Union Cabinet Approves Changes In Definition Of MSMEs, Nod For $6.62 Bn Fund Of Funds

The Union Cabinet on Monday approved the decision to revise the definition of MSMEs and allow financing relief for the same. It has also given its nod to set up the INR 20,000 Cr ($2.64 Bn) subordinated debt for stressed MSMEs and equity infusion of INR 50,000 Cr ($6.62 Bn) through a Fund of Funds.

The Cabinet has now redefined the medium businesses as the enterprises with investments up to INR 50 Cr with a turnover of less than INR 250 Cr. However, the definition of small and micro businesses remain the same as announced by finance minister Nirmala Sitharaman on May 13 as part of the economic stimulus package.

This means that a business will now be classified as ‘micro’ units if they have investments upto INR 1 Cr and turnover of less than INR 5 Cr. For an MSME to be defined as a ‘small’ unit, its investment limit has been raised from INR 5 Cr to INR 10 Cr with a turnover of less than INR 50 Cr. 

MSME minister Nitin Gadkari said, “We interacted with different associations and they wanted an increase in the threshold for medium businesses. The government has decided to accept their suggestions. It has also been decided that export turnover will not be a part of the definition.”

Further, the Cabinet has also approved provisions made for INR 20,000 Cr subordinate debt for two lakh MSMEs, which are NPA or are stressed. Government will support MSMEs with INR 4,000 Cr to Credit Guarantee Trust for Micro and Small enterprises (CGTMSE). Banks are expected to provide the subordinate-debt to promoters of MSMEs equal to 15% of his existing stake in the unit subject to a maximum of INR 75 Lakh.

Further, the Fund of Funds with a corpus of INR 10,000 Cr, which will provide equity funding support for MSMEs has also been approved. It shall be operated through a Mother and a few Daughter funds. It is expected that with leverage of 1:4 at the level of daughter funds, the Fund of Funds will be able to mobilise equity of about INR 50,000 Cr. The Fund of Funds is expected to benefit over 25 lakh MSMEs under stress.

According to the MSME ministry’s annual report for 2019, India has currently over 63 Mn MSMEs out of which 99.4% are micro-enterprises. An estimated 32.4 Mn lakh MSMEs (51.25%) are in rural areas and 31Mn lakh MSMEs (48.75%) are in urban areas. However, till the end of May 2019, only 68.25 lakh MSMEs had registered as MSMEs on the UAM (Udyog Aadhar Memorandum) self-declaring platform.