UNDER COVER
Risk cover for SMEs is now the subject matter of insurers’ focus
Small business insurance covers are back in focus. With the slowdown hitting them hard,
SMEs are even more susceptible to financial loss than before. It all started with the
meltdown that crippled their margins and bought many SMEs to a standstill. Client
defaults and lack of credit literally left them sandwiched and devoid of options.
Naturally, this affects the mindset of small business owners and they try to cut down on
costs, including on insurance premiums. A senior private insurance company
spokesperson who wished not to be named says, "Insurance policy renewals have been
affected, as SMEs are opting for fewer covers in order to save on costs. Our agents are
negotiating with them and trying to make them understand that if you don't cover the real
risks your business faces, losses arising from lack of insurance can be compounded in the
current situation."
For example, a small business dealing in perishable goods based out of a low-lying area
in Mumbai would always do well to have cover against flooding due to heavy rains.
Similarly, as the Satyam episode proved, having management liability insurance can
make a big difference, and even more so if the company is in a high-risk arealike
healthcare or pharma. However, awareness continues to be a challenge for insurers, as
policies are still 'sold and not bought' in India. Rahul Aggarwal, founder of Optima Risk
Management Solutions, estimates that though 60% of corporate insurance policies are
today sold to SMEs, the premiums from this segment only account for around 30% of
revenues.
General (non life) insurance premiums—such as fire, property, cash, etc.—are set to
grow at approximately 20% over the next six years and touch Rs 1 trillion by 2015,
according to a recent ASSOCHAM-United India Insurance Co. report. However today, at
Rs 310 billion, India's general insurance industry still lags behind many other economies.
And with small businesses comprising a large segment of Indian industry, which is the
biggest consumer of general insurance, SME will clearly be a priority area for insurers
going ahead.
After de-tariffing began in 2007, there was aggressive selling of insurance in the
decontrolled environment by insurance companies and banks. From the insurer's point of
view as well, SME has become an extremely lucrative segment. "The perception that
insurance is a cost rather than a necessity still exists among entrepreneurs. However,
SME insurance is the one of the fastest growing segment in general insurance after health
and auto. Also, the increased focus by financial institutions on this segment has led to
insurance being compulsorily mandated and a gradual rise in demand is visible," says
Gaurav Garg, managing director, Tata AIG General Insurance. Private insurers like Tata
AIG and Bajaj Allianz have started planning 'bundled' policies for the SME sector. Bajaj
Allianz has already sent their proposed covers to the regulator IRDA for approval.
The range of policies for smaller businesses is huge. In today's business climate there is
no shortage of insurable risks. Aggarwal says, "I believe that credit insurance is
extremely important today. Companies' cash flows have been hit because of numerous
payment delays and defaults. A large firm has a certain cushion to protect itself, but an
SME doesn't have this luxury. Credit insurance can indemnify the SME from defaults."
Other insurance covers that have come into focus following the slowdown are liability
covers and group health insurance. Liability cover helps a business protect itself from
losses arising out of a lawsuit filed by aggrieved parties.
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In some cases, it is a prerequisite when a firm deals with certain customers. For example,
travel portal 90di.com had to buy a professional indemnity liability policy worth Rs 1
crore from Oriental General Insurance before working on a recent project for a software
giant. Says Abhinit Kumar, founder, 90di.com, "Certain IT clients insist their vendors
have liability insurance, so that if a technical error by the vendor costs the IT firm's
customer, they (the IT company) are protected from coughing up legal damages."
Group health cover has also become especially important. Salary raises are expected to be
virtually nil in many industries this year. And as medical bills remain a constant worry
for most salaried people, a company-sponsored health cover is a great way of showing
solidarity with one's employees. This is more true for an SME that needs to hold on to its
people but cannot give them the kind of perks and cash incentives that used to be the
norm.
In India, insurance is an imperative and not just a desirable factor. Competition is fierce,
credit avenues are getting squeezed and customers in India are learning what a useful tool
litigation can be. Unlike a few years ago, an SME cannot afford to scrimp on premiums
and hope for the best. However, a smaller company has some natural limitations. It
doesn't have the time or manpower to cope with high premium costs and paperwork. The
management needs to focus on critical growth areas instead of keeping track of when the
policy is due to be renewed. Having realised this, insurers have modified their offerings
to suit SMEs. The trend now is to offer 'bundled policies', wherein several different kinds
of insurance apart from the usual fire,
marine and burglary (such as fidelity, personal
accident, public liability, cash in transit, keyman insurance, etc.) are knit together in a
package. The more covers you opt for, the greater the discount you are entitled to.
