Equity capital is a much-neglected area in the SME sector.
Mumbai: State Bank chairman Arundhati Bhattacharya on Friday urged small and medium enterprises (SMEs) to focus on raising funds through equity instead of debt to drive their businesses in a healthier manner.
She said SMEs' relying more on debt for their growth capital in the initial stage of their business put pressure on their balance sheets.
"One of the major problems facing SMEs in our country is lack of equity. Equity capital is a much-neglected area in the SME sector," Bhattacharya told an SME summit and asked them to learn from technology players which have sourced large amount of equity to ramp up their business and market share.
Quoting the examples of e-commerce companions like the Flipkart and Amazon, she said these firms have done wonders with the help of equity.
Urging SMEs to present their case in a better way to investors to attract investments, she said, "There are people who can give you equity but you should know how to convince them that you are the right person who can give them good returns if they invested in his/her company."
She rued the fact a large number of entrepreneurs start off with borrowed money (from family or friends) and then depend on banks and not equity.
"With more debt, the requirement of margin goes up which strain your financial statements," she said. Addressing the same event, chairman of Insolvency and Bankruptcy Board of India, M S Sahoo said the board will soon come out with an insolvency framework for SMEs.
"Currently our entire regulatory framework and the ecosystem are designed only to deal with corporate insolvency. Over 95 per cent of SMEs, particularly MSMEs, are individuals and are not covered by corporate form of business. They would be covered when we come up with an individual insolvency regime," Sahoo said.
The board will come out with an insolvency regime for SMEs in two phases, he said.
"An individual insolvency regime is much difficult to bring in (as) compared to a corporate regime that is why we are planning to do it in phases. In the first phase, we are looking at guarantees to corporates--individuals who have given guarantees on behalf of corporates. "In the second stage, we will look at individuals who have some kind of businesses, proprietorships/partnership or a non-corporate form of business which should cover the MSMEs," Sahoo said.