial Unit/ Industry related service or business enterprise, managed by one or more women entrepreneurs in proprietary concerns, or in which she/ they individually or jointly have a share capital of not less than 51% as Partners/ Shareholders/ Directors of Private Limits Company/ Members of Cooperative Society.

The opportunities in the small scale sector are enormous due to the following factors :
- Less Capital Intensive
- Extensive Promotion & Support by the Government - Reservation for Exclusive Manufacture by small scale sector - Project Profiles - Funding s - Finance & Subsidies - Machinery Procurement - Raw Material Procurement

- Manpower Training
- Technical & Managerial skills

Tools & Tools utilisation support - Reservation for Exclusive Purchase by Government - Export Promotion - Growth in demand in the domestic market size due to overall economic growth - Increasing Export Potential for Indian products - Growth in Requirements for ancillary units due to the increase in number of greenfield units coming up in the large scale sector.

Rationale & Objectives of SME Development

There are numerous arguments in favor of the small-scale industries which justify the rationale of small-scale industry development. The Industrial Policy Resolution 1956 has put forward four arguments in favor of small-scale industries which emphasize the very rationale of small-scale industry in the Indian economy. The arguments are: Employment Generation Balanced Regional Development Equal Distribution Of Income and Wealth Latent Resource utilization.

Class Discussion
What may be the other objectives behind setting up the Small and Medium Enterprises in India??

Scope of SME in India

In India the important areas of operation of Small Business Enterprises are Manufacturing Services Trading

Role of SME in Economic Development of India

The importance of Small Scale Industries are as follows Promotes Rural and Semi Urban Growth Fosters Women Employment Drives the Employment avenues of Semi Skilled People. Acts as an aid to large scale enterprises. Promotes Rural Development and better habitat.

SSI Registration
Small Scale and ancillary units (i.e. undertaking with investment in plant and machinery of less than Rs. 6.0 million and Rs. 7.5 million respectively) should seek registration with the Director of Industries of the concerned State Government. Registering Your SSI Unit
The main purpose of Registration is to maintain statistics and maintain a roll of such units for the purposes of providing incentives and support services. States have generally adopted the uniform registration procedures as per the guidelines. However, there may be some modifications done by States. It must be noted that small industries is basically a state subject. States use the same registration scheme for implementing their own policies. It is possible that some states may have a 'SIDO registration scheme' and a 'State registration scheme'.

Benefits of Registering
The registration scheme has no statutory basis. Units would normally get registered to avail some benefits, incentives or support given either by the Central or State Govt. The regime of incentives offered by the Centre generally contains the following: - Credit prescription (Priority sector lending), differential rates of interest etc. - Excise Exemption Scheme - Exemption under Direct Tax Laws. - Statutory support such as reservation and the Interest on Delayed Payments Act. (It is to be noted that the Banking Laws, Excise Law and the Direct Taxes Law have incorporated the word SSI in their exemption notifications. Though in many cases they may define it differently. However, generally the registration certificate issued by the registering authority is seen as proof of being SSI).
States/UTs have their own package of facilities and incentives for small scale. They relate to development of industrial estates, tax subsidies, power tariff subsidies, capital investment subsidies and other support. Both the Centre and the State, whether under law or otherwise, target their incentives and support packages generally to units registered with them.

Objectives of The Registration Scheme

They are summarised as follows: - To enumerate and maintain a roll of small industries to which the package of incentives and support are targeted. - To provide a certificate enabling the units to avail statutory benefits mainly in terms of protection. - To serve the purpose of collection of statistics. - To create nodal centres at the Centre, State and District levels to promote SSI.

Features of The Scheme

Features of the scheme are as follows: - DIC is the primary registering centre - Registration is voluntary and not compulsory. - Two types of registration is done in all States. First a provisional registration certificate is given. And after commencement of production, a permanent registration certificate is given. - PRC is normally valid for 5 years and permanent registration is given in perpetuity.

Provisional Registration Certificate (PRC)

- This is given for the pre-operative period and enables the units to obtain the term loans and working capital from financial institutions/banks under priority sector lending. - Obtain facilities for accommodation, land, other approvals etc. - Obtain various necessary NOCs and clearances from regulatory bodies such as Pollution Control Board, Labour Regulations etc.

Permanent Registration Certificate

Enables the unit to get the following incentives/concessions: - Excise exemptions - Income-Tax exemption and Sales Tax exemption as per State Govt. Policy. - Incentives and concessions in power tariff etc. - Price and purchase preference for goods produced. - Availability of raw material depending on existing policy.

Procedure For Registration

Features of the present procedures are as follows: - A unit can apply for PRC for any item that does not require industrial license which means items listed in Schedule-III and items not listed in Schedule-I or Schedule-II of the licencing Exemption Notification. Units employing less than 50/100 workers with/without power can apply for registration even for those items included in Schedule-II. - Unit applies for PRC in prescribed application form. No field enquiry is done and PRC is issued. - PRC is valid for five years. If the entrepreneur is unable to set up the unit in this period, he can apply afresh at the end of five years period. - Once the unit commences production, it has to apply for permanent registration on the prescribed form. The following form basis of evaluation: - The unit has obtained all necessary clearances whether statutory or administrative. e.g. drug license under drug control order, NOC from Pollution Control Board, if required etc. - Unit does not violate any locational restrictions in force, at the time of evaluation. - Value of plant and machinery is within prescribed limits. - Unit is not owned, controlled or subsidiary of any other industrial undertaking as per notification.