There are newer forms of insurance emerging as well. Though fire, motor and
engineering insurance still comprise the bulk of policies taken out, policies related to
public liability, keyman insurance (indemnifying business against loss arising from
departure of a business partner) and credit insurance are getting increasingly popular as
well. Says TA Ramalingam, head-underwriting at Bajaj Allianz General Insurance, "The
awareness about these unconventional covers is slowly increasing. We are pushing them
actively through our agents and bank partners. Entrepreneurs have realised that certain
eventualities, such as a robbery of cash/goods while in transit or losses arising from the
death of a key management figure or partner, are very real fears and need to be insured
against." Aggarwal of Optima agrees but adds, "There is still some amount of incredulity
when I tell the client that he can actually insure his business against losses arising from
theft by an employee or inability of a debtor to pay for goods or services rendered. So its
a slow process of education." Indian entrepreneurs are slowly getting to grips with these
new forms of insurance, but that can also lead to some comic moments. "People say, give
me insurance against business collapse. At other times, entrepreneurs want us to
reimburse them if the company doesn't reach a certain revenue target within a certain
time frame. We have to explain that we can only come into the picture when the risk is
genuinely insurable!" smiles Ramalingam. Allianz offers two main covers - shopkeeper
insurance and an office package policy. The former is for small ventures whose assets are
insured for upto Rs 20 crore. The latter insures office equipment, cash, appliances etc.
and is popular with service providers such as architects, doctors, lawyers, etc.
Though small businesses in India typically lean towards public sector insurers because
they believe that PSUs have their 'interests at heart', some companies balance the best of
both worlds. Food retailer Spinach approached a private insurer, Cholamandalam, for
shopkeeper insurance. It also has a relationship with a PSU insurer for insuring its capital
goods. "Eventualities like floods and even terrorism are realities you have to deal with in
a metro like Mumbai or Delhi," says Pushpamitra Das, group chief financial officer, retail
business, Wadhawan Food Retail, which owns the Spinach brand. He adds, "Apart from
insuring ourselves against these risks, we have also gone in for a comprehensive group
health policy. All our employees have a free insurance cover of Rs 5 lakhs each. Since
the sales staff in any retail outlet tends to come from the lower economic strata of society,
we believe that it is up to us to look after their interests." For valuation of the goods
covered by insurance, WFRL approached an insurance broker who considerably
simplified matters. "Our business is retail, so we left the insurance part of our business to
the specialists," confides Das. Experts believe that this is extremely important for all
SMEs. It is well-known that small sized enterprises are often arm-twisted by insurers into
accepting diminished settlement sums, as they lack the size and volume to get their way
from the insurer during claim time. To avoid this, it is best for an SME to associate itself
with a brokerage that will be able to simplify a lot of matters and give it a better range of
options.
Nikhil Menon
--------------------
Preparing For Change
Credit availability to MSMEs is now easing
In times of global economic turmoil, MSMEs have reason to hope for better times ahead.
That is the message, which came out loud and clear from Planning Commission deputy
chairman Montek Singh Ahluwalia at the recently concluded ET India MSME Summit in
New Delhi. "You cannot have a healthy industrial sector without a healthy MSME
sector," he said.
Acknowledging that the biggest bugbear for small businesses is credit availability and
banks' growing reluctance to lend to them, Mr Ahluwalia said that the allocation of a Rs
7,000 crore corpus to SIDBI for refinancing and restructuring of bank credit to SMEs, is
starting to have effect: "The impression I have got after talking to bankers is that in the
last few weeks, availability of credit to SMEs is easing. In October and November, it was
not easy to get credit from banks but in January that changed."
Mr Ahluwalia emphasised that the government realizes the importance of clustering and
asked MSME representative bodies to support the government's efforts on this front. "It is
lot easier to deliver services, both on the government and the private sector side in a
cluster. It will be good to get feedback on the cluster policy from industry associations,"
he said.
He invited the Economic Times and the MSME fraternity to come up with a list of
measures that the sector urgently needs and how government action could help. "We at
the Planning Commission would love to receive such a list." Exhorting small businesses
to take advantage of the current situation, he suggested that periods of economic
slowdown are opportunities to rethink, restructure and re-organise. "There is no doubt
that the world will recover. When we are back on the growth path, we should be leaner
and meaner that we entered the downturn," he said.
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Page 2
No Limits To Ideas
Collaborative innovation on multiple fronts is crucial to realise the wealth of ideas
residing among SMEs, says Prof Anil Gupta
Given the economic distress worldwide, a sector which provides maximum employment
cannot be left to fend for itself without a major transformation led by the entrepreneurs,
policy makers and other support organisations. There are several innovative options that
one can try at four different levels:
Stimulating demand
The demand in different group of industries will have to be stimulated using different
instruments and channels. One way is by using credit to overcome the resistance for
consumption among those segments that have regular income. For instance to stimulate
demand in solar energy or other energy conservation products, incentives could be given
to organised sector employees. However, unless market for resale is created, demand
may not stimulate.
