Month: October 2020

University of Mumbai BMS Notes

Cash & Carry Arbitrage

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Cash and carry arbitrage is a financial arbitrage strategy that involves the exploitation of the mispricing between an underlying asset and the financial derivative corresponding to it. Using the cash and carry arbitrage strategy, a trader aims to use market pricing discrepancies between the underlying(s) and the derivative to their advantage by exploiting the opportunity to generate profits via a correction in the mispricing. The strategy is sometimes also referred to as basis trading.

This is a term used often in cash and carry and reverse cash and carry arbitrages. The cost of carry or CoC is the cost that a trader or investor has to bear for holding a position in the underlying market till the future contract’s expiration date arrives. Typically, cost of carry is expressed as a percentage.

Contango and backwardation

  • When a market is said to be in contango when the future price is higher than the spot price of the asset. It is when the market is in contango that cash and carry arbitrage occurs.
  • The term contango is largely used in the commodities market while the term premium is used in the equity derivatives market.
  • Backwardation happens in an exactly reverse scenario, and that’s when reverse cash and carry arbitrage comes into play. Backwardation is also termed discount in the equity derivatives market.
  • When the premium widens, it is indicative of a bullish market and when the discount widens, it may be a sign of a bearish market.

Example of cash and carry arbitrage

Assume that an underlying asset is trading at Rs 102, with a cash or carry of Rs 3. The futures contract is at Rs 109. The trader buys the underlying and goes long while also shorting the future and selling it at Rs 109. The cost of the underlying is Rs 105 (cost of carry included) but the sale that the trader has locked is at Rs 109. Hence, the profit is Rs 4, and that has happened by making use of the pricing difference between the securities in the two markets.

In a nutshell

Cash & carry arbitrage occurs when the price of an asset in a future contract is greater than the price of the underlying in the spot or cash market. In such a scenario, the investor shorts the future and takes a long position in the cash market. Getting a fair understanding of how futures contracts work is important before you take the step towards arbitrage strategies.

Arbitrage strategies help traders benefit in a risk-free manner. Understanding cash and carry arbitrage definition helps you practice it, and get a better grip on the arbitrage strategy.

How It Works

A trader implements a cash and carry arbitrage strategy by identifying lucrative arbitrage opportunities in the market. They identify and invest in securities that they identify as mispriced in relation to each other. The trader opts to go long in a commodity, while, at the same time, taking a short position for the corresponding financial derivative and selling it off.

The commodity purchased is held until the expiration date, i.e., the delivery date of the corresponding contract. The trader then delivers the underlying against the corresponding contract and locks in a riskless profit. The profit earned by the trader is determined by the purchase price of the underlying plus its total carrying cost.

By shorting the corresponding contract, the investor locks in a sale at the price at which the contract is priced at. Hence, the investor will already have determined the sale price. If the purchase price of the underlying plus its carrying cost is less than the price at which the contract is sold, the trader makes a riskless profit by exploiting this mismatch of prices.

Risks Associated with Cash and Carry Arbitrage

In the cash and carry arbitrage strategy, the acquisition cost of the underlying is certain; however, there is no certainty with regards to its carrying costs. In the event that the carrying costs of the underlying increase and rise beyond the locked-in sale price of the corresponding contract, the investor incurs a loss instead of a profit. An example of an increase in carrying costs is the rising margin rates by brokerage firms.

Summary:

  • Cash and carry arbitrage is a financial arbitrage strategy that involves the exploitation of the mispricing between an underlying asset and the financial derivative corresponding to it.
  • Using the cash and carry arbitrage strategy, a trader aims to use market pricing discrepancies between the underlying(s) and the derivative to their advantage by exploiting the opportunity to generate profits via a correction in the mispricing.
  • Traders secure a profit by taking a long position on the financial commodity and shorting the corresponding contract.
University of Mumbai BMS Notes

Reverse Cash & Carry Arbitrage

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Reverse Cash and Carry arbitrage is a combination of short position in underlying asset (cash) and long position in underlying future. It is initiated when future is trading at a discount as compared to cash market price. In other words, the cash market price is trading higher as compared to future. The arbitrageur/ trader can take position by selling his delivery of stocks in cash and simultaneously buying futures of same underlying assets of equal quantity. A trader must have delivery in that particular stock when there is such an opportunity available in the market.

Reverse cash and carry arbitrage occurs when market is in “Backwardation”, which means future contracts are trading at a discount to the spot price.

Reverse cash and carry arbitrage is performed when the futures is trading at a discount to the cash market price.

Lets assume the following data:

Cash market price:         Rs.100

December futures price:  Rs.90

This reflects a negative cost of carry which is bound to reverse to positive at some point in time during contract’s life and this reversal is an opportunity for traders to execute reverse cash and carry arbitrage.

Lets assume a contract multiplier for futures contract on Stock A is 200 shares. To execute reverse cash and carry, arbitrageur will buy one Dec Fut at Rs.90 and sell 200 shares of Stock A at Rs.100 in cash market. This would result in the arbitrage profit of Rs. 2000 (200 X Rs.10). Position of the arbitrager in various scenarios of stock price would be as follows:

Case I: Stock rises to Rs. 110

Loss on underlying = (110 – 100) x 200 = Rs. 2000

Profit on futures = (110 – 90) x 200 = Rs. 4000

Net gain out of arbitrage = Rs. 2000

Case II: Stock falls to Rs. 85

Profit on underlying = (100 – 85) x 200 = Rs. 3000

Loss on futures = (90 – 85) x 200 = Rs. 1000

Net gain out of arbitrage = Rs. 2000

On maturity, when the futures price converges with the spot price of underlying, the arbitrageur is in a position to buy the stock back at the closing price/ settlement price of the day.

Management Notes

Derivatives Market: Meaning, History & Origin, Market: Futures, Options and Hedging

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Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, bonds, commodities, currencies, or market indices. They are used for hedging risk, speculation, and arbitrage opportunities. Common types include futures, options, swaps, and forwards. Derivatives help investors manage price fluctuations and uncertainties in financial markets. They are traded either on exchanges (standardized contracts) or over-the-counter (customized contracts). While derivatives can enhance portfolio returns, they also involve high risk and leverage, making them suitable for experienced investors and institutions looking to manage financial exposure effectively.

Important Features of Derivatives:

  • Underlying Asset Dependency

Derivatives derive their value from an underlying asset, which can be stocks, bonds, commodities, currencies, interest rates, or indices. The price of a derivative fluctuates based on changes in the value of the underlying asset. This dependency makes derivatives useful for hedging risks and speculative investments. Investors use derivatives to predict price movements and minimize losses caused by volatility in the market, making them essential financial instruments for risk management.

  • Leverage and Margin Trading

Derivatives allow traders to control a large market position with a relatively small investment, known as leverage. Investors use margin trading, where they deposit a fraction of the total trade value as collateral. While leverage can amplify gains, it also increases the risk of significant losses if the market moves unfavorably. Proper risk management is crucial, as excessive leverage can lead to margin calls and financial instability for investors.

  • Risk Management and Hedging

One of the primary functions of derivatives is risk management. Businesses and investors use derivatives to hedge against unfavorable price movements in their portfolios or business operations. For example, companies involved in international trade use currency derivatives to protect against exchange rate fluctuations. Similarly, farmers and commodity traders use futures contracts to lock in prices, ensuring predictable revenues despite market volatility.

  • Speculative Trading Opportunities

Derivatives attract investors seeking speculative gains by predicting market price movements. Traders buy or sell derivatives based on expected price changes in the underlying asset. Since derivatives require less capital due to leverage, they enable higher returns on investment. However, speculation involves high risks, and incorrect predictions can lead to substantial financial losses, making it important for traders to have market expertise and risk management strategies.

  • Liquidity and Market Efficiency

The derivatives market is highly liquid, allowing investors to buy and sell contracts easily. Standardized contracts traded on exchanges like NSE and BSE ensure price transparency and smooth transactions. The presence of multiple buyers and sellers improves market efficiency, helping in accurate price discovery. Additionally, derivatives help prevent market manipulation, as they reflect real-time expectations of future price movements, making them vital for financial markets.

  • Standardized and Over-the-Counter (OTC) Trading

Derivatives are traded in two forms: exchange-traded derivatives (ETDs) and over-the-counter (OTC) derivatives. ETDs are standardized contracts traded on regulated exchanges like NSE and BSE, ensuring transparency and reduced counterparty risk. OTC derivatives, on the other hand, are customized agreements between two parties, offering flexibility but involving higher risks, including default risk due to the absence of centralized clearing.