NOC From Pollution Board

As per the provisions of the Water (Prevention & Control of Pollution) Act, 1974 and Air (Prevention & Control of Pollution) Act, 1981, any entrepreneur desirous of establishing a new industry or expansion of its existing unit is required to obtain consent to establish (NOC) from the Board before taking any steps for establishment/expansion of the said industry. The Board has categorized the small scale industrial units into two categories namely Green Category and Red Category taking into consideration their pollution potential loads. The Board has laid down very simple procedure for obtaining consent to establish (NOC) for the said categories of industries.

Machinery & Equipment Selection

You must know the different types of machinery and equipment that are needed to set up your enterprise. Make a listing of the leading dealers/suppliers where the machinery is available. The following factors determine the type of machines you will need: Capacity of the proposed unit Minimum scale of production which is economical Expected performance standards Productivity Waste Minimization Availability of spare parts for the new machinery

Project Report
What is a project report?
The project report is a document, which gives an account of the project proposal to ascertain the prospects of the proposed plan/activity. The project report contains detailed information about:

Land & building required Manufacturing Capacity per annum Manufacturing Process Machinery & equipment along with their prices and specifications Requirements of raw materials Power & Water required. Manpower needs Marketing Cost of the project and production. Financial analyses & economic viability of the project.

How is a Project Report Prepared? A project report is prepared with the help of prescribed guidelines available with MSMEDI's, DIC's & financial institutions. Information about prices of machinery & equipment, raw material and other various inputs required for setting up an enterprise need to be collected from the market.

Is there any standard model for preparing the project report?

A model proforma for preparing the project report is available with MSMEDI's, DIC's & financial institutions. Every institution has its own model proforma. However contents of all the proforma are almost similar.
Is a model project report available?

Yes, Model project profiles are available with the MSMEDIs(formerly Small Industries Service Institute's) & DIC's for the guidance of entrepreneurs.. However, these project profiles have to be recast in accordance with specific needs of the entrepreneurs and the current prices of inputs.
Which agency assists in preparation of Project Report? MSMEDIs, NSIC and State Govt. agencies viz. DICs, SFCs can help you in preparing the Project Report. You can also prepare the Project Report yourself by collecting detailed information on various points.

Home Assignment
Refer to a specimen of a Project Report and try drafting it on your own for a new manufacturing or service enterprise.

Project Planning & Scheduling using Networking Techniques

PERT, the Project Evaluation and Review Technique, is a network-based aid for planning and scheduling the many interrelated tasks in a large and complex project. It was developed during the design and construction of the Polaris submarine in the USA in the 1950s, which was one of the most complex tasks ever attempted at the time. Nowadays PERT techniques are routinely used in any large project such as software development, building construction, etc. Supporting software such as Microsoft Project, among others, is readily available. It may seem odd that PERT appears in a book on optimization, but it is frequently necessary to optimize time and resource constrained systems, and the basic ideas of PERT help to organize such an optimization. PERT uses a network representation to capture the precedence or parallel relationships among the tasks in the project. As an example of a precedence relationship, the frame of a house must first be constructed before the roof can go on. On the other hand, some activities can happen in parallel: the electrical system can be installed by one crew at the same time as the plumbing system is installed by a second crew.

Pert Chart

Project Planning & Scheduling using Networking Techniques CPM(Critical Path Method) Has some common characteristics with PERT
Defined by activities and events
An activity is a time-consuming effort that is required to complete part of a project. Shown as an arrow on the diagram An event is denoted by a circle and defines the end of one activity and beginning of the next. An event may be a decision point.



Critical Path Method

CPM Example

Project Appraisal
Project appraisal is a generic term that refers to the process of assessing, in a structured way, the case for proceeding with a project or proposal. In short, project appraisal is the effort of calculating a project's viability. It often involves comparing various options, using economic appraisal or some other decision analysis technique

Project Appraisal Criteria

Technical: will the project work? Has due attention been paid to technical factors affecting the project design? Given the human and material resources identified, can the project activities be undertaken and outputs achieved within the time available and to the required standards?
Financial: can the project be financed? Will there be sufficient funds to cover the expenditure requirements during the life of the project? Economic: will the nation and society at large be better off as a result of the project? Will the project benefits be greater than the project costs over the life of the investment when account is taken of time (namely, is the Net Present Value of the project positive at the test discount rate)? Social and gender: what will be the effect of the project on different groups, at individual, household and community levels? How will the project impact on women and men? How will they participate in various stages of the project cycle? Will the social benefits of the project be greater than the social costs over the life of the investment when account is taken of time?

Project Appraisal Criteria

Institutional: are the supporting institutions in place? Can they operate effectively within the existing legislative and policy environment? Has the project identified opportunities for institutional strengthening and capacity building? Environmental: will the project have any adverse effects on the environment? Have remedial measures been included in the project design? Political: will the project be compatible with government policy, at both central and regional levels?
Sustainability and risk: will the project be exposed to any undue risks? Will the project benefits be sustainable beyond the life of the project?

Project Appraisal Techniques/ Standard Methods Of Project Appraisal

Traditional Methods Pay back Period Method Accounting Rate of Return Profitability Index (post Pay back) Time Adjusted Methods Net Present Value Approach Internal Rate of Return Profitability Index