Some of the ways of reducing cost are:
a. Pooling the under utilised manufacturing/fabrication capacity: Distributed
manufacturing by pooling the under-utilised capacity of those whose cost is less than the
lead manufacturers after taking into account the cost of logistics and transportation, offers
one possibility. Commercial banks having data of such enterprises in different branches
may join hands in creating knowledge network among the SSIs.
b. Dematerialising the economy: Doing an energy and material audit of the current unit
to identify the redundancy, inappropriate shop floor design, sourcing and procurement
procedures, waste reutilisation processes, technological bottlenecks, etc. Students of
engineering colleges can be given crash course in the subject.
c. Creating industrial symbiosis: Treating clusters as ecosystems and trying to find uses
of waste of one unit in another for which it becomes an input. Erkman and others had
saved enormous cost in Tirupur by finding entrepreneurs to harness the heat and recycle
the hot waste water after processing as input for other units.
Upgrading technology and skills
One assumes that during the economic downturn, environmental and energy concerns
could not become the priority. My contention is that if competitiveness is closely tied to
the conservation of energy than the true goals of competitiveness and conservation can
converge.
There are about six lakh technology students who spend at least six months in their final
year for doing a project. And yet, nobody knows the fate of these projects. The grassroots
innovations already developed in the informal sector also do not get an opportunity for
being valorised by these students. By creating a techpedia, we will solve these problems
and also identify the centres of excellence among thousands of B or C level technology
institutions (apart from similar hotspots in A Class institutions). Incentives and awards
can be given to the students who find low-cost process and product options for the
industry or add value to grassroots innovations or develop business plans to become
entrepreneurs based on technologies developed by them or other students.
Stimulating innovation
Customisation offers an opportunity for small-scale shoemakers through online portals.
This will help customers send a few key dimensions specified on the portal and they
would get a customised shoe of the design and hues delivered to them. Customers get
better comfort and the industry gets a new business opportunity. Similarly in the pharma
sector, small-scale industries can easily enter into the nutraceutical business, which has
enormous scope worldwide. In the process, lot of grains such as minor millets will come
in demand because of higher fibre and mineral content. Some other ideas are:
a. Creating web presence for at least ten million MSMEs in twelve to fifteen months:
Ministry of MSME has taken several very imaginative steps in recent past to increase the
web presence. The industrial survey provides some information, which can be sanitised
and offered to various portals who are willing to provide free of cost service to the SMEs
for one year. It is hoped that once these units start getting orders within the country and
outside, they might be able to afford the maintenance of their presence on the web.
National Small Scale Industries Corporation (NSIC) has already started pooling orders
and distributing the same to MSMEs.
b. Consulting, contracting and curative services in rural areas for stimulating business and
growth: Way back in 1983, in a national seminar on rural credit policy chaired by then
Deputy Governor, Reserve Bank, I had suggested that lot of small farmers and artisans
needed services which involve tremendous transaction costs at the individual level. By
pooling their demand, newer opportunities for growth could be generated. Nothing much
has happened since except in the insurance sector and micro finance. The idea is that if
every tractor, thresher or pump set owner has to get their machinery serviced before the
season to prevent breakdowns and loss of work, the cost will be much higher. However,
if service contracts can be offered through banks, which may have financed these units or
otherwise, one could reduce the per-head cost drastically, improve efficiency and
conserve energy.
c. Converting crisis into opportunity by utilising skills of millions of industrial workers
returning to rural areas: Such an opportunity may never arise again when because of
unfortunate economic depression so many trained and skilled workers would be available
in rural areas but without proper use of their skills and industrial attitude. This is the time
for major agro industrial and agri businesses to invest at least ten to twenty thousand
crores in new small ventures. The crisis could then be overcome faster. The returnee
workers could become the hub of such reconstruction efforts. Likewise, massive rural
sanitation and health education campaigns can be launched on the shoulders of retrained
and re-tooled workers.
Creating new partnerships
It is ironical but true that there is no S&T (Science & Technology) policy for MSMEs
focusing on their problems and emerging challenges in economically depressed times.
The Ministry of MSME is seriously considering ideas about innovation and R&D
promotion fund to stimulate the growth in the sector. We need several urgent
interventions for revitalising MSMEs:
a. Technology audit by formal R&D institutions: All the major labs of CSIR, DST, DBT,
petroleum, coal and other sectors including ICAR should be asked to take up technology
audit of the MSMEs in their command areas by constituting special teams comprising
retired scientists. This will not disrupt their ongoing research programmes and at the
same time, life long wisdom of the senior scientists and technologists would be available
to the MSMEs.
b. National Innovation and R&D Fund for MSMEs: Specific research projects emerging
from such audits should be supported within a month of submission through a dedicated
fund called as National Innovation and R&D Fund for MSMEs earmarked for the
purpose. This Innovation Fund should also support the technologies developed in
MSMEs and at grassroots level.