  • Contractual Nature and Expiry

Derivatives operate under legally binding contracts with predefined terms and conditions, such as expiry date, contract size, strike price, and settlement method. Every derivative has a fixed expiration date, after which it must be settled. Investors choose between physical settlement (actual delivery of assets) or cash settlement (payment based on price differences). The fixed timeframe makes derivatives time-sensitive, requiring careful monitoring and execution.

  • Volatility Sensitivity

Derivatives are highly sensitive to market volatility, as their value depends on price movements in the underlying asset. Increased economic uncertainties, political events, or financial crises can cause rapid changes in derivative prices. While this volatility presents profit opportunities, it also raises financial risks for traders. Investors must analyze market trends, use risk management tools, and set stop-loss limits to protect their investments from unexpected price swings.

History & Origin of Derivatives Market:

The derivatives market traces its origins back to ancient times, with early forms of derivatives existing in ancient Mesopotamia, where merchants used forward contracts to guarantee prices for future transactions in commodities like grain. However, the modern derivatives market began in the 17th century in Japan with the origin of rice futures trading on the Dojima Rice Exchange in Osaka. This marked the formalization of trading contracts that could hedge against price fluctuations.

The concept of derivatives evolved over time, especially in the United States in the 19th century, where futures contracts for agricultural products like corn, wheat, and cotton were developed to manage price risks. The establishment of the Chicago Board of Trade (CBOT) in 1848 further shaped the growth of the futures market.

The 1970s saw significant growth in financial derivatives, particularly with the introduction of financial futures and options contracts. The Chicago Mercantile Exchange (CME) pioneered the first financial futures market in 1972, and the options market expanded with the creation of the Chicago Board Options Exchange (CBOE) in 1973. Over the following decades, financial innovation and technology advancements led to the development of complex derivatives, including swaps and credit derivatives, which transformed the derivatives market into a global financial industry.

Examples of Derivatives Market:

  • Stock Futures and Options Market

Stock futures and options are popular derivatives where traders speculate on the future price movements of stocks. For example, if an investor believes Reliance Industries’ stock price will rise, they can buy a Reliance Futures contract. If the price increases, they profit; if it drops, they incur losses. Similarly, options allow investors to buy or sell stocks at a predetermined price before expiry. Stock derivatives help in hedging risk and increasing liquidity, allowing investors to benefit from price movements without holding the actual stock. These contracts are actively traded on exchanges like NSE and BSE in India.

  • Commodity Derivatives Market

Commodity derivatives allow traders to hedge against price fluctuations in raw materials and agricultural products. For example, a farmer expecting a decline in wheat prices can sell wheat futures to lock in a price. Similarly, manufacturers buy oil futures to hedge against rising crude oil prices. These derivatives reduce uncertainty in agriculture, metals, and energy sectors. Commodity futures are actively traded on platforms like the Multi Commodity Exchange (MCX) in India, helping farmers, traders, and industries manage price volatility and ensure stable revenue streams.

  • Currency Derivatives Market

Currency derivatives help businesses and investors hedge against exchange rate fluctuations. For instance, an Indian exporter expecting the USD to weaken against INR can buy a currency futures contract to lock in a fixed exchange rate. This protects them from potential forex losses. Similarly, investors trade EUR/INR or USD/INR futures for speculative gains. The NSE and BSE currency derivatives segments facilitate such trades, providing liquidity and risk management tools for companies involved in international trade and finance.

  • Interest Rate Derivatives Market

Interest rate derivatives help businesses and investors manage interest rate risks. For example, banks use interest rate swaps to hedge against rising borrowing costs. Suppose a company has a floating-rate loan but expects interest rates to rise; it can enter an interest rate swap to convert it into a fixed-rate loan, ensuring stable repayment costs. Governments and corporations also use bond futures and swaps to manage debt portfolios. In India, interest rate derivatives are actively traded on exchanges like NSE and BSE, helping institutions navigate changing interest rate environments.

  • Credit Derivatives Market

Credit derivatives protect lenders from default risks. One common instrument is the Credit Default Swap (CDS), where an investor buys insurance against a borrower defaulting on a loan or bond. For example, if a bank has issued loans to a financially unstable company, it can purchase a CDS contract to hedge against non-payment risk. If the borrower defaults, the seller of the CDS compensates the buyer. Credit derivatives are widely used in global financial markets to manage credit exposure and reduce systemic risk in banking and lending institutions.

Derivatives Market:

  • Futures Market

The futures market involves buying and selling standardized contracts to buy or sell an asset at a predetermined price on a specified date. These contracts are typically used for hedging or speculating on the price movements of commodities, stocks, or financial instruments. For example, if a farmer expects a fall in wheat prices, they may sell wheat futures to lock in a price. Futures markets offer high liquidity and help participants manage price risks. They are primarily traded on exchanges like NSE and MCX, providing a platform for price discovery and risk management.

  • Options Market

The options market involves the trading of options contracts that give the holder the right, but not the obligation to buy or sell an underlying asset at a set price before a specific expiration date. There are two types: call options (right to buy) and put options (right to sell). Investors use options to hedge against potential price movements or to speculate. For example, buying a call option on a stock allows the buyer to profit if the stock price increases. The options market offers flexibility and is actively traded on stock exchanges like the NSE.

  • Hedging

Hedging is a risk management strategy used to offset potential losses in investments or business operations by taking an opposite position in a related asset or market. For instance, a company that imports goods can use currency futures to hedge against fluctuations in exchange rates. In the commodity market, producers and consumers use futures contracts to lock in prices and minimize risks from price volatility. Hedging helps businesses and investors reduce uncertainty and protect against adverse price movements, ensuring more predictable financial outcomes in volatile markets.

University of Mumbai BMS Notes

Elements of a Derivative Contract

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Before entering the world of futures trading, investors must take the time to understand how contracts in the sector work and how they differ from trading in other, more mainstream asset classes, such as stocks and bonds.

The contract legally obligates a buyer to acquire an asset, or a seller to sell an underlying asset, at a predetermined date and price in the future. The asset involved can be anything from physical commodities gold, oil, corn, etc. to financial instruments, such as stock indices, interest rates and currencies.

Now before entering into a futures contract known as taking a position an investor should be aware of the four main elements of a futures contract. These instruments are much different from buying shares in companies on stock exchanges. In that type of trade, an investor immediately takes ownership of the underlying asset.

The four elements in a futures contract are:

Asset Class

The contract will specify the asset that underlies the contract, which is crucial in measuring the value of the trade. Some of the most highly traded assets in futures trading include energy products, agricultural commodities, precious metals, equities indices, and forex.

Quantity

The quantity explains the size of the contract, which typically outlines the specific number of the units being bought or sold. For example, one contract in WTI crude oil futures gives the holder the right to acquire 1,000 barrels of oil. If trading gold futures, one contract would give a market player the right to buy 100 troy ounces of gold.

Expiration

Futures contracts must have an end date an expiration on a set day in the future. The expiry date is the final day the contract can be traded. After that date, the contract must be settled under the terms of the agreement.

Price

The price of a contract is ultimately determined by the open market, reflecting the value of the asset involved. A futures contract, however, will contain a specific price, usually tied to the spot or cash price of the underlying commodity. The contract will also make clear what currency is being used in the contract, such as whether the asset is priced in U.S. dollars or another denomination.

Other Considerations

There are details involved in futures contracts, including delivery terms. Although most futures contracts are closed out before expiration, it’s still important to know the contract’s delivery terms. This involves knowing whether delivery will be in the physical commodity or will involve a cash settlement. Trading in gold, soybeans or oil often means a physical delivery, while other instruments, such as contracts based on S&P 500 Futures, are settled in cash.

University of Mumbai BMS Notes

Factors Driving Growth of Derivatives Market

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Over the last three decades, the derivatives market has seen a phenomenal growth. A large variety of derivative contracts have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are:

  • Increased volatility in asset prices in financial markets

A price is what one pays to acquire or use something of value. The objects having value maybe commodities, local currency or foreign currencies.   The concept of price is clear to almost everybody when we discuss commodities. There is a price to be paid for the purchase of food grain, oil, petrol, metal, etc. the price one pays for use of a unit of another persons money is called interest rate. And the price one pays in one’s own currency for a unit of another currency is called as an exchange rate.

