A Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of ₹20,000 crore, and credit guarantee corpus of ₹3,000 crore is being set up to finance small business units, with a focus on SC/ST/OBC business owners. An electronic receivables settlement system will be brought in to help SMEs receive their dues more quickly from larger firms.

A new bankruptcy law will be introduced, in place of the Sick Industrial Companies framework to allow businesses to close down if unviable. Private equity and venture capital funds have been granted greater clarity on taxation. Taxes on the royalty and technical fees payable by Indian firms to foreign partners have also been slashed from 25 per cent to 10 per cent to help start-ups access technology more easily.

Background

Micro enterprises find it extremely hard to secure bank funding or indeed funding from any formal sources due to perceived high risks, irregular cash flows from business operations, lack of credit ratings, and other disadvantages. The bulk of these firms are either funded by the owner’s capital or borrowings at usurious rates from informal money lenders.

While banks are nearly absent from this segment, NBFCs and Microfinance institutions lending specifically to these businesses have been scaling down their lending due to tightening regulations. Micro enterprises are also hamstrung by a lack of bargaining power vis-a-vis the larger firms which buy their goods and services and suffer long waiting periods for settlement of their legitimate dues.

Private equity and venture capital funds, particularly domestic ones have been a good source of funding for start-ups in select mid sized industry segments. However, the investment flows into these PEs have been impacted in recent years by an unfriendly tax regime. Currently, most categories of venture capital funds enjoy neither the tax pass-through status of mutual funds, nor the tax exemptions granted to Foreign Portfolio Investors. Investors in these funds often suffer tax at the highest tax rates due to this uncertainty.

The verdict

While the MUDRA scheme appears good on paper, it takes a very indirect route to funding micro enterprises, as its capital will be deployed mainly in refinancing Microfinance companies, who will make the ultimate lending decision. The venture capital fund for start-ups, with an initial corpus of ₹10,000 crore, announced in the last budget is yet to be operationalised. The electronic receivables system may introduce transparency into micro enterprises dealings with their bigger clients. But greater public reporting from the larger firms on their SME dues, may be essential to ensure better accountability on prompt settlement. Though it has been packaged as a measure to help startups, the tax cut on royalty and technical fees from 25 to 10 per cent, as of now, seems designed to benefit larger multinationals listed in India (they are the biggest royalty/fee payers to their parents) more than small enterprises. The tax clarity for PE and venture funds is welcome and may help drive greater flows into these funds which can be channelled into start-ups.

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