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Venture Capital for Sick Units and SMEs

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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-sized enterprises 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 .

Rs 200 crore) medium-scale category. 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 SME’s significance 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. .SME’s (Small and Medium Scale Enterprises Companies whose personnel numbers fall below certain limits.

25 Lakh & upto Rs. 2 Crore & upto Rs. 5 Crore Medium Enterprises above Rs. 10Lakh Micro Enterprises Small Enterprises upto Rs. 25Lakh above Rs. 2 Crore above Rs. 10 Lakh & upto Rs.Definition of SME’s Service Enterprises – Investment in Equipments Description INR Manufacturing Enterprises – Investment in Plant & Machinery Description INR Micro Enterprises Small Enterprises upto Rs. 5 Crore Medium Enterprises above Rs. 5 Crore & upto Rs. 10 Crore .

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 .SME Overview 29.

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 .Challenges to SME Sector ₹ SMEs face a number of problems – – – – – – – – – absence of adequate and timely banking finance.

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

2 lakh. . ₹ 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.5 lakh and micro (service) enterprises having investment in equipment up to Rs. the Branch Manager may take a decision.Applicability of Sick unit definition ₹ 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. having investment in plant and machinery up to Rs.

₹ ₹ ₹ The above process should be completed in a time bound manner not later than 3 months. with credit facilities of Rs. ₹ Opportunity should be given to the unit to present the case before the next higher authority. ₹ A committee approach comprising of senior officials of the bank is needed for sick units declared unviable.1 crore and above. 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 . ₹ Decision should be taken only after giving an opportunity to the promoters of the unit to present their case.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.

VC for Sick Units. SMEs .

• Funds are provided after careful scrutiny • Main aim is to earn higher returns on their investments • Active part in the management of the company . • Bankers curtailed lending to SMEs due to the greater risk of nonperforming 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.Emergence of VC • SMEs dependence on Bank finance for expansion and working capital requirements.

• Induct fund at low cost. retail. media.main public financial institution in VC funding • SIDBI Venture Capital Limited . share the risk and provide management and technology upgradation support • The Small Industries Development Bank of India . pharmaceuticals.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.

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structure and involvement • Information concerning the product or service. size. Business must fit their investment criteria • Differing operating approaches . specialization.What do VCs look for • Higher return on their investment. the market analysis. stage of the company. company operations. the investment required and financial projections and management team • A good business plan is a pre-requisite.location. .

• SeedFund • Upstream Ventures Benefits of Venture Capital to SME’s • Injection of Long Term equity Finance • VC-a business partner.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). sharing risks and rewards • VC-provides assistance and practical advice to the company • VC-leverages his networks and contacts to add value to the company .

How Does it all work………???? .

Strategic Sale.5 years of investment Provide a profitable exit to investors by way an IPO. established performance record and a high degree on integrity Sustainable competitive advantage Scalability of operations Potential for above average profitability leading to attractive 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 Expectations of the VC of an SME? • . the VC gets in touch with the SME • • • What are the key investment criteria for VC? • • • • • • The Company should have high growth potential -scale up sufficiently within 3 .SIDBI-Funds Issue Process 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. etc The Company at the time of investment should be unlisted. Mergers & Acquisition. A strong committed management team.

On an average it should be possible to complete the full cycle of processing of the proposal including due diligence.12 weeks. 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. A VC also co-invests with other VC funds. sanction.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. between 8 . . How long does it take VC to make an investment or participation decision? What are the instruments of finance by which VC investment is made? Investment is made by way of equity and equity type instruments. • All proposals are reviewed by an Investment Committee (IC) which also involves a presentation by the promoters. documentation etc.

Strategies Adopted by the Units for Revival ₹ Diversification − Some units change the product line since demand for the existing product was inadequate. − Units can diversify their attention from exports market to local market or vice versa if they feel that the demand for either is declining. is found uneconomical. materials and workforce) are often utilized. existing resources (machineries. . For this kind of diversification. − The other type of diversification is of shifting from manufacturing activities to job-work. the manufacturing as an activity. This need is felt necessary when.

the cost reduced.₹ Technical Aspects Rejection of finished goods was on the higher side. The required machinery was not made available in time. With the introduction of improved technology. It was decided to modernise machineries. the unit became sick but the entrepreneur decided to go in for a second hand machinery. Consequently. . cost of production was on the higher side. In one unit.

family members taking the entrepreneur's place can help revive the units. the unit was revived. Often. if the incoming entrepreneur is highly competent and adopted modern methods of management. bank withdrew the case from the court and rehabilitated the same.₹ Change of Management - - Change of management as well as ownership is inevitable on the death of an entrepreneur. But. There was a positive response to the efforts put in by the new management. Or. Bank filed the court case for the recovery since the management was not competent. a newly inducted management decided not to accept any remuneration from it until bank loans were fully repaid. . when the management was changed. Thus. In one case. professionals can be introduced to revive the units.

Productivity of the workers was very low.Workers went on strike for a long time due to unsatisfactory attitude of the entrepreneur. In the same case. . the concerned court authorities granted retrenchment of workers which also proved to be a useful remedy for revival. Consequently. the productivity of workers improved significantly. His son adopted a different approach. Eg. The entrepreneur rightly decided to offer incentives on the basis of output.₹ Labour .Borrowal of funds from friends and relatives to overcome sickness due to shortage of funds. - - ₹ Finance . Revival of Hindustan Antibiotics Ltd.

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 .

Gujarat • Established in 1996 • Develops products and systems that help bridge the technology gap in the dairy industry • Helps in improvement of effectiveness and efficiency of milk collection and processing . Vidyanagar.Case: Shree Kamdhenu Electronics Private Limited • Location: Vallabh.

Case: Shree Kamdhenu Electronics Private Limited (cont'd) • Problems: Saturation. Systems and processes • Outcome: Akashganga Process. Overall Growth . Debt Ridden • AAVISHKAAR’S ROLE – April 2003 invested of 18 lakhs to gain 26. Reduction in Risk.62% equity – Improving financial discipline and cost control – Improvement of Management.

a high degree of commitment and professional approach is needed to regain lost strength.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. ₹ Strive to revive each eligible sick unit as early as possible to make our industrial economy more healthy. ₹ There are already many success stories in this regard. . ₹ When these expectations are fulfilled. the present rate of success in rehabilitation can be enhanced effectively.

Thank you! Questions? .