Unit No. 3Understanding Ownership Structure: Definition of small scale, medium scale and large scale enterprises, role of small enterprises in economic development, policies governing SMEs, Steps in setting up a small unit, Sources of finance for SME’s, Setting up of a small Business Enterprise-; Rationale for Small & medium enterprise; Objective; Scope; Role of SME in Economic Development of India, Identifying business opportunity in various sectors, SME Registration; NOC from Pollution Board; machinery and equipment selection; project report preparation; project planning and scheduling using networking techniques of PERT / CPM; Methods of Project Appraisal.

SSI’s

• Stands for Small Scale Industries• MSME in Indian Context• Governed by MSME Act, 2006

Small Scale Industries

• A SSI is an industrial undertaking in which the investment in fixed assets in plant and machinery, whether held on ownership term or on lease or hire purchase, does not exceed Rs.1 Crore.

• This investment limit is varied by the government from time to time.

• Entrepreneurs in small scale sector are normally not required to obtain a licence either from the Central Government or the State Government for setting up units in any part of the country. Registration of a small scale unit is also not compulsory.

• The ministry of micro, small and medium enterprises acts as the nodal agency for growth and development of SSIs in the country. (http://msme.gov.in/Web/Portal/New-Default.aspx)

• Objective: To promote SSIs and enhance their competitiveness Various public sector enterprises assist it.

• Small Industry Development Organization. (SIDO)

- It is the apex body for assisting the government in formulating and overseeing the implementation of its policies and programmes/projects/schemes.

• National Small Industries Corporation Ltd. (NSIC):

• It was established by the government with a view to promoting, aiding and fostering the growth of SSI in the country, with focus on commercial aspects of their operations

Importance of SMEs

• Small and Medium Enterprises (SMEs) are vital for development of a country

– Helps reshaping the productive sectors

– Generates employment

– Creating an environment for entrepreneurship

– Promotes innovation

• Globally, SMEs contribute over 90% of Business Enterprises and 50-60% of Total Employment.

(UNIDO Report 2009-10)

Importance of SMEs

• In Europe, Japan and the USA, 99% of the enterprises belong to the small business segment

• Employment generated through Small businesses is more than 50% in the EU and approximately 40% in the USA

(World Retail Banking Report 2010)

Facts About MSME

• This sector contributes 8% of India’s GDP.

• It contributes 45% of manufactured output and 40% of its exports.

• It provide employment to about 60 million people through 26 million enterprises.

• The Small Scale Industry Sector holds the Key to Economic Prosperity of the Indian Economy, Characterized by abundant Labor Supply, Unemployment & Under Employment , Scarcity of Finance, Growing Modern Large Industries providing scope for development of Ancillary Industries & so on.

• The Small Scale Industry has grown phenomenally during the last Six Decades & has acquired a very prominent place in the Socio – Economic Development in the Country.

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Classification

Definitions After 2nd Oct. 2006

Investment Ceiling for Plant, Machinery or Equipments

Classification Manufacturing Enterprises

Service Enterprises

Micro Up to Rs. 2.5 million Up to Rs. 1 million

Small Between 2.5 to 50 million Rs. 1 to 20 million

Medium Rs. 50 million to Rs. 100 million

Rs. 20 to 50 million

Features of SSI

Characteristics of Small Enterprises :

• A Small Enterprise is generally a “One Man Show”.

• Owner himself / herself is also a Manager of the Enterprise. Thus, a Small Enterprise is managed in a personalized manner.

• A Small Enterprise has lesser Gestation Period compared to a Large Enterprise.

• Small Enterprises generally carryout their operations so as to cater to the Local & Regional Markets.

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Characteristics of Small Enterprises :

• Small Enterprises use indigenous resources & therefore can be located anywhere subject to the availability of these resources like Raw Materials, Labor, Transport Facilities etc.

• They are fairly Labor Intensive with comparatively smaller Capital Investment than the Larger Units.

• Using Local Resources, Small Units are decentralized & dispersed to Rural Areas & Smaller Towns

• Small Enterprises are more susceptible & highly reactive & receptive to Socio – Economic conditions compared to larger enterprises

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Advantages of Small Enterprises :

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They are the Back Bone of the Industrial Activity in the Country & are playing a very important role in improving the Socio – Economic Conditions of the people. Advantages of these Enterprises are as follows :

1) They create greater Employment Opportunities thro Labor Intensive processes & thereby help in tackling the Unemployment Problem.