c. Awards for Innovations by/for MSMEs: Karnataka Council for Science and
Technology and Indian Institute of Science, Bangalore has one of the most outstanding
programmes for mentoring promising student projects. Every year, a large number of IISc
professors personally scrutinise the best projects supported under the scheme and give
awards. There is a need to replicate this programme in every state with a sharper focus
on industrial and rural applications.
d. Dedicated R&D Centres for various industrial clusters: There is a need for focused
R&D centres, say for ceramics, herbal drugs, auto parts, etc., devoted to address MSME
problems. Additionally, existing facilities in public, private and civil society sectors
should be expanded to provide time bound dedicated support.
There are a large number of other ideas that need to be tried in close consultation with
MSME Associations and knowledge networks. At times like these, we have to start
imperfectly and improve the ideas through constant feedback and learning as we go
along. India should also consider the difficulties of other developing countries and not
use protective policies to prevent small-scale industries in those countries to be adversely
affected. In the process, we would have taken the leadership that many western countries
through protective policies are unwilling to take. It will also make our MSMEs more
efficient and globally integrated. A G2G (Grassroots to Global) perspective developed by
the Honey Bee Network can provide a viable platform for linking creativity and
innovation in the unorganised sector as well as MSMEs with the global markets. The
experience of National Innovation Foundation (NIF) can be drawn upon and synergy can
be built among different sub-systems of innovation in the near term.
I hope that MSME associations will see the writing on wall, and trigger cooperative,
collaborative, creative, and compassionate innovations for their own survival but also for
better conservation of environment and improved life of workers either laid off or under
the threat of the same. At stake is social peace and stability.
.....
MSMEs are still on shaky legal grounds
The Indian MSME faces major challenges when it comes to legal issues. Even as
constructive steps have been taken towards promotion and development of MSMEs, the
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 requires
certain legislative reforms, said Rohit Kochhar, managing partner at law firm Kochhar &
Co, while speaking at the ET India MSME Summit. "In its current form, there is a
yawning gap between the MSMED Act and its implementation," he added. There are
several glaring discrepancies between the provisions of the Act and its implementation.
Many states have not established the required councils and those that are set up are barely
functioning causing MSMEs to run from pillar to post to realise their unpaid receivables.
Though the Facilitation Council envisioned under the Act provides a time limit of 90
days for completion of proceedings, this is seldom adhered to in practice thereby
rendering the provisions of the Act meaningless.
One way is through factoring, which would have been a more effective mechanism but
for want of legislative support. "Sadly, the relevant proposed legislation i.e. "Factoring of
Debt due to Industrial and Commercial Undertakings Bill 2000" still remains a pending
draft. There is a need for enacting a factoring legislation, which would clearly define the
legal relationship between the factor and the seller's business unit. Such legislation would
also encourage banks and factoring companies to provide factoring services more
liberally," said Kochhar.
Another key challenge for SMEs has been getting credit at lower interest rates from
banks and financial institutions as compared with their large counterparts. "There is a
need for SMEs to be organised in the form of LLPs (Limited Liability Partnership) for
them to attract investment and credit facility at a low rate," says Amit Agarwal, partner,
SN Gupta & Co. The LLP Bill, 2008, which was passed by the Rajya Sabha last October,
is a much awaited legislation that should provide required breathing space to such SMEs
who have till date not been able to avail the benefits of corporate structure. The SME
sector has been given special protection under the Industrial Policy of 1948, wherein with
RBI guidelines, banks and financial institutions are required to give loans (lesser in
amount) to the sector on a priority basis. However, the advent of LLP would give viable
option to the existing SMEs in the form of an LLP, as the security creation will get easier
in case of any loan given as LLP would be a separate entity altogether than the partners
who constitute it.
"However, it remains to be seen whether the RBI would still consider SMEs who have
acquired the status of an LLP as priority sector to be provided with easy loans. Banks and
financial institutions will be able to enforce the securities created while granting the loans
specifically as the LLP can be sued being a separate legal entity," says Satwinder Singh,
partner, Vaish Associates. Small retailers, bullion traders, and jewellery retailers will all
be benefited by adopting LLP as they now have an option to convert their family owned
partnership into a corporate LLP structure. This new Act would also benefit the services
sector and professionals like chartered accountants, company secretaries, and lawyers.
Monica Behura
----------------------
Page 3
In Line with Online
Mobile and Internet advertising firms discover small businesses for growth
While it is still recession for most advertisers and agencies are trying hard to cut costs,
those dealing with digital advertising have a reason to smile. Digital advertising is the
next big thing as it is measurable, focused, and cost effective, a great combination for
micro small and medium enterprises (SMEs) to cash in on. Aashish Solanki, founder of
Bangalore-based Net Bramha Studio is one of the companies, which does digital
advertising for SMEs and builds their online presence from scratch. "We work for small
companies like Game Kraver, My Piction and Nemo Solutions, helping position them and
conducting viral marketing campaigns. It helps them get better RoI," says Solanki.