The changes in demand and supply influencing factors culminate in market adjustments through price changes. These price changes expose individuals, producing firms and governments to significant risks. The break down of the BRETTON WOODS agreement brought and end to the stabilizing role of fixed exchange rates and the gold convertibility of the dollars. The globalization of the markets and rapid industrialization of many underdeveloped countries brought a new scale and dimension to the markets. Nations that were poor suddenly became a major source of supply of goods. The Mexican crisis in the south east-Asian currency crisis of 1990’s has also brought the price volatility factor on the surface. The advent of telecommunication and data processing bought information very quickly to the markets. Information which would have taken months to impact the market earlier can now be obtained in matter of moments. Even equity holders are exposed to price risk of corporate share fluctuates rapidly.

This price volatility risk pushed the use of derivatives like futures and options increasingly as these instruments can be used as hedge to protect against adverse price changes in commodity, foreign exchange, equity shares and bonds.

  • Increased integration of national financial markets with the international markets

Earlier, managers had to deal with domestic economic concerns; what happened in other part of the world was mostly irrelevant. Now globalization has increased the size of markets and as greatly enhanced competition .it has benefited consumers who cannot obtain better quality goods at a lower cost. It has also exposed the modern business to significant risks and, in many cases, led to cut profit margins

In Indian context, south East Asian currencies crisis of 1997 had affected the competitiveness of our products vis-Ã -vis depreciated currencies. Export of certain goods from India declined because of this crisis. Steel industry in 1998 suffered its worst set back due to cheap import of steel from south East Asian countries. Suddenly blue chip companies had turned in to red. The fear of china devaluing its currency created instability in Indian exports. Thus, it is evident that globalization of industrial and financial activities necessitates use of derivatives to guard against future losses. This factor alone has contributed to the growth of derivatives to a significant extent.

  • Marked improvement in communication facilities and sharp decline in their costs.
  • Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies

A significant growth of derivative instruments has been driven by technological break through. Advances in this area include the development of high speed processors, network systems and enhanced method of data entry. Closely related to advances in computer technology are advances in telecommunications. Improvement in communications allow for instantaneous world wide conferencing, Data transmission by satellite. At the same time there were significant advances in software programmed without which computer and telecommunication advances would be meaningless. These facilitated the more rapid movement of information and consequently its instantaneous impact on market price.

Although price sensitivity to market forces is beneficial to the economy as a whole resources are rapidly relocated to more productive use and better rationed overtime the greater price volatility exposes producers and consumers to greater price risk. The effect of this risk can easily destroy a business which is otherwise well managed. Derivatives can help a firm manage the price risk inherent in a market economy. To the extent the technological developments increase volatility, derivatives and risk management products become that much more important.

  • Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets.
University of Mumbai BMS Notes

Difference between Forwards & Futures

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A forward contract is a customized contractual agreement where two private parties agree to trade a particular asset with each other at an agreed specific price and time in the future. Forward contracts are traded privately over-the-counter, not on an exchange.

A futures contract often referred to as futures is a standardized version of a forward contract that is publicly traded on a futures exchange. Like a forward contract, a futures contract includes an agreed upon price and time in the future to buy or sell an asset usually stocks, bonds, or commodities, like gold.

The main differentiating feature between futures and forward contracts that futures are publicly traded on an exchange while forwards are privately traded results in several operational differences between them. This comparison examines differences like counterparty risk, daily centralized clearing and mark-to-market, price transparency, and efficiency.

Forward Contract

Futures Contract
Definition A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time at a specified price.

A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price.
Structure & Purpose Customized to customer needs. Usually no initial payment required. Usually used for hedging. Standardized. Initial margin payment required. Usually used for speculation.
Transaction method Negotiated directly by the buyer and seller Quoted and traded on the Exchange
Market regulation Not regulated Government regulated market (the Commodity Futures Trading Commission or CFTC is the governing body)
Institutional guarantee The contracting parties Clearing House
Risk High counterparty risk Low counterparty risk
Guarantees No guarantee of settlement until the date of maturity only the forward price, based on the spot price of the underlying asset is paid Both parties must deposit an initial guarantee (margin). The value of the operation is marked to market rates with daily settlement of profits and losses.
Contract Maturity Forward contracts generally mature by delivering the commodity. Future contracts may not necessarily mature by delivery of commodity.
Expiry date Depending on the transaction Standardized
Method of pre-termination Opposite contract with same or different counterparty. Counterparty risk remains while terminating with different counterparty. Opposite contract on the exchange.
Contract size Depending on the transaction and the requirements of the contracting parties. Standardized
Market Primary & Secondary Primary
Management Notes

Types of Underlying Assets

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  1. Financial Claims or Stocks

The stock is defined as the financial claim which represents proportionate ownership of the investor or holder towards the earnings and overall assets of the issuing business. Stocks can be bifurcated into common and preferred stocks. Stocks are primarily issued with the intent of raising finance to fund business operations or high growth projects.

  1. Debt Securities or Bonds

Bond is defined as the financial instrument that gives fixed interest payments to the holder. Corporations and government institutions issue bonds to raise finance with the intent to fund business projects or government projects. The holder of such instruments is termed as creditors of debt.

  1. Exchange Traded Funds

Exchange-traded funds are defined as the special variant of the mutual fund whose benchmark is the underlying index. It is basically a group of securities encompassed as one unit.

  1. Market Index

The market index is defined as the collection of securities. The collection could be focused on one specific area of the financial market. These are designed to assess the performance of the financial markets. The index is employed to develop passive investment strategies.

  1. Currency

Currency is defined as the instrument of monetary exchange replacing traditional barter system wherein such medium is broadly acceptable in the specific country. Different countries may have different currencies. The most common and popular acceptable currency across the globe is that of United States dollars wherein many countries have performed dollarization to meets its currency requirement equivalent to global standards.

  1. Commodities

The commodity is defined as the instrument which is employed in business and commerce-related activities. These items are input for general commerce and production of business activities. Gold and silver are the most popular commodities that are traded over the commodities market.

University of Mumbai BMS Notes

Marketing Institutions and Assistance

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Marketing is about-

Product Mix: Service, Brand, Package, Design, Warranty etc.

Price Mix: Price policy, Terms of credit, Discount etc.

Promotion Mix: Personal Selling, Advertisement, Publicity, Sales

Promotion etc.

Place Mix: Distribution channels: Wholesaler, retailers, agents,

transport, inventory, warehousing.

The success of marketing depends on well- established institutional set

up and financial, technical and organisation assistance in time.

NSIC (National Small Industries Corporation):

The National Small Industries Corporation Ltd. (NSIC) was set-up by the Government of India in 1955 with the objective of promoting and developing small scale industries in the country.

FUNCTIONS:

Supply and distribution of indigenous and improved raw materials. Supply of both indigenous and imported machine on easy hire-purchase terms. Marketing of Small Industries products within the country. Export of Small Industries products and developing export. Developing prototypes of machines, equipment and tools which are then passed on to Small-Scale Units for commercial production. Technical training in several industrial trades Development and up-gradation of technology and implementation of modernization programmes. Providing of Common Facilities through Prototype Development & Training Centres. Setting-up Small Scale Industries in other developing countries on turnkey basis. acilities are available to the Small-scale unites registered with NSIC under the Single Point Registration Scheme under the Government Store Purchase Programme.

State Financial Corporation (SFC):

State Financial Corporation (SFCs), operating at the State-level, function with the objective of financing and promoting small and medium enterprises for achieving balanced regional socio-economic growth, generating greater employment opportunities. At present, there are 18 SFCS in the country.

Functions

  • To provide terms loans for the acquisition of land, building, plant and machinery, pre-ops and other assets.
  • To promote self-employment.
  • To promote industry by the rural and urban artisans.
  • To encourage new and technically/professionally qualified women entrepreneurs in setting up industrial project.
  • To finance expansion, modernisation and upgradation of technology in the existing units.
  • To provide financial assistance for transport vehicles strictly for captive use, depending on the requirement of the projects.
  • To provide Interest subsidy for self-employment of young persons, adoption of indigenous technology in small and medium sector.

State Industries Development Corporations (IDC)

The State Industries Development Corporations (SIDCs) were established

under the Company Act, 1956 in the sixties and early seventies as wholly owned State Government undertaking for promotion and development of medium and large industries. SIDCs act as catalysts for industrial development and provide impetus to further investment in their respective states; The SIDCs are agent of IDBI and SIDBI for operating its seed capital scheme.