2) They have Low Gestation Period & thereby Expensive Financial Resources are not idled unproductively for long periods.

3) They can be set up easily in Rural & Backward Areas. 4) They need Small / Local / Regional Market. 5) They encourage growth of Local Entrepreneurship. 6) They create Decentralized pattern of Ownership. 7) They foster Diversification of Economic Activities.

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8) They Innovate & Introduce New Products particularly to cater to Local Needs.

9) They influence & improve Standard of Living of Local People.

10) They provide equitable dispersal of enterprises throughout Rural & Backward Areas.

11) They earn Vital Foreign Exchange for the Country through their Exports of Goods / Services.

12) They Increase Revenue to Central & State Govts by way of Taxes Paid by them.

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Role of Small enterprises in Indian economy

Problems of SSI

Setting up an SSI

Stages for setting up SSI

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Project Identification

• Project identification is the first phase of a project cycle. It is a recurrent process for documenting, ranking and approving candidate projects.

Project Formulation

• It refers to step by step investigation of resources and development of project idea.

• To derive maximum benefits from minimum expenditure in shortest possible time

Elements of Project Formulation

Selection of Ownership

Location of plant

Factors affecting layout

Project Report :

For any New Project or Enterprise to be set up, Proper Planning is necessary.

A detailed Project Report provides such a plan for the Project. The Report is useful to the Entrepreneur for Planning & Implementing the Project. This is essential for Obtaining Finance & other clearances for the Project.

In fact, the Project Report gives a detailed insight of the Techno – Economic Viability of the Project.

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Format of a Project Report:

• 1. Cover Sheet• 2. TABLE OF CONTENTS• 3. EXECUTIVE SUMMARY• 4. THE BUSINESS• 5. Funding Requirement• 6. The Product or Services

Format of a Project Report:

• 7. The Plana.Marketing Planb.Operational Planc.Organization Pland.Financial Plan• 8. Critical Risks• 9. Exit Strategy• 10. Appendix

EXECUTIVE SUMMARY

• The first impression about the business personal

THE BUSINESS

• Details about the business concept

• Objective of the business

• A brief history about the past performance of the company

• Form of ownership

Legal Forms of Business

Three basic legal forms of business:

• Proprietorship - Single owner, unlimited liability, controls all decisions, and receives all profits.

• Partnership - Two or more individuals having unlimited liability who have pooled resources to own a business.

• Corporation - Most common form of corporation; regulated by statute; treated as a separate legal entity for liability and tax purposes.

Funding Requirement

• Investors & financial institutions

• A careful, well- planned funding requirement should be documented.

• It is also necessary to project how these requirements would be fulfilled.

The Product/ Services

• Key features of product & the product range

The Plan- Marketing Plan

• Marketing Mix strategies are to be drawn based on the market research

• Taste, needs, habit of the customer – Marketing Segmentation and Targeting

• Marketing mix strategies

• Budget

Operational Plan

• Plant location & plant layout.

• Budget

Organization Plan

• Responsibilities & duties amongst people in the organization

• Information about board of directors• Manpower plan• Details about the laws that would be governed

in managing the employees of the organization• Budget

Financial Plan

• Two to five years for an existing company• 1. Projected sales• 2. Projected income & expenditure statement.• 3. Projected breakeven point• 4. Projected profit & loss statement• 5. Projected balance sheet• 6. Projected cash flows.• 7. Projected fund flows.• 8. Projected ratios

Critical Risks

• The investors are interested in knowing the tentative risks

• Purpose- To evaluate the viability of the project & to measure the risks involved in the business

• It give confidence to the investors as they can calculate the risks involved

Exit Strategy

• How the organization would be dissolved, what would be the share of each stakeholder in case of winding up of the organization.

Appendix

• The curriculum vitae of the owners, ownership agreement

• Certificate from pollution board

• Memorandum of understanding, article of association

• All the supporting agreements/documents that can help in marketing the project viability at large.

Essentials for Project Report

• 1. The project report should be sequentially arranged.• 2. The project report should be covering all the details about

the proposed project.• 3. The project report should not be very lengthy a subjective.• 4. The project report should justify the financial needs and

financial projection.• 5. The project report should also justify market prospects and

demands.• 6. The project report should be attractive to the financial

agencies and investors.