Harsha J is grateful to the downturn. As advertising budgets come under intense scrutiny
in a depressed market, his Bangalore-based web marketing firm Adventure is making the
best of the situation, convincing his clients to increase their online and mobile spends.
Adventure designs web-based marketing material such as e-mailers and websites, along
with developing and running Google AdWords campaigns for its clients. "Almost two-
thirds of our clients are thinking differently now. Earlier the focus was more on
conventional mass media but they gradually realised that online and mobile advertising
could be effective and measurable modes to reach their desired target group. We have
seen a growth of at least 10-15% over the last couple of months," he says. It's not hard to
see why. Compared to television, print, radio and even out-of-home advertising, Internet
and mobile-based communication is more easily measurable and interactive. And while
the share of such media in overall budgets is still small, it's growing significantly.
Recently Lintas Media Group and Pinstorm organized a panel discussion called 'Is pay-
for-performance advertising the answer?' where the members were of the opinion that
online advertising is a boon to the SME sector. The main reason for this view is the lower
cost of advertising and the wider reach that it offers.
Digital marketing firm Pinstorm estimates that the mobile advertising industry including
WAP and SMS has grown from Rs 20 crore in 2006-07 to Rs 50 crore in 2008-09. And
while the digital advertising industry has not observed a dip, its current rate of growth at
24% is slower than the anticipated 35%. According to Mahesh Murthy of Pinstorm, "the
share of online advertising for small Indian companies is 25% and is growing at 10%
year-on-year."
Accountability is one of the biggest draws of such tech-based media. "Today every
advertiser wants to know where each dollar is being spent and the result of it. In a
recessionary time, advertisers move money to more measurable mediums," says Naveen
Tewari, CEO of mKhoj, a mobile advertising firm started two years year ago. "We have
grown 10 times in the last six months and expanded to 25 countries."
"Around 70-80% of a brand's audience can be reached on the Internet and hence it is up
to advertisers, agencies and publishers to churn out innovative ways to address the users
effectively. Only then we can hope that the medium can grow faster," agrees Rahul J
Jethva, CEO of Spring Communications. "There's a 30-35% cost saving in advertising
online compared to advertising in print," says Subhash Lal of Thinkingdesign, a Delhi-
based startup. Launched five months ago by Lal, an NID graduate, the firm provides
brand identity, language and strategy services to clients in the fashion, home decor and
jewellery businesses. "The downturn forced three or four really good clients to put their
plans on hold; others, started insisting on web advertisements instead of print to save on
costs," Lal says.
"Even 3G is round the corner, which would increase activity in this space. With the
mobile handset functioning almost like a computer and more user friendly applications
available, advertisers see an opportunity for their brands here," says Prathap Suthan,
NCD, Cheil Communications.
According to Vinod Thadani, regional head, mobile, Group M, South Asia, "The reach
and engagement of mobile is an important factor for this medium. Initially it was used
more by the finance and travel companies but in 2008 other sectors like lifestyle, apparels
and FMCG also joined in. At least 10-15% of digital ad budgets are now planned for the
mobile medium," says Thadani.
Suresh Narasimha, co-founder of TeliBrahma, a provider of Bluetooth-based
communication service, says the penetration of Bluetooth-enabled mobile phones is
increasing. He says acceptance of Bluetooth advertising is 10-15% in retail locations, 30-
40% in hangout places and more than 60% in events. "There is more value in digital
media, and brands can benefit if they can integrate planning and measurement," he says.
The company itself does a lot of online advertising for its own brand.
Online advertising is also fast catching up among the biggies. Samsung's director
marketing for South-West Asia YY Kim who's sold on the benefits of this new age
medium says: "Online advertising works very well for our technology-based products
like Mp3 players, notebook PCs, mobile phones, LCD and Plasma TVs. Our online
campaign for notebook PCs in November 2008 was a success. It doubled visitor traffic to
one lakh in the following month," he says. Currently, online advertising is 1% of
Samsung's ad spend in India and is likely to grow to 2% this year.
Abhijeet Mukherjee & Ravi Teja Sharma
........
Body of Evidence
Introduction of laws on insolvency and bankruptcy will induce risk taking in enterprise
Temporary stresses in business and also eventual closure in many cases are inevitable in
the era of global competition. A fair and effective mechanism for insolvency and
bankruptcy, therefore, is considered a prerequisite for inducing risk taking and enterprise
creation in an economy.