Functions:

  • Grant of financial assistance to industrial units by way of loans, and guarantees.
  • Providing risk capital to entrepreneurs by way of equity participation and seed capital assistance.
  • Administering incentive schemes of Central/State Governments;

Technical Consultancy Organisations (TCO):

Objective:

  • Carrying out industrial potential surveys, identification of project ideas, project formulation;
  • Evaluation of projects referred to them;
  • Preparation of project profiles, feasibility studies;
  • Preparation of project reports and where called upon, to render turn-key services in project implementation;
  • Conduct Entrepreneurship Development Programmes, entrepreneurship awareness camps, SEEUY training programmes;
  • Identifying the potential entrepreneurs and providing them with technical and management assistance.
  • Undertaking market research and surveys, for specific products;
  • Undertaking energy audit and energy conservation assistants;
  • Project supervision;
  • Undertaking export consultancy and export oriented projects based on modern technology.

National Institution of Design (NID,1970) along with Indian Institution Technology, Mumbai Industrial Design Centre developed courses for industrial design to serve the needs of industries. The candidates selected from backgrounds in engineering, architecture and applied art have become new cadre of fully trained Indian designers. Programme on khadi, Garment Design, cane, bamboo, leather, glass bell metal and wider range of plastics have reduced cost, saved on materials and increased productivity of enterprises.

Science and Technology Entrepreneurship Park (STEP)

Function:

  • Conducts entrepreneurship Development programme (EDP).
  • Sets up institute- Industry linkage scale.
  • Sets up database and information Canter for needs of particular Industry or a cluster of units nearby.
  • Provides infrastructure including Central work shop and nursery sheds e.g. Tiruchilapali NIT supported STEP.
  • Develops Special process, computer added designs e.g. Harcoat
  • Butler Technological institute, Kanpur developing fibre reinforced spun pipes made out cement

Marketing assistance scheme

Marketing, a strategic tool for business development, is critical for the growth and survival of micro, small & medium enterprises. Marketing is the most important factor for the success of any enterprise. Large enterprises have enough resources at their command to hire manpower to take care of marketing of their products and services. MSME sector does not have these resources at their command and thus needs institutional support for providing these inputs in the area of marketing. Ministry of Micro, Small & Medium Enterprises, inter-alia, through National Small Industries Corporation (NSIC), a Public Sector Enterprise of the Ministry, has been providing marketing support to Micro & Small Enterprises (MSEs) under Marketing Assistance Scheme. Emergence of a large and diverse services sector in the past years had created a situation in which it was no longer enough to address the concerns of the small scale industries (SSI) alone but essential to include the entire gamut of enterprises, covering both SSI Sector and related service entities, in a seamless web. There was a need to provide space for the small enterprises to grow into medium scale enterprises, for that is how they will be able to adopt better and higher levels of technology and remain competitive in a fast globalizing world. Thus, as in most developed and developing countries, it was necessary that in India too, the concerns of the entire range of enterprises – micro, small and medium, were

addressed and the sector was provided with a single legal framework. The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 addresses these issues and also other issues relating to credit, marketing, technology upgradation etc concerning the micro, small and medium enterprises. The enactment of MSMED Act 2006, w.e.f. from 2nd October, 2006 has brought medium scale industries and service-related enterprises also under the purview of the Ministry, accordingly the name of Ministry has also been changed.

The need of the hour presently is to provide sustenance and support to the whole MSME sector (including service sector), with special emphasis on rural and micro enterprises, through suitable measures to strengthen them for converting the challenges into opportunities and scaling new heights. Thus, although the medium

enterprises are also proposed to be included as the target beneficiaries in the scheme, special attention would be given to marketing of products and services of micro and small enterprises, in rural as well as urban areas.

Objectives:

The broad objectives of the scheme, inter-alia, include:

  • To enhance marketing capabilities & competitiveness of the MSMEs.
  • To showcase the competencies of MSMEs.
  • To update MSMEs about the prevalent market scenario and its impact on their activities.
  • To facilitate the formation of consortia of MSMEs for marketing of their products and services.
  • To provide platform to MSMEs for interaction with large institutional buyers.
  • To disseminate/ propagate various programmes of the Government.
  • To enrich the marketing skills of the micro, small & medium entrepreneurs.

Marketing support to MSMES

Under the Scheme, it is proposed to provide marketing support to Micro, Small &

Medium Enterprises through National Small Industries Corporation (NSIC) and enhance competitiveness and marketability of their products, through following activities:

Organizing International Technology Exhibitions in Foreign Countries by NSIC and participation in International Exhibitions/Trade Fairs:

International Technology Expositions / exhibitions may be organized by NSIC with a view to providing broader exposure to Indian micro, small & medium enterprises to facilitate them in exploring new business opportunities in emerging and developing markets. These exhibitions may be organised in consultation with the concerned stakeholders and industry associations etc. The calendar for these events may be finalised well in advance and publicised widely amongst all participants/stakeholders. The calendar of events would also be displayed on the Web-site of NSIC. Such expositions showcase the diverse technologies, products and services produced/rendered by Indian MSMEs and provide them with excellent business opportunities, besides promoting trade, establishing joint ventures, technology transfers, marketing arrangements and image building of Indian MSMEs in foreign countries. In addition to the organisation of the international exhibitions, NSIC would also facilitate participation of Indian MSMEs in the select international exhibitions and trade fairs. Participation in such events exposes MSMEs to international practices and enhances their business prowess. These events provide a platform to MSMEs where they meet, discuss, and conclude agreements on technical and business collaborations.

Management Notes

Institutional Support to an Entrepreneur

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  1. Central Government Institutions:

The Government Formulated the Micro, Small and Medium Enterprises:

Development Act, 2006 and established the National Board for Micro, Small and Medium Enterprises (NBMSME) and made rules there under in the year 2006. This Board examines the factors affecting promotion and development of MSMEs and reviews policies and programmes from time to time relating to these enterprises, from time to time and makes recommendations to the Government in formulating the policies for the growth of MSMEs.

The Government of India constituted the National Commission for Enterprises in the Unorganised Sector (NCEUS) to examine the problems of the enterprises in the unorganized/informal sector. The Commission has made recommendations to provide technical, marketing and credit sup­port to these enterprises.

The various policies and schemes of Government assistance for the development of rural industries insist on the utilisation of local resources and raw materials and locally available manpower. These are translated into action through various agencies, departments, corporations, etc., all coming under the purview of the industries department. All these are primarily concerned with the promotion of small and rural industries.

Some such support measures are being discussed briefly below:

(i) Small Scale Industries Board (SSIB):

It was established in 1954 to provide effective coordination and inter- institutional linkages for the benefit of small scale sector.

It consists of the following members:

  1. Union Industry Minister
  2. State Industry Minister
  3. Selected members of Parliament
  4. Secretaries of department concerned
  5. Eminent experts in the field

(ii) National Bank for Agriculture and Rural Development (NABARD):

NABARD is designated as an apex development bank in the country. This national bank was established in 1982 by a Special Act of the Parliament, with a mandate to uplift rural India by facilitating credit flow in agricul­ture, cottage and village industries, handicrafts and small-scale industries. It is also required to support non-farm sector while promoting other allied economic activities in rural areas. NABARD functions to promote sustainable rural development for attaining prosperity of rural areas in India.

It is basically concerned with “matters concerning policy, as well as planning and operations in the field of credit for agriculture and other economic activities in rural areas in India”. It is worth noting with reference to NABARD that RBI has sold its own stake to the Government of India. Therefore, Government of India holds 99% stake in NABARD.

Role of NABARD:

It is an apex institution which has power to deal with all matters concerning policy, planning as well as operations in giving credit for agriculture and other economic activities in the rural areas.

  1. It is a refinancing agency for those institutions that provide investment and production credit for promoting the several devel­opmental programs for rural development.
  2. It is improving the absorptive capacity of the credit delivery system in India, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, and training of personnel.
  3. It co-ordinates the rural credit financing activities of all sorts of institutions engaged in developmental work at the field level while maintaining liaison with Government of India, and State Governments, and also RBI and other national level institutions that are concerned with policy formulation.
  4. It prepares rural credit plans, annually, for all districts in the country.
  5. It also promotes research in rural banking, and the field of agriculture and rural development.

Various services offered by NABARD are:

  1. Attracting youth to rural non-farm sector
  2. District Industries Rural Project (DRIP)
  3. Rural Entrepreneurship Development Programme (REDP).

(iii) Small Industries Development Organisation (SIDO):

It was constituted in 1954 to develop support services for promotion of SSS. Over the years, it has seen its role evolve into an agency for advocacy, hand holding and facilitation for the small industries sector. It has over 60 offices and 21 autonomous bodies under its management.

These autonomous bodies include:

  1. Tool Rooms
  2. Training Institutions
  3. Project-cum-Process Development Centres.

The SIDO provides a wide spectrum of services to the small industries sector.

