Venture Capital for Sick Units and SMEs

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

SMEs (Small and Medium Scale Enterprises

Companies whose personnel numbers fall below certain limits.

Responsible for driving innovation and competition in many economic sector Unemployment can be significantly reduced with the help of SMEs Contributes 9% of GDP and most crucial link between India's economic growth and socio-economic progress

SMEs significance

Indias most successful SMEs

* Vadodara-based Ankur Scientific Energy Technologies (revenue below Rs 50 crore) small-scale category *Delhi based-DFM Foods-(Rs 50- Rs 200 crore) medium-scale category.

Definition of SMEs
Service Enterprises Investment in Equipments
Description INR

Manufacturing Enterprises Investment in Plant & Machinery

Description INR

Micro Enterprises Small Enterprises

upto Rs. 10Lakh

Micro Enterprises Small Enterprises

upto Rs. 25Lakh

above Rs. 10 Lakh & upto Rs. 2 Crore

above Rs. 25 Lakh & upto Rs. 5 Crore

Medium Enterprises

above Rs. 2 Crore & upto Rs. 5 Crore

Medium Enterprises

above Rs. 5 Crore & upto Rs. 10 Crore

SME Overview
29.8 Million MSMEs 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 MSMEs are unregistered

Challenges to SME Sector

SMEs face a number of problems
absence of adequate and timely banking finance, 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

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.e. 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 substandard is reduced in due course; 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; and c) The unit has been in commercial production for at least 2 years.

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. 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, having investment in plant and

machinery up to Rs.5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh, the Branch Manager may take a decision.

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. Opportunity should be given to the unit to present the case before the next higher authority. Decision should be taken only after giving an opportunity to the promoters of the unit to present their case. A committee approach comprising of senior officials of the bank is needed for sick units

declared unviable, with credit facilities of Rs.1 crore and above.

The above process should be completed in a time bound manner not later than 3 months. 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

VC for Sick Units, SMEs

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

Venture Capital for MSME in India

Venture Capitalists reluctant to invest in MSEs Change in VC scenario Expansion in reach in sectors such as clean energy, healthcare, pharmaceuticals, retail, media. Induct fund at low cost, share the risk and provide management and technology upgradation support The Small Industries Development Bank of India - main public financial institution in VC funding SIDBI Venture Capital Limited

What do VCs look for

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

VC funding SMEs- scenario in India

Popular Venture capitalists funding SMEs in India SIDBI Venture Capital Limited (SVCL) Helion Venture Partners Erasmic Venture Fund(Accel India Venture Fund), SeedFund Upstream Ventures Benefits of Venture Capital to SMEs Injection of Long Term equity Finance VC-a business partner, 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????

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 VCs email id. Based on a preliminary assessment of the business plan, 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 - 5 years of investment Provide a profitable exit to investors by way an IPO, Strategic Sale, Mergers & Acquisition, etc The Company at the time of investment should be unlisted. A strong committed management team, 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?

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. All proposals are reviewed by an Investment Committee (IC) which also involves a presentation by the promoters. On an average it should be possible to complete the full cycle of processing of the proposal including due diligence, sanction, documentation etc. between 8 - 12 weeks.

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. A VC also co-invests with other VC funds.

What is VCs 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.

Strategies Adopted by the Units for Revival

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

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

introduction of improved technology, the cost reduced.

 Change of Management

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

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

Finance - Borrowal of funds from friends and relatives to overcome sickness due to shortage of funds.

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

Case: Shree Kamdhenu Electronics Private Limited

Location: Vallabh, Vidyanagar, 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

Case: Shree Kamdhenu Electronics Private Limited (cont'd)

Problems: Saturation, Debt Ridden AAVISHKAARS ROLE
April 2003 invested of 18 lakhs to gain 26.62% equity Improving financial discipline and cost control Improvement of Management, Systems and processes

Outcome: Akashganga Process, Reduction in Risk, Overall

Growth

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

Thank you!

Questions?