The two terms Insolvency and Bankruptcy, though generally used together, are not
synonymous. Bankruptcy represents body of law designed to protect interests of creditors
allowing confiscation and distribution of debtor's assets among creditors. The second
body of law purported to protect debtors, who would voluntarily declare insolvency, cede
all their assets to the court, and be discharged from the 'debtors' prison'. In practical
terms, insolvency means that net assets at fair market value are less than liabilities which
can necessitate the liquidation of assets through a court-ordered bankruptcy process.
For bankruptcy, there is no comprehensive policy or law in India. When a business fails
there are three types of creditors whose liabilities need to be settled: Statutory dues (such
as central and state taxes, dues of labour, of utilities such as electricity, water, finance by
state institutions etc.); dues payable to Banks and Financial Institutions; and dues to the
sundry creditors (buyers, suppliers and others). Respective Acts provide for appropriate
legal recourse for recovering statutory dues from individuals, firms or companies
prescribing fines, attachment of assets and also, in most cases, imprisonment. The final
recovery procedures, whether on behalf of central or state governments, are effected by
state governments through their administrative machinery.
In Indian mechanism there are specific problem areas with regards to small enterprises.
The first problem is that two set of institutions: the statutory authorities on the one hand
and banks/ financial institutions on the other, set out to recover dues under different set of
laws from the same entity simultaneously. Most of the provisions for recovery of
statutory dues are through mechanism under Land Revenue Acts in the States. Typically
the process entails arrest and detention of the person and attachment and sale of debtor's
assets.
Secondly, the banks and financial institutions have several options for restructuring a
stressed account and recovering their dues: the State Level Inter-Institutional Committee
(SLIC) route for revival or restructuring when more than one FIs are involved or 'One
Time Settlement' (OTS) or restructuring of the failed/'sick' as per RBI guidelines or
finally recovery of dues through the DRT Act and the SARFAESI Act. However, there is
no institutional mechanism to guide the process. The report of 'Working Group on
Rehabilitation of Sick SMEs' (RBI, 2007) highlights the shortcomings of the current
dispensation succinctly. It states: "..the normal action plan of any banker when a small
unit is in stress is to stop operations in the account, serve a recall notice and initiate action
under SARFAESI Act. Efforts for rehabilitation, if any, are ad hoc and not properly
structured after viability study or analysis of the root causes of sickness etc. The bank
staff puts in efforts to avoid classification of the account as NPA. All focus of the banks
is centered on the asset classification and not health classification".
Thirdly, while the entrepreneur may be trying to restructure the unit, the statutory
authorities could move for attachment of assets and his imprisonment. Though
theoretically, the legal remedy to escape attachment of assets and accompanying
imprisonment, the entrepreneur could take shelter through insolvency under the two
insolvency Acts, the insolvency mechanism through the two Acts is all but dysfunctional.
The conditions attached are almost impossible to meet and terms are antiquated, hugely
subjective. Most importantly in current dispensation under the two Acts, there is no
protection from 'criminal cases'—as the defaults under statutory dues are construed, and
the eventual attachment of assets and imprisonment. There is no BIFR type of mechanism
for small enterprises to put a stay. Not only all personal belongings of debtor are attached
and auctioned but also of all their guarantors.
Therefore, the key issues are:
n The case of small enterprise is fundamentally different from corporates both in terms of
personal liabilities of promoters and related legal provisions. The liabilities among small
enterprises in case of default are unlimited and there is no BIFR like mechanism for
them.
n There is no mechanism for addressing eventualities born out of 'temporary stresses' in
life of an enterprise. While the ineffectual mechanism of SLIIC does exit—jurisdiction of
which is limited to institutional credit only - there is absolutely no system for
restructuring of multi-agency statutory liabilities.
n The insolvency mechanism under the two Acts is largely dysfunctional both because of
uninterested judicial dispensation for insolvency cases as well as because of extremely
harsh conditions post insolvency that are meted out to debtor.
n There is no wholesome mechanism for bankruptcy in India. Therefore, there is no
functional system for recovering debts when creditors include government agencies
(center and state), public institutions (center and state), banks/FIs and private parties.
n There being no single administrative mechanism for insolvency and bankruptcy, there
is no one to decide whether or when the firm is to be liquidated or be sent for
restructuring. Therefore, even a temporary stress or shock is enough to bring a small unit
to 'sickness' and eventually to 'closure'.
The current conditions of slow down injuring financially a large number of individuals
and small entrepreneurs and eventual closure of many small units, make it hugely
important that following steps are taken urgently:
n Need for substantive amendments in the two Insolvency Acts or replacement by new
(single and comprehensive) law
n Enactment of comprehensive Bankruptcy Law mechanism covering non-corporate
entities
n Suitable revisits to other central and state statutes
affecting current recovery procedures and clauses of
imprisonment
n Constitution of Authority/Registrar/ Central Registry System where all the orders
declaring a person as insolvent may be filed
n Instituting a time bound restructuring mechanism for small scale sector learning from
the shortcomings of the BIFR and providing effective protection against attachment of
assets and imprisonment during the restructuring exercise.
n Need to institute specialised bankruptcy and insolvency courts (fast track) and a cadre
of specialists providing a 'single window' to address all related issues: restructuring,
liquidation, bankruptcy and insolvency.