These include:

  1. Facilities for testing, tool making, training for entrepreneurship development, preparation of project and product profiles, technical and managerial consultancy, assistance for exports, pollution and energy audits etc.
  2. The SIDO provides economic information services and advis­es Government in policy formulation for the promotion and development of SSIs.

Consequent to the increased globalization of the Indian economy, small industries are required to face new challenges. The SIDO has recognised the changed environment and is currently focusing on providing support in the fields of credit, marketing, technology and infrastructure to SSIs. Global trends and national developments have accentuated SIDO’s role as a catalyst of growth of small enterprises in the country.

The Institutions/Centres Administered by SIDO:

The SIDO has promoted the following institutes and centres and is responsible for their management:

  1. Small Industries Service Institutes (SISI):

The institute functions under the Ministry of SSI, Government of India and it provides services such as preparation of project reports, training programmes in different activities, extending technical assistance and offering guidance on Industrial policy of Government of India. It is a pioneer organisation, to develop small scale industries through counselling, consultancy/training. It also assists the industries in marketing the products and acquiring quality standards.

SISI also provides various types of extension services and assistance in setting up of units, promoting and developing product and services by the Small Scale Industries. The small industries service institutes have been set up in state capitals and other places all over the country to provide consultancy and training to small entrepreneurs both existing and prospective. At present the SIDO has been administering 28 SISIs and 30 branch SISIs working in different parts of the country.

  1. Product-cum-Process Development Centres:

These have been promoted to provide specific service to different types of small scale units concentrated in different locations. These centres are responsible for serving as research and development institutions in areas of dense industry clusters, to encourage product design and innovation, to develop new processes and upgrade the existing level of technology, to act as centres of excellence in respective areas and • to provide technical and managerial support services.

III. Regional Training Centres (RTCs):

These centres are located in major cities and are responsible for quality awareness programme among the small units. For this purpose, they are engaged in systematic testing and technical consultancy services. These centres are also responsible for assisting field testing stations which are expected to provide testing services to SSI units.

  1. Establishment of Training Institutes:

The SIDO also controls the affairs of NISIET (Hyderabad), NIESBUD (New Delhi) and integrated training centre (Industries) at Nilokheri. These institutions are responsible for arranging training facility to entrepreneurial trainers.

Main Objectives of SIDO are:

  1. To formulate policy for promotion of SSI
  2. To Provide coordination of policies of state government

iii. To collect and disseminate information

  1. To provide wide range of extension services through allied institutions
  2. To promote facilities for technology up gradation
  3. To offer consultancy services

Various Services Rendered by SIDO:

  1. Entrepreneurship development and Management training.
  2. Efforts for skill development.

iii. Preparation of feasibility reports for different products.

  1. Provision of testing services.
  2. Availability of tool room facilities.

(iv) National Small Industries Corporation (NSIC):

The National Small Industries Corporation (NSIC) Ltd. was established by the Government as a Public Sector Company in 1955.

Its main functions are:

  1. To arrange for Supply of machinery and equipment.
  2. To arrange Provision of financial assistance.

iii. To provide Assistance for arrangement of raw materials.

  1. To aid establishment of technology transfer centres.
  2. To make arrangement of marketing assistance.
  3. To ensure priority in government purchase programme

vii. To promote, aid, and foster the growth of micro and small enterprises in the country, generally on a commercial basis

viii. To provides a variety of support services to micro and small enterprises catering to their different requirements in the areas of raw material procurement; product marketing; credit rating; acqui­sition of technologies; adoption of modern management practices, arranging for business partners, ensuring technology transfer pro­grammes through missions, delegations and expositions etc.

The Technical Service Centres (TSCs), established by NSIC are functioning in different parts of the country, providing diverse technical support to the small scale sector.

Some of which are:

Entrepreneurship Development Institute of India:

Entrepreneurship development and training is one of the key elements for the promotion of micro, small and medium enterprises, especially for creation of new enterprises by the first generation entrepreneurs. In order to inculcate the entrepreneurial culture amongst the first generation of entrepreneurs on a regular basis, the Ministry has set up

Three national entrepreneurship development institutes namely:

  1. National Institute for Micro, Small and Medium Enterprises (NI-MSME) at Hyderabad,
  2. National Institute for Entrepreneurship and Small Business Development (NIESBUD) at NOIDA (Uttar Pradesh)
  3. And Indian Institute of Entrepreneurship (IIE) at Guwahati, as autonomous societies.

These institutes are engaged in developing training modules; undertaking research & training; and providing consultancy services for entrepreneurship development & promotion of MSMEs, including enhancement of their competitiveness.

  1. National Institute for Micro, Small and Medium Enterprises (NI-MSME):

The National Institute of Micro, Small and Medium Enterprises was established with the mission of promoting the growth and development of MSMEs through services in the areas of policy, entrepreneurship, technology, information, education, management and extension. NIMSME has designed specialized and need-based programmes, workshops and seminars in tune with the current developments in policy and the economy.

NIMSME has been providing unstinted support, in terms of offering services like research, consultan­cy, information, training and extension not only to enterprises but also to concerned developmental agencies. It deserves all appreciation for its outstanding work and contribution to MSMEs, the demand for more such institutes in the country is gathering momentum.

  1. National Institute for Entrepreneurship and Small Business Development (NIESBUD):

NIESBUD is an apex body established by Ministry of Micro, Small & Medium Enterprises. The Government of India for coordinating, training and over­seeing the activities of various institutions/agencies engaged in entrepreneurship development particularly in the area of small industry and small business. Its main activities are to evolve effective training strategies and methodology, standardising model syllabi for training various target groups, formulat­ing scientific selection procedure, developing training aids, manuals and tools, facilitating and supporting Central/State/ Other agencies in organising entrepreneurship development programmes, conducting training programmes for promoters, trainers and entrepreneurs and undertaking research and exchange experiences globally

  1. Indian Institute of Entrepreneurship (IIE):

The Indian Institute of Entrepreneurship (HE) was established in the year 1993 in Guwahati by the erstwhile Ministry of Industry (now the Ministry of Micro, Small and Medium Enterprises), Government of India as an autonomous national institute with an aim to undertake training, research and consultancy activities in small and micro enterprises focusing on entrepreneurship development.

The main objectives of the institute are:

(1) To organize and conduct training for entrepreneurship development,

(2) To evolve strategies & methodologies for different target groups & locations & conduct field tests,

(3) To identify training needs and offer training programmers to Government and non-Government organisations engaged in promoting and supporting entrepreneurship etc.

(v) Small Industries Development Bank of India (SIDESI):

It is a Subsidiary of IDBI and was setup as an act of parliament, for ensuring larger flow of financial and non-financial assistance to the small scale sector.

The SIDBI has taken over the outstanding portfolio of the IDBI relating to the small scale sector for promotion, financing and development of the SSI sector and for coordinating the activities of other institutions. It is the principal financial institution for the promotion, financing and development of industry in the small, tiny and cottage sectors and for co-coordinating the functions of the institutions engaged in similar activities.

Over the years SIDBI has striven to fulfill the role enshrined in its charter by formulating and reorienting its policies, gearing up operations and enlarging the pro­file of its promotional and developmental activities aimed at facilitating entrepreneurial entry and strengthening the small scale sector to enable them to meet the emerging challenges.

From being a mere traditional refinancing institution, it has emerged stronger in meeting the varied re­quirements of the SSI sector by exploring new areas and seeding option for the future growth, like launching new financial products and instruments and support service programmes.

It has also devised tailor-made schemes for direct lending to small scale sector so as to supplement the efforts of Primary Lending Institutions (PLIs), which includes:

  1. State Financial Corporation’s (SFCs), State Industrial Development Corporations (SIDCs), Scheduled Commercial Banks (SCBs) both in the public and the private sector. State
  2. Co-operative banks, scheduled urban co-operative banks and regional rural banks SIDBI – Venture Capital Ltd.

iii. SIDBI has also encouraged the growth of the venture capital industry for hi-tech SME units in India by promoting 13 State/regional level funds and setting up an all India Venture Fund.

It provides assistance for:

  1. Setting up of new SSI units, small hotels, hospitals and so on.
  2. Technological up gradation and modernization, expansion and diversification.

iii. Quality up gradation

  1. Development of markets
  2. Development of infrastructure.
  3. Discounting of bills of manufacturer-seller in selling either equipments or components.

(vi) National Board for Micro, Small and Medium Enterprises (NBMSME):

In pursuance of the MSME Development Act, 2006, the National Board for Micro, Small & Medium Enterprises consisting of a total of 47 mem­bers have been constituted. The 20 non-official members on the Board represent industry associations of MSMEs from all over the country while the other 27 members comprise Members of Parliament, Ministers of six State Governments, representatives of RBI, Banks etc.

