How will Self-Reliant India Fund benefit India’s MSMEs

Before we dive deeper into how the Self-Reliant India Fund will benefit MSMEs, let’s have a quick understanding of why the fund came to be. The MSME sector in India has been one of the major contributors to the socio-economic development of the nation. With close to 6.3 crore MSMEs in the country — this sector has emerged as a significant contributor to the Indian economy in terms of employment, Gross Domestic Product (GDP), and exports. In order to give the MSME sector a boost, the government introduced a fund of funds called the Self-Reliant India Fund. The funding arrangements were officially announced by Finance Minister Nirmala Sitharaman in May 2020.  Once the Self-Reliant India Funds are fully rolled out, they will mobilise the equity investments in the MSME sector; to further aid their growth, enable listing on stock markets and also promote global expansion programmes. The Self-Reliant India Fund was recently in the news as Union Minister Narayan Rane stated that the Self-Reliant India Fund aims to provide growth capital to MSMEs. This will be done via equity, quasi-equity and debt, as permitted by the SEBI guidelines. 

An overview of the Self-Reliant India Fund structure

As only a handful of players in the financial services industry provide early-stage equity capital to MSMEs, the inadequate availability of capital has been one of the biggest challenges for this sector. Another reason for stagnant growth among MSMEs is that most venture capitalists, primarily offer early-stage funding — only a few of them provide growth-stage funding. Furthermore, even though listing in a stock exchange offers a host of benefits, MSMEs usually back away from listing due to the compliance burdens and increased disclosure requirements. The government launched the Self-Reliant India Fund in a bid to address these challenges and to allow MSMEs to grow to their full potential. The Self-Reliant India Fund is a SEBI-Registered Category-II Alternative Investment Fund (AIF) and is built on the investment strategy of holding a portfolio of other investment funds. The Self-Reliant India Fund will operate as per the ‘Mother Fund and Daughter Fund’ structure. 

As a combination of Mother/Daughter Funds, here’s how the Fund is structured:

• Both the Mother and Daughter Funds will be registered as AIF.
• The Mother Fund will provide funds to the Daughter Fund for onward investment as growth capital in eligible MSMEs.
• Only the Daughter Funds will invest in MSMEs under this Fund.
• To enable the Daughter Fund to provide both equity and debt funding to MSMEs, the Daughter Fund will be ​​registered as Category I or II AIFs with SEBI.
• The government of India is the sole investor providing an initial budgetary support of Rs. 10,000 crore in a phased manner. No other investments will be allowed under the Mother Fund.
• The Mother Fund will empanel Daughter Funds that are looking to invest in MSMEs, provided they fulfill conditions as laid down under the Self-Reliant India Fund. 
• The balance of 80% of the Rs.50,000 crore Self-Reliant India Fund will be provided by the Daughter Funds — which will raise capital from external sources such as Commercial Banks, HNIs, financial institutions, private equity investors, institutional investors, venture capitalists, public sector units, foreign development institutions, pensions, etc.

How will MSMEs benefit from the Self-Reliant India Fund?

In most cases, the MSMEs procure debts from financial institutions. These financial institutions provide debt by keeping a debt : equity ratio of 3:1. Under the Self-Reliant India Fund, the availability of operating funds for the MSMEs will be increased by 3x. The Self-Reliant India Fund has been set up with the primary goal of providing growth capital to credit-strapped MSMEs.

Equity or equity-like financing will be offered and the listing of MSMEs on the stock exchanges will also be promoted.

The Self-Reliant India Fund will help MSMEs to scale up faster, which, in turn, will create more employment opportunities and eventually propel the Indian economy on a higher growth trajectory. The SRI Fund will also empower MSMEs to go beyond domestic barriers and tap into lucrative opportunities in the international market. The Defence Minister, Rajnath Singh recently stated that MSMEs will be key for India to be self-reliant. Supporting MSMEs with growth funding will have a key role to play in making India a self-reliant nation. 

Who is eligible for the Self-Reliant India Fund?

The Self-Reliant India Fund’s target groups are those MSMEs that have the potential to grow but are unable to scale up due to the lack of growth funds. 

MSMEs who fulfill the below conditions will be considered eligible for the Self-Reliant India Fund:

• All MSMEs, defined as per the MSMED Act will be eligible for consideration.
• Post assessment of eligible MSMEs, the funding will be provided to those MSMEs who are found to be viable, have a positive growth trajectory and to those who have a defined business plan for growth. The CAGR of the previous 3 years will also be taken into consideration.
• NBFCs, financial inclusion sectors, non-profit institutions, microcredit sector, SHGs, and other financial intermediaries will not be eligible for consideration.

Setting up MSMEs for greater growth

With MSMEs spread across the breadth of the nation, the Self-Reliant India Fund needs to be widely dispersed with a view of providing funding access to MSMEs in every nook and corner of the country. NSIC Venture Capital Fund Limited (NVCFL), a special purpose vehicle, is in charge of implementing this scheme. Under this scheme, Rs 1,080 crore has already been approved. The deployment of the Self-Reliant India Funds will be carried out in a phased manner. There are currently five Daughter Funds — MegaDelta Fund I, Carpediem Capital Partners Fund II, BanyanTree India Growth Capital Fund, Stakeboat Capital Fund II and SVL-SME Fund (Neev II), that are listed on the NVCFL portal.

As per Union Minister Narayan Rane’s statement, by assuming an average investment of Rs. 10 crore per MSME — nearly 5000 MSMEs are expected to benefit from this Rs. 50,000 crore Self-Reliant India Fund.

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