(Excerpts from the policy paper: 'Towards establishing modern insolvency and
bankruptcy codes for small enterprises)
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Page 4
small is the new Big
Global IT heavyweights see a growing opportunity in India’s SMEs during the downturn
The winds of recession have blown to India as well. Some sectors are down, and the
stimulus packages are yet to show their effect. But this has had a positive effect as many
companies have discovered a whole new market to sell. This was known before and
companies were targeting it, but today there is a new found urgency. The SME segment.
For IT companies for example, this is a good time to target the SMEs with cloud
computing as a form of disaster management. While the IT sector has been the most
prolific in targeting emerging businesses, other sectors are warming up to the market in a
big way. In the last few months, Indian arms of global IT heavyweights such as IBM,
SAP, and Oracle have unveiled strategies to tap SMEs. According to research firm AC
Nielsen, there are over nine million such enterprises in India, with an average IT spend of
Rs 30 lakh a year.
"There are about seven million small-and-medium-businesses that don't consume any IT
today and are open to the software as a service model (SaaS) or Cloud Computing to
enable them to compete with giants in their verticals," says Doug Farber, VP, Asia
Pacific, Salesforce.com. A Springboard study says that the Indian SaaS market will grow
at a CAGR of 76% between 2007-2011 and reach $260 million in revenues by 2011.
Springboard also said that the Indian SaaS market is poised for high growth with 76% of
survey respondents, who have not adopted SaaS, planning to do so within the next 12
months. Frost & Sullivan estimates the market to grow at a CAGR of approximately
71%, expecting it to reach $267 million by 2011.
Cisco is planning to give its services business a bigger thrust to tide over the tough year
that lies ahead. Crucial to the success of this strategy is rolling out the red carpet for
SMEs, by targeting a growth of more than 25% from this sector this year. "While the
consulting business has seen lower activity, SMEs can drive our services business
further," says Kumar GB, senior vice president, services, India and SAARC. The top US
network equipment maker has been aiming for long-term revenue growth of 12-17% a
year. To achieve this figure, Cisco expects Indian SMEs to play a much bigger role as
some of their major markets experience a slow down. Last year, says Kumar, the services
business grew by over 50% in India.
At one time, IT companies considered selling to such customers unviable. Today, they
are developing products for them. Kumar says that the demand this year is coming from
private companies who are catering to defence services and government departments. For
these companies, it is not so much about understanding technology but creating value.
While earlier the services used to be bundled free with the product, "that is not the case
anymore," he says, referring to an important change which is expected to add to revenues
in these times. For Cisco, SMEs are again a more reliable source of revenue as they have
not experienced the kind of turmoil that the bigger players are witnessing. "Most of them
are still on the growth path," says Kumar. The value of services is going up, and is not
tied with the product anymore, he maintains.
Cisco is also pushing for adoption of telepresence units by SMEs. These are equipped
with large, high-definition screens with built-in microphone and camera lenses, and are
more evolved than traditional videoconferencing systems. To install such a system,
Cisco's fee includes not just the equipment but also constructing the room with
appropriate acoustics.
Its competitor LifeSize is also targeting the emerging businesses aggressively. The
market for telepresence is expected to grow as companies cut travel costs and chose the
economy of video conferencing for face-to-face meetings. Kumar points out that in
congested and big cities like Mumbai people are using their systems to even talk to other
offices within the city.
In spite of Reserve Bank of India announcing measures to release funds and directing
banks not to stop lending, many PSU banks are refraining from extending financial
assistance for working capital and overdrafts citing reasons of liquidity crunch. This will
surely hit the SMEs and emerging enterprises, who, unlike large corporates cannot bank
on their internal accruals and investment portfolios.
For software giant Microsoft, the market is also about addressing the disaster recovery
space. "We are seeing explosive growth in deployment of security solutions in this
space," says Rajeev Mittal, group director, SME Business at Microsoft India. He says that
this is arising from two areas: Requirement for more and more sophisticated solutions
and customers moving their security environments from other vendors to Microsoft.
It is this same space that is being targeted by Mark Sorenson, Sr VP, EMC Storage
Division. "Targeting SMEs in these times of slowdown is the way forward," he says.
Typically, power makes for 50% of the cost of running a data centre. EMC has devised
storage methods to store the same amount of information using dramatically less power,
which is the main offering to
Indian SMEs.
