If you are an entrepreneur or own a small and medium enterprise (SME), the recently approved National Manufacturing Policy is set to make life a little easy for you. If the policy sets out to do what it has stated, you will see reduced burden of regulatory compliances, have better access to technology and finance and enjoy select incentives.

Here's a lowdown on the Manufacturing Policy's initiatives for the SME sector, which accounts for 45 per cent of the country's output and 40 per cent of exports. These initiatives, together with the government's mandatory procurement policy from SMEs and the draft FDI Retail policy's insistence on 30 per cent procurement from small industries may cumulatively help improve the prospects of small companies and entrepreneurs.

More funding options

While the promoters of micro and small enterprises have limited muscle to raise fresh equity, borrowing from banks has never been easy either. Micro, small and medium enterprises (MSMEs) accounted for just a fourth of the outstanding bank lending to manufacturing industries as of September, despite contributing over 40 per cent to the nation's output. The policy has, therefore, come up with a few innovative ways to improve capital infusion.

For one, any capital gains arising from sale of property or a plot by an individual will not be taxed if the money from such sale is invested in a manufacturing SME start-up for purchase of machine or equipment. This effectively incentivises aspiring entrepreneurs to channelise money from sale of, say, an ancestral property or land.

Two, the policy will encourage venture capitalists (VC), who are typically willing to assume the risks arising from investing in SMEs. The policy will grant a tax pass-through status to venture capital funds registered with the SEBI. This simply means that the income from the venture will not be taxed with the VC firm; it will only be taxed in the hands of the VC investors.

To provide sufficient muscle for VCs to invest in small companies, the policy will seek out RBI's help to allow banks to invest in VCs which focus on SME investing. A similar move on the insurance side, by tweaking IRDA norms, is also sought, to enable insurance companies to invest in such VCs. Such a move, if made possible, could provide more confidence for VCs to invest in SMEs.

The policy will also help improve the credit channels available to SMEs. It will explore the option of including manufacturing SMEs in the ‘priority sector' lending category of banks. How will this help SMEs? Granting the priority sector status will require banks to mandatorily allocate a certain proportion of their total lending to this segment, thus improving borrowing prospects of SMEs.

If that is on the finance side, the policy will also give a boost to SMEs in using improved technology. SMEs will have access to a patent pool created by the government through the Technology Acquisition and Development fund. SMEs may also choose to get reimbursement for technologies that they acquire, up to Rs 20 lakh.

Land, which is a critical resource for SMEs to carry out their manufacturing business, is too expensive especially in areas which have infrastructure access. The proposed clusters of special manufacturing zones may, if the state concerned chooses to, allot a certain percentage of land in the zone to MSMEs. Such space, whether leased out or sold can be expected to be fairly priced compared with the exorbitant market rates. The pooled infrastructure facilities already available in such zones will also reduce fixed costs for small players.

The policy also set outs to reduce the burden of SMEs in complying with regulations by setting up organisations that will look into compliance of routine issues such as Provident Fund, Employees' State Insurance, pension schemes and so on, for a small fee.

Opportunities for small companies

While the above are some of the direct benefits that the Manufacturing Policy expects to provide, budding entrepreneurs will also do well to look out for business opportunities arising from this policy.

Industries that make LED, solar energy equipment, fuel efficient transport system, IT hardware, IT-based security system and hybrid electric automobiles will stand to gain from the government's procurement policy, provided there is local value addition/use of local technology by the companies. An uptick in demand arising from government procurement may provide room for more players in these industries.

The policy will also provide incentives for production of certain equipment and devices. This will include equipment to reduce energy consumption such as energy conserving lighting technologies, smart grid solutions equipment to produce renewable energy from solar, wind, hydro or geo thermal sources. Production of energy storage systems for use with electric or hybrid motor vehicles, besides pollution control devices and those used for water conservation will also be encouraged.

An incentive of 10 per cent subsidy on capital cost and five per cent interest reimbursement on nominal rates charged by lenders will be given. While these are not necessarily targeted at SMEs, some of the businesses may well be compact enough and fit an SME bill. Together with the thrust on increased financing options, these technology-intensive industries may become more penetrable segments for SMEs.

Related Topics
comment COMMENT NOW