The main purpose of the board is:

  1. To solve the various issues relating to development of MSMEs
  2. To come out with remedial measures which are undertaken in consultation with the concerned departments/agencies.

(vii) Khadi and Village Industries Commission (KVIC):

The Khadi & Village Industries Commission (KVIC), established under the Khadi and Village Industries Commission Act, 1956, is a statutory organisation engaged in promoting and developing khadi and village in­dustries for providing employment opportunities in rural areas, thereby strengthening the rural economy.

Main reasons for its formation are:

  1. The KVIC has been identified as one of the major organisations in the decentralized sector for generating sustainable rural nonfarm employment opportunities at low per capita investment.
  2. This also helps in checking migration of rural population to urban areas in search of employment opportunities.

iii. New reform programmes are undertaken which aim at revitalizing the khadi sector for enhanced sustainability of khadi; increasing incomes for spinners and weavers; increasing employment; enhancing artisan’s welfare and gradually enabling khadi institutions to stand on their own feet.

(viii) Mahatma Gandhi Institute for Rural Industrialisation (MGIRI):

In order to strengthen the R& D activities in khadi and village industry sectors, a national level institute namely ‘Mahatma Gandhi Institute for Rural Industrialization (MGIRI)’ has been established at Wardha, Maharashtra in association with IIT, Delhi by revamping the erstwhile Jamnalal Bajaj Central Research Institute.

A brief account of these organ­isations is given below:

The national level institute namely Mahatma Gandhi Institute for Rural Industrialization (MGIRI) has been established at Wardha, Maharashtra, to strengthen the R&D activities in khadi and village industry sectors.

The main functions of the Institute are:

To improve the R&D activities under rural industrial sector through encouraging research, extension of R&D, quality control, training and dissemination of technology related information.

(ix) Coir Board:

The Coir Board is a statutory body established under the Coir Industry Act, 1953 for promoting overall development of the coir industry and improving the living conditions of the workers engaged in this traditional industry.

The activities of the board for development of coir industries include:

  1. Undertaking scientific, technological and economic research and development activities
  2. Developing new products & designs and marketing of coir and coir products in India and abroad.

iii. Promoting co-operative organisations among producers of husks, coir fibre, coir yarn and manufacturers of coir products; ensuring remunerative returns to producers and manufacturers,

  1. Promoting two research institutes namely; Central Coir Research Institute (CCRI), Kalavoor, Alleppey, and the Central Institute of Coir Technology (CICT), Bengaluru for undertaking research activities on different aspects of coir industry, which is one of the major agro based rural industries in the country

(x) National Institute for Small Industry Extension Training (NISIET):

The NISIET, since its inception in 1960 by the Government of India, has taken gigantic strides to become the premier institution for:

  1. The promotion, development and modernisation of the SME sector. An autonomous arm of the Ministry of Small Scale Industries (SSI)
  2. The Institute strives to achieve its avowed objectives through a gamut of operations ranging from training, consultancy, research and education, to extension and information services.
  3. State Government Institutions:

The State Governments also execute different promotional and developmental projects and schemes to provide number of supporting incentives for development and promotion of MSMEs in their respective states. These are executed through the State Directorate of Industries, which has District Industries Centres (DICs) under it, for implementing the central/state level schemes.

(i) State Financial Corporation (SFC):

Its main objectives are:

  1. To provide term loans for the acquisition of land, building, plant and machinery.
  2. To promote of self-employment.

iii. To encourage women entrepreneurs

  1. To bring about expansion of industry
  2. To provide seed capital assistance.

(ii) State Small Industries Development Corporation (SSIDC):

The State Small Industries Development Corporations (SSIDC) were set up in various states under the companies’ act 1956, as state government undertakings to cater to the primary developmental needs of the small tiny and village industries in the state/union territories under their juris­diction.

Incorporation under the companies act has provided SSIDCs with greater operational flexibility and wider scope for undertaking a variety of activities for the benefit of the small sector, such as procuring and dis­tributing the scarce raw materials, supplying machinery on hire purchase system, providing assistance for marketing of the products of small-scale industries, constructing industrial estates /sheds, providing allied infrastruc­ture facilities and their maintenance and to extend seed capital assistance on behalf of the state government concerned etc.

SSIDC provides the following important functions:

  1. Procurement and distribution of raw materials.
  2. Supply of machine on hire-purchase basis

iii. Construction of industrial estates.

  1. Providing assistance for marketing of products of SSI.

(iii) Technical Consultancy Organisations (TCOs):

Services of TCOs include:

  1. Preparation of project profiles.
  2. Undertaking industrial potential surveys.

iii. Identification of potential entrepreneurs.

  1. Undertaking market research.
  2. Project supervision and rendering technical and administrative assistance.
  3. Conducting EDPs.

(iv) Khadi and Village Industries Commission (KVIC):

It is engaged in the development of khadi and village industries in rural areas. Main objectives of KVIC are:

  1. To provide employment in rural areas.
  2. To help in skill improvement.

iii. To bring about rural industrialization.

  1. To facilitate transfer of technology.
  2. Non-Government Institutions:

Besides the Central Government and the State Government agencies, there are some Non-Governmental agencies that are also supporting the cause of small scale industries in the country. These agencies include Non- Government organisations and industry associations. They provide a com­mon platform to voice SSI needs and initiate co-operative efforts.

Govern­ment policies have stressed the increasing role of these associations and NGO’s in setting up common facilities and other cooperative ventures in technology, marketing and other support systems. Some of these major associations are as follows:

(I) Indian Council of Small Industries (ICSI):

It was established in 1979 to help tiny, cottage and small industries and artisans of rural areas. Membership of ICSI constitutes about 1500 associations of the decentralized sector.

Main functions of ICSI are:

  1. Information dissemination.
  2. Entrepreneurship development.

iii. Consultancy and managerial support.

  1. Training and research.

(II) Laghu Udyog Bharti (LUB):

Laghu Udyog Bharti (LUB) was founded in 1995 to promote and safe­guard the interest of tiny and small scale industries. It has been given representation on the national and the state level government bodies responsible for the development of SSIs. It is also responsible for undertak­ing entrepreneurial training, providing support for technology up gradation and marketing services.

LUB performs following functions:

  1. Entrepreneurial training.
  2. Technology up gradation.

iii. Marketing services.

(III) India SME Technology Services Ltd.:

India SME Technology Services Ltd. (ISTSL) provides a platform where micro, small and medium enterprises can tap opportunities at the global level for acquisition of new and emerging technology or establish business collaboration.

Their mission is:

To render professional services for technology transfer and attendant support services in order to enhance market competitive­ness of micro, small and medium enterprises and promote sustainable development.

(IV) Credit Guarantee Fund Trust for Micro and Small Industries:

A Credit Guarantee Fund Scheme for small industries was launched by the Government and the SIDBI set up the Credit Guarantee Fund Trust for Small Industries (CGTSI), with a mission

to implement the credit guarantee fund scheme for micro and small enterprise in August 2000 to ensure better flow of credit to micro and small enterprises by minimising the risk perception of banks/ financial institutions in lending without collateral security.

(V) Federation of Associations of Small Industries of India (FASII):

It was promoted in 1959 to represent the problems of SSIs with the Government and liaisoning with other agencies involved in promotion of SSI sector.

Its objectives are as follows:

  1. To promote the development of small scale, tiny and cottage industries;
  2. To cooperate with industrial business, educational institutions in collecting and exchanging information pertaining to the small scale sector;

iii. To undertake professional, technical and management consultation services;

  1. To undertake studies, surveys and research assignments;
  2. To further the cause of small industries by interacting with Union and State Governments and other bodies;
  3. To establish and operate trade centres display centres, sub-contracts exchanges and other promotional institutions for the benefit of the small scale sector and

vii. To establish test centres, laboratories and common facility centres for the SSI sector.

(VI) World Association of Small and Medium Enter­prises (WASME):

The World Association for Small and Medium Enterprises was found­ed in 1981 to ensure business cooperation among its members. Its membership represents chamber of commerce, small industries develop­ment corporations, financial institutions and commercial banks and other State Government agencies of developing countries.

It facilitates:

  1. Technology transfer
  2. Manpower training

iii. Maintaining a register of experts/consultants, organising seminars and conferences

  1. And acts as a clearing house of information and marketing services etc.

(VII) Federation of Indian Chambers of Commerce and Industry (FICCI):

The FICCI was established in 1927 as the national agency through which the chambers of commerce and trade association in India could crystallize their views on current economic problems.