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Registration of SSI

Introduction

• SSI units(i.e. undertaking with investment in plant and machinery of less than Rs. 10 lakh) should seek registration with the Director of Industries of the concerned State Government.

• States generally adopt the uniform registration procedures

Objectives of Registration

Benefits of registration

Features of the scheme

• DIC is the primary registering centre• Registration is voluntary.• Two types of registration• Provisional registration certificate valid for 5

years• After commencement of production, a

permanent registration certificate is given.

Provisional Registration Certificate (PRC)

Permanent Registration Certificate

• Income-Tax and Sales Tax exemption• Incentives and concessions in power tariff.• Price and purchase preference for goods

produced.• Availability of raw material• Permanent registration of tiny units should

be renewed after 5 years.

Procedure for registration

• A unit can apply for PRC for any item that does not require industrial license and items not listed in Schedule-I or Schedule-II.(http://laghu-udyog.gov.in/publications/reserveditems/reservitems.html)

• Units employing less than 50/100 workers with/without power can register even for items included in Schedule-II.

• PRC is valid for five years• At commencement of production, it has to apply for

permanent registration(http://dcmsme.gov.in/howtosetup/grgxx01x.htm)

The following form basis of evaluation

• The unit has obtained all necessary clearances whether statutory or administrative. e.g. drug license under drug control order, NOC from Pollution Control Board, if required etc.

• Unit does not violate any locational restrictions in force, at the time of evaluation.

• Value of plant and machinery is within prescribed limits.

• Unit is not owned, controlled or subsidiary of any other industrial undertaking as per notification.

Government Policy towards SSI

Small Scale Enterprises have been given an important place in the frame work of Indian Planning for both ideological & Economic Reasons. Development of Small Scale Enterprises have been taken up with various important objectives to be realized.

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Objectives

• The generation of Immediate Employment Opportunities with relatively Low Investment.

• The promotion of more equitable distribution of National Income.

• Effective mobilization of untapped Capital & Human Skills.

• Dispersal of Manufacturing activities all over the Country, leading to growth of Villages , Small Towns & economically Backward Regions.

Therefore, the Govt of India as well as various State Govts in the Country have started various programs & evolved policies for the Development of Micro & Small Enterprises in the Country.

Various measures taken by the Central & State Govts for the development of Micro & Small Enterprises have included Product Reservations, subsidies on fixed capital investment, Sales Tax & Income Tax Concessions, Preferential allocation of credit & interest subsidy, extension of business & Govt purchases, Marketing Assistance including Export Promotion by institutions such as National Small Industries Corporation, Small Industries Development Organization & several other agencies.

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For the purpose of administration of India’s Micro & Small Enterprises have been divided into Seven Groups as under into Traditional Sector & Modern Sector.

Traditional Sector : 1) Handicrafts. 2) Handlooms. 3) Khadi, Village & Cottage Industries. 4) Coir. 5) Sericulture.

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Modern Sector : 6) Power Looms. 7) Residual Micro & Small Enterprises.

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Governmental Support to Small Scale Enterprises :

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Immediately after independence, Govt of India

initiated various steps for promotion & development of Small Scale & Cottage Industries. Govt of India has attached great importance to the development of Small Enterprises Sector in all the Five Year Plans since the beginning in 1951.

Impact of Liberalization, Privatization & Globalization of

Small Enterprises : The process of Liberalization & Economic Reforms , since 1991, have

thrown up new challenges to the small enterprises sector , simultaneously creating tremendous opportunities for the growth of this sector.

In this changed scenario, building Competitive Strengths, introducing Technology Up gradation & Quality Improvement are important issues which need to be addressed in order to build the capacity to withstand emerging pressures & ensure sustained growth. Also small enterprises sector needs to reposition itself if it has to meet the growing demands for ancillary items , subcontracting etc from other Medium & Large Enterprises , requiring higher standards of Quality, Economies of Scale & strict delivery schedules.