While the offerings to SMBs are hotting up in the IT space, other sectors are not far
behind. For example players in the printing business are looking at SMEs. Take Infoprint
for example. Established in January 2007 as a joint venture between IBM (Printing
system division) and RICOH, the company is actively targeting SMEs.
"Only 20% of our clients are large enterprises. Others are SMEs," says Benoit Chatelard,
vice president, Asia Pacific. He says that most such customers are indirect clients for the
print service providers who are our largest target segment that falls under the subset of
production printing. Most small banks, insurance companies, etc., are outsourcing their
printing requirements to print service providers across the country.
And understandably, companies are also lining up to service SMEs in the fashion
industry, at a time when bigger houses are cutting down costs despite the rise of the
rupee, as their clients in the US face the brunt of the recession. Take Lectra, which has
now increased focus on the emerging businesses.
"The fashion industry is composed of a large number of SMEs, many of whom have been
loyal customers for a long time and have helped us develop solutions perfectly adapted to
their needs," says Prashanth LJ, managing director, Lectra Technologies India. On the
software side, Lectra is offering a range of 2D and 3D design, engineering, prototyping,
product development and material consumption management solutions adapted to all
types of fashion products (apparel, footwear, luggage and leather goods) and to all levels
of user expertise.
The economic slowdown has forced SMEs to look at alternative solutions. Many of them
are deferring their expansion plans and reducing their spends. But companies are also
strengthening their existing infrastructure, implementing proven technology to optimise
their processes.
But this is not a dampener to Lectra which has been involved with SMEs for some time.
With tougher market conditions in the
export market, Indian SMEs are competing with their counterparts from other countries
who have implemented new technologies to offer quality products at competitive rates.
Free market has also brought in competition from other countries to the domestic market.
With the ever increasing input costs like power, transport, taxes and labour, SMEs
to are constantly looking at ways and
means to save on raw materials, decrease time to market and thereby reduce the cost
of the end product.
Anirvan Ghosh
.............
The Power of Possibility
Improving access to transform small businesses
The world has changed significantly, giving rise to a new generation of businesses and
individuals who believe they can have the goods, services and information they want
anytime, anywhere and any way they want. Modern day lives and businesses are not
bound by geography, time or other limitations. With India opening its door to
globalisation in the mid 90’s we witnessed a rapid flow of significant new opportunities
to Indian businesses. This also opened up greater access to developed country markets
and enabled technology transfer which promised improved productivity and higher living
standard.
This ‘power of possibility’ which has been channelled through access is what makes all
forms of interaction and exchange possible between people, businesses and nations
possible. Access eliminates barriers and protectionism to create liberalised trade
opportunities for small business to go global, in turn building stronger economies and
increasing the standard of living. Access has been made a reality principally due to forces
like road transportation, rail transportation, water transportation and air transport,
especially air transportation which plays a vital role in making access possible across
international boundaries and helps businesses to transit goods and services to remotest
places in the world. For instance, FedEx Express connects 90% of the world’s GDP
within one to three days.
The Indian express industry which is the catalyst in driving access is valued at Rs 7,000
crore and is expected to double by 2012. This coexistence and interdependence of the
express industry with a country’s economy will leverage the growth of SMEs and will
assist in providing access to markets, services and technology from any where in the
world.
Access will also empower people with more choices and greater confidence in creating
new opportunities, accelerating and simplifying global connections. Though access is a
force, which is equally beneficial to all businesses across the world, it is more valuable to
business that largely operate at local level like Small and Medium Enterprises (SMEs) in
taking their business to global platforms and creating wider opportunities.
Though today all levels of business contribute equally to the Indian economy the SMEs
form the bedrock. In the last couple of years SMEs have had a share of around 17% in the
national GDP. As the economy develops SMEs will account for an increased share of
both gross national income and employment. However, to achieve the desired growth
SMEs need to have suitable access to high quality business development services (BDS)
to support their growth.
In the future SMEs are expected to be a significant player in India’s future and a driving
force to Indian economy, SMEs contribution to national GDP is projected to go up by a
minimum of 5% and touch 22% share of India's GDP by 2012. Trends also indicate that
there has been a rise in movements of SMEs products and services across state and
international borders and are garnering a larger share in the economy. Access is what
underlies ones ability to exchange and innovate to realise new opportunities and shape
businesses and lives. Considering the potential in the Indian market and the emergence
thousands of SMEs it is extremely crucial to pave ways for these SMEs to reach out to
the international markets. This extensive outreach can be made through access enabling
SMEs to transform to large international business.
Keeping in mind the current economic situation access to ideas, places, materials and
technology would result in greater opportunities for all involved. Jobs are created,
productivity and prosperity rise, growth and innovation are spurred. These benefits would
start a virtuous cycle. Access also produces a "network effect" in which new connections
and opportunities lead to more new connections and opportunities. The network gains
strength as it expands, spurring further opportunity and empowerment.