It serves as the coordinating agency for the commercial and industrial interests as represented by various chambers of commerce and trade associations. The Federation maintains very close relations with the Union Government and is also represented on over 65 advisory committees ap­pointed by the Government and other leading organisations.

(VIII) Small and Medium Business Development Chamber of India (SME Chamber of India):

The chamber puts all its efforts for the development and growth of MSMEs by organising various activities to accomplish its objectives. The Chamber provides information and guidance to new and existing entrepreneurs in effectively managing and growing their business. The Chamber has developed key strategies to promote and support the MSME sector. The Chamber also gives importance to and encourages MSMEs to adopt inno­vative ideas and concepts for the promotion of their business.

The chamber organises:

  1. Seminars
  2. Conferences,

iii. Workshops and Training Programs

  1. And other trade promotional activities to educate & create awareness among MSMEs.
  2. The Chamber recognises successful entrepreneurs by conferring National & International Level MSME and Entrepreneurship Excellence Awards for their outstanding achievements in the fields of Manufacturing, Services, International Trade, Finance, Agro & Food Processing, IT and IT Enabled Services, Telecommunication, Research, Technology Development and other sectors.

(IX) Associated Chambers of Commerce and Industry of India (ASSOCHAM):

Assocham is another apex organisation like FICCI to which some of the older chambers of commerce are affiliated. It was founded in December 1920. It seeks to make the businessmen’s voice heard and to ensure that their views are taken into account in the moulding of the nation’s economic life. It also undertakes persuasive activities directed at the administrative departments and to the law makers with a view to acquainting themselves with the view point of the members.

(X) Confederation of Indian Industry (CII):

It was created in 1992 by changing the name of Confederation of Engineering Industry. It is responsible for advisory, consultative and repre­sentative services to industry and the Government. It has been given rep­resentation on major policy formulating bodies, related with the industry. It also works like a nodal agency for international industrial cooperation.

(XI) Federation of Indian Exporters Organisation (FIEO):

This is an apex organisation set up by the Ministry of Commerce in the year October 1965. It represents the Indian entrepreneur’s spirit of enterprise in the global market. The Federation performs activities of common nature such as sending trade delegations abroad and inviting trade delegations from foreign countries, sponsoring commodity and market surveys and collection and dissemination of commercial intelligence.

It provides facilities for:

  1. Settlement of trade disputes arising in the course of foreign trade
  2. And advises Government on all matters relating to export trade.

(XII) Rural Small Business Development Centre (RSBDC):

It is the first of its kind set up by the world association for small and medium enterprises and is sponsored by NABARD. It works for the benefit of socially and economically disadvantaged individuals and groups.

It aims at:

  1. Providing management and technical support to current and prospective micro and small entrepreneurs in rural areas.
  2. Organizing several programmes on rural entrepreneurship, skill up gradation workshops, mobile clinics and trainers training programmes, awareness and counseling camps in various villages of North India.

(XIII) Entrepreneurship Development Institute of India (EDI):

The Entrepreneurship Development Institute of India (EDII), an autonomous body and not-for-profit institution, set up in 1983, is sponsored by apex financial institutions, namely the IDBI Bank Ltd, IFCI Ltd. ICICI Ltd and State Bank of India (SBI).

The Institute is registered under the Societies Registration Act 1860 and the Public Trust Act 1950. The Government of Gujarat pledged twenty-three acres of land on which stands the majestic and sprawling EDII campus.

The institute is located close to Ahmedabad Airport at the village Bhat in Gandhinagar District. Its buildings, designed by Bimal Hasmukh Patel, are set in a 23-acre (93,000 m2) lush green campus and received the Aga Khan Award for Architecture in 1992.

The EDII has been selected as a member of the Economic and Social Commission for Asia and the Pacific (ESCAP) network of Centres of Ex­cellence for HRD Research and Training.

EDI has helped set up twelve state-level exclusive entrepreneurship development centres and institutes. Entrepreneurship has been taken to schools, colleges, science and technology institutions and management schools in the water performance sector by including entrepreneurship in their curricula.

The University Grants Commission appointed the EDI as an expert agency to develop a curriculum on Entrepreneurship. In the inter­national arena, the development of entrepreneurship by sharing resources and organising training programmes, have helped the EDI earn support from the World Bank, Commonwealth Secretariat, UNIDO, ILO, FNSt, British Council, Ford Foundation, European Union and other agencies.

The institute has carried out the task assigned by the Ministry of Exter­nal Affairs (India), to set up Entrepreneurship Development Centres in Cambodia, Lao PDR, Myanmar and Vietnam. The institute is working to­wards creating ED Centres in Uzbekistan and Kazakhstan.

Courses offered by EDI:

(a) Post Graduate Diploma in Management Development Studies (PGDM-DS):

Post Graduate Diploma in Management – Development Studies is designed as a broad and multi-disciplinary focused programme to equip students with knowledge, analytical and con­ceptual skills of social and economic development.

(b) Post Graduate Diploma in Management Business Entrepreneurship (PGDM-BE):

The PGDM-BE two-year, full-time, residential programme at the EDI, has been designed for entrepreneurs and entrepreneurial managers.

(c) Post Graduate Diploma in Management Development Studies (PGDM-DS):

The institute has launched a new course – Post Graduate Diploma in Management – Development Studies in market, which makes sure that the youth is equipped with instruments to bring about ‘change’ in society. Of the many fundamentals and theories, the Development Studies course imbibes Mahatma Gandhi’s principle- “Be the change you want to see in the world”. Development Studies (DS) may be considered an MBA equivalent course that creates social entrepreneurs. Social entrepreneurship is a gutsy, enterprising and challenging concept.

The entrepreneurship process at EDI:

Students are taught to identify opportunities and check on their feasibility. Through mentoring and guidance the students prepare a business plan. They are given a platform to pitch their ideas to banks and investors, so that they can launch their own venture.

(XIV) Indian Investment Centre (IIC):

The Indian Investment Centre is a Government of India organization and enjoys nearly more than three decades of rich understanding in investment promotion. It is the body which is to be contacted first for investment and is the single window agency for bona fide information or any assistance that may be required for investments, technical collaborations and joint ventures. All the services provided by the Indian Investment Centre are free of charge.

Role of Direct Foreign Investment:

  1. The Indian Investment Centre is the body which is known to generate wider knowledge about conditions, laws, policies, procedures and incentives pertaining to investment and the infrastructural facilities available; and of investment opportunities in India.
  2. The Indian Investment Centre functions as a single reference point for foreign investment projects and aids Indian and foreign entrepreneurs in meeting the procedural requirements of project approvals. It also aids them in over-coming bottlenecks, if any, in the process for implementation of the project.

iii. It informs and assists foreign entrepreneurs on matters pertaining to financial and technical collaborations in India.

  1. The Indian Investment Centre advises foreign investors on setting up industrial projects in India.
  2. It provides them information regarding investment environment and opportunities. It also apprises the investors about Government, industrial and foreign investment policies, facilities and incentives taxation laws and assists them in identifying collaborators in India.
  3. Overseas the Government body assists Indian companies in discovering source of capital and technology, hence facilitating for­eign collaborations.

vii. It undertakes promotional work and guides entrepreneurs abroad via diplomatic officers in the external affairs office and other relevant organizations.

Role in Non-Resident Indian Investment:

The Indian Investment Centre is the main organization responsible for promoting investment in India by Non-Resident Indians (NRIs) and Over­seas Corporate Bodies with NRI holdings, providing them lead services.

  1. It is functioning as a sole agency for projects with NRI investment and provides all the necessary services for setting up such projects.
  2. The Indian Investment Centre apprises them of Government policies and procedures and the services and inducements available to them.

iii. The necessary data for the selection of projects is made available to the NRIs and Overseas Corporate bodies.

  1. The nodal agency also assists them in obtaining the approval of the Government authorities.
  2. The Indian Investment Centre stands on the State Level Review Committees, which monitors the execution of the projects and thus help them in removing complicatedness, if any, in the process of implementation.
  3. District Industries Centres (DIC) & Indus­trial Estates:

In each district, there is one agency to deal with all requirements of small and village Industries. This is called “District Industries Centre”, The District Industries Centres have undertaken various programmes for investment promotion at the grass root level such as organizing seminars workshops, extending support for trade fairs and exhibitions organized by various Industry’s associations.

All the services and support required for MSME units under was the single roof of the District Industries Centre. The Centre has a separate wing to look after the special needs of cottage and house­hold industries as district from small industries.

The Department of Industries & Commerce is the anchor department as far as development of industries is concerned. This department is re­sponsible for formulating and implementation of industrial policies in the State.