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Salient features of the price policy

1. Increasing in the investment limit in plant and machinery of tiny enterprises from Rs. 2 Lakhs to Rs. 5 Lakhs, irrespective of the location of the enterprise.2. Inclusion of industry related service and business enterprises, irrespective of their location as small-scale industries.3. To introduce a limited partnership act. This would limit the financial liability of the new enterprises to the capital invested.4. Introduction of a scheme of integrated infrastructural development for small-scale industries.5. Introduction of factoring services to help solve the problems of delayed payments of small-scale sector.

6. Market promotion of small-scale industries products through co-operative/public sector institutions, other specialized professional/marketing agencies and the consortium approach.

7. To set up a Technology Development Cell in the small industries development organization.

8. To accord priority to small and tiny sector in the allocation of indigenous raw materials.

9. Setting up of an Export Development Center in the small industries development organization.

10.To widen the scope of the National Equity Fund (NEF) to enlarge the single window scheme and also to associate commercial banks with provision of composite loans.

The new policy was founded on a proper understanding of the fundamental problems of the small-scale sector and the measures proposed by it have integrated the various handicaps that face this sector.

Tax Benefits: Boon for the Growth of SSIs

• Need for Tax benefits

• Tax Holidays (Section 80J of income tax act,1961):- Small-scale industries, are exempted from the payment of income-tax of their profits subject to a maximum of 6% per annum of their capital employed. This exemption in tax is allowed for the period of five years from the commencement of production.

• Conditions:- (i) The unit should not have been formed by the splitting or reconstitution of an existing unit.

• (ii) The unit should employ ten or more workers in a manufacturing process with power, or at least twenty workers without power.

• Depreciation (Section 32 of the income tax act, 1961):- Small-scale industry is entitled to a deduction on depreciation on block of assets at the prescribed rate

• In the case of the small-scale industry, deduction from the actual cost of plant and machinery is allowed subject to a maximum of rupees 20 Lakhs

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• Rehabilitation Allowance (33-B income tax act, 1961):-

• (i) Flood, Cyclone, earthquake or other natural upheavals.• (ii) Riot or civil disturbance Accident fire or explosion• (iii) Action by an enemy or action taken in combating an enemy.• The rehabilitation allowance should be used for the business

purposes within three years of the unit's re-establishment reconstruction of revival.

• The rehabilitation allowance is allowed to the unit equivalent of 60% of the amount of the deduction allowable to the unit.

• Investment Allowance (31-A income tax act, 1961):- The investment allowance under the section 31A of the Income-tax Act, 1961, is allowed at the rate of 25% of the cost of acquisition of new plant or machinery installed

• A small-scale industry can avail of investment allowance provided it has put to use machinery or plant either in the year of installation or in the immediate following year, falling which the benefit will be forfeited.

• Expenditure on Scientific Research (35 income tax act, 1961):- The following deductions in respect of expenditure on scientific research are allowed

• (i) Any revenue expenditure incurred on scientific research related to the business of the assessee in the previous year.

• (ii) Any sum that it pays to a scientific research association or a university, college, institutions or to a public company which has as its object, the undertaking of scientific research.

• (iii)Any capital expenditure incurred on scientific research related to the business of the assessee subject to the provision of section 35(2) of the Income Tax Act, 1961.

Greater Attention on TQM in Small Enterprise:-

TQM can help strengthening of small enterprises in the following manner:•(i) By increasing efficiency in processes.•(ii) By providing more time for innovation and creativity.•(iii) Boosting the morale of employees•(iv) Improving the quality of products and services•(v) Enhancing customer satisfaction•(vi) Snatching higher market share•(vii) Generating higher productivity•(viii) Achieving higher profits, etc.

SME Financing

• Sources of Fund: Internal and External Sources

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Internal

• Retained Profits• Controlling Working Capital• Sale of Assets• Owner Personal Saving• Reducing Stocks

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External

• Short Term: Less than 1 Years

• Medium term: 1-5 Years

• Long Term: 5 years +

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Short Term

• Indigenous/Commercial bankers• Installment Credits• Advances• Accrued Expense and Deferred Incomes• Account Payable• Trade Credit• Bill Discounting• Factoring

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Medium Term

• Special Financial Institutions • Commercial Banks• Public deposits• Investment Companies• Hire Purchase• Lease Financing• Loans from Government

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Long Term

• Equity Shares• Preference Shares• Debenture• Retained Earning• Venture Capital• Commercial banks• Institutional Financing

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