The Directorate of Industries and Commerce (DIC) which has its headquarters at Bangalore, has a network of District Industries Centres in all the 27 Districts.

The Directorate of Industries & Commerce is the first State Government Department in the country to get the ISO Certif­icate which affirms the quality, efficiency, productivity and service stan­dards. The mission of the Department is to provide prompt and efficient services to the entrepreneurs/industrialists for smooth and time-bound implementation and operation of industrial projects and schemes.

In each district one agency to deal with all requirements of small and village Industries. This is called “District Industries Centre”

The District Industries Centres have undertaken various programmes for investment promotion at the grass root level such as:

  1. Organizing seminars workshops, extending support for trade fairs and exhibitions organized by various Industries associations.
  2. All the services and support required by for MSME units under the single roof of the District Industries Centre. The Centre has a separate wing to look-after the special needs of cottage and house­hold industries as district from small industries.

Administration:

General Manager is the head of the District Industries Centre. The post of General Manager is of Joint/Deputy Commissioner Level. The General Manager has senior officers to assist him, such as Managers, Officers of all related fields.

Objectives of District Industries Centres (DIC):

(i) To identify prospective entrepreneurs to take up viable projects.

(ii) To identify viable projects and make demand survey on the available resources of the district and plan for promotion of viable industries in the area.

(iii) To prepare viable and feasible project reports.

(iv) To strengthen the guidance cell to solve the problems of the entrepreneurs.

(v) To maintain up to date data on SSI Sector.

(vi) To recommend financial proposals to Orissa State Financial/ Corporation/Financial Institutions/Banks etc.

(vii) To allot Govt, land/shed in Industrial Estates

(viii) To recommend for power connection.

(ix) To arrange for EDP training

(x) To arrange exhibition, fair and publicity and visit of industrialists to Trade Fairs and different Industrial Estates of other States.

(xi) To solve the problems of the industrial units at the district level

(xii) To monitor the health of existing SSI units and the progress of those in the pipeline.

(xiii) To provide necessary marketing assistance.

(xiv) To monitor the implementation of the Prime Minister’s Rozgar Yojana.

(xv) To assist revival of sick SSI Units.

(xvi) To update the library in different DICs by procuring different hand books relating to industries

Functions of DICs:

The DICs art funded by the State government concerned and the Cen­tre jointly. The Government has provided substantial assistance to the DIC’s which can be spent by DICs on construction of an office building, expenditure on furniture, fixtures, equipment, vehicles and other recur­ring expenses.

With this basis facility, DIC’s in the district level undertakes various promotional measures with a view to bringing out all development of SME in the district.

In starts from exploration of potential entrepreneurs to marketing the products produced by the SMEs. The DICs provide and arrange a package of assistance and facilities for credit guidance, raw materials, training, marketing etc. including the necessary help to unem­ployed educated young entrepreneurs in general.

Thus it may be said that DIC extends promotional, technical, physical, financial, marketing and all other type of services, required for growth and development of SSI.

The important functions of DICS are discussed as follow:

(i) Identification of Entrepreneurs:

DIC’s develop new entrepreneurs by conducting entrepreneurial motivation programmes throughout the district particularly under SEEUY scheme. DICs also take association of SIS’s and TCOs for conducting EDPs.

(ii) Provisional Registration:

Entrepreneurs can get provisional registration with DICs which enable them to take all necessary steps to bring the unit into existence. The entrepreneur can get assistance from term lending institutions only after getting provisional registration.

(iii) Permanent Registration:

When the entrepreneur completes all formalities required to commence the production like selection of site, power connection, installing machinery etc. they can apply to DIC for permanent registration. It is only after getting the permanent registration that the entrepreneur can apply for supply of raw mate­rials on concessional rates. Permanent registration is essential to avail all types of benefits extended by the government from time to time.

(iv) Purchases of Fixed Assets:

The DIC’s recommend loan applications of the prospective entrepreneur to various concerned financial and developmental institutions e.g. NSIC, SISI etc. for the purchase of fixed assets. It also recommend to the commercial banks for meeting the working capital requirement of SSI to run day-to-day operations.

(v) Clearances from Various Departments:

DIC takes the initiative to get clearances from various departments which is essential to start a unit. It even takes follow up measures to get speedy power connection.

(vi) Assistance to Village Artisans and Handicrafts:

In spite of inherent talent and ability, village artisans are not better off because they lack financial strength to strive in the competitive market. DIC in support with different lead banks and nationalized banks extends financial support to those artisans.

(vii) Incentives and Subsidies:

DIC helps SMEs and rural artisans to subsidies granted by government under various schemes. The different types of subsidies are power subsidy, interest subsidy for engineers and subsidy under IRDP etc. from various institutions.

(viii) Interest Free Sales Tax Loan:

SIDCO provides interest free sales tax loan up to a maximum limit of 8per cent of the total fixed assets for SSI units set up in rural areas. But the sanction order for the same is to be issued by DIC. The DIC recommends the case of SME to National Small Industries Corporation Limited for registration for Government purchase programme.

(ix) Assistance of Import and Export:

Government is providing various types of incentives for import and export of specific goods and services. These benefits can be availed by any importer or exporter provided the same is routed through the concerned DIC. Export and import license is also issued to the importer or exporter only on the basis of recommendation of DIC.

(x) Fairs and Exhibitions:

The DIC inspires and facilitates the SSI units to participate in various fairs and exhibitions which are organized by the Government of India and other organizations to give publicity to industrial products. DICs provide free space to SMEs for the display of their products and provide financial assistance for the purpose.

(xi) Training Programmes:

DIC organizes training programs to rural entrepreneurs and also assists other institutions or organization imparting training to train the small entrepreneurs.

(xii) Self-Employment for Unemployed Educated Youth:

The DICs have launched a scheme to assist the educated unemployed youth by providing them facilities for self-employment. The youth should be in the age group of 18 to 35 years with minimum qualification of Metric or Middle with I.T.I. in engineering or Technical Trade. Technocrats and women are given preference.

Thus the above mentioned organisations in all the categories have been set up and are steadily working towards the development of small indus­tries. The entrepreneurs would indeed be benefited, provided they take benefit from the services provided by these organisations. The assistance provided ranges from setting up of the business unit, financing, training, procuring of raw materials, purchase of plant and machinery, marketing of their products, selling, and exporting their products.

It is seen that the Government of India and the Government of Karnataka are indeed setting up these agencies to help the entrepreneurs, to motivate them in setting up more units which will not only help them but also help the economy.

They want to create more of job providers than job seekers. The entre­preneurs should make use of the facilities provided by the Governmental organisations and agencies in order to grow economically and become more competitive globally.

University of Mumbai BMS Notes

Problem of Venture set-up and prospects

indiafreenotesby indiafreenotes2

Lack of Finances

Cash flow is essential for startups to survive. One of the key challenges that small businesses face today relates to finances. As income increases, the expenditures also increase and to top it all, startups rely heavily on investors who provide them strong financial support. When such situations arrive, startups are the first ones who lose on properly managing their finances, and eventually succumb to the pressure. While entrepreneurs have to make sure that they have enough funds to go around, in the meantime, they also have to pay their employees, contractors, mortgage, and grocery bills.

Poor Business Planning

Proper planning is the key for startups to get their businesses off the ground. In this technological landscape, writing a formal business plan based on a vague requirement of some institution is suicidal. Due to poor planning, many businesses fail in the very first year because they do not effectively factor in challenges and pitfalls. Even if the startups have innovative ideas and ambitions, but their business plans lack perspective, they are doomed to fail or they have to continuously devise and change them.

Lack of Proper Marketing Strategy

It is always a challenge for startups to figure out best ways to market their products or services. The fact that small businesses need to maximize their return on investment with efficient and result oriented targeted marketing also makes them vulnerable in terms of trust they have develop vis-à-vis customers. Without putting a comprehensive marketing strategy in place, companies’ profits take a steep plunge.

Lack of A Dedicated Team

Due to the lack of a proper team, any business will suffer immensely. Lack of commitment aggravates frustration in the organization which quickly escalates into an open conflict. If the team members start making under commitments due to the fear of being responsible or blamed for failure, businesses will never achieve their goals.

Fierce Competition

Competition is the most inevitable challenge that startups face. In fact, startups have to bear the brunt of facing two-way challenge: one coming from monopolistic businesses that have dominated the market and making difficult for newcomers to emerge. Second, there are countless startups that are launched regularly in the market having innovative ideas, so it is highly likely to get swallowed by the shadow of other startups.

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