Author: indiafreenotes

MSMEs contribute nearly 8% of the country’s GDP, around 45% of the manufacturing output, and approximately 40% of the country’s exports. It won’t be wrong to refer them as the ‘Backbone of the country.’

The Government of India has introduced MSME or Micro, Small, and Medium Enterprises in agreement with Micro, Small and Medium Enterprises Development (MSMED) Act of 2006. These enterprises primarily engaged in the production, manufacturing, processing, or preservation of goods and commodities.

MSMEs are an important sector for the Indian economy and have contributed immensely to the country’s socio-economic development. It not only generates employment opportunities but also works hand-in-hand towards the development of the nation’s backward and rural areas. According to the annual report by the Government (2018-19), there are around 6,08,41,245 MSMEs in India.

A proposal was made to redefine MSMEs by the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018, to classify them as manufacturing or service-providing enterprises, based on their annual turnover.

Since its formation, the MSME segment has proven to be a highly dynamic Indian economy sector. MSMEs produce and manufacture a variety of products for both domestic as well as international markets. They have helped promote the growth and development of khadi, village, and coir industries. They have collaborated and worked with the concerned ministries, state governments, and stakeholders towards the upbringing of rural areas.

MSMEs have played an essential role in providing employment opportunities in rural areas. They have helped in the industrialization of these areas with a low capital cost compared to the large industries. Acting as a complementary unit to large sectors, the MSME sector has enormously contributed to its socio-economic development.

MSMEs also contribute and play an essential role in the country’s development in different areas like the requirement of low investment, flexibility in operations, mobility through the locations, low rate of imports, and a high contribution to domestic production.

With the capability and capacity to develop appropriate local technology, provide fierce competition in domestic and international markets, technology-savvy industries, a contribution towards creating defense materials, and generating new entrepreneurs by providing knowledge, training, and skill up-gradation through specialized training centers.

Importance of MSMEs to Indian Economy

• MSMEs employ about 12 crore people, making them the second-largest source of jobs after agriculture.
• It contributes about 6.11% of GDP from manufacturing and 24.63% of GDP from service activities, with about 45 lakh units across the country.
• As India strives to become a $5 trillion economy, the MSME ministry aims to raise its contribution to GDP by up to 50% by 2025.
• They account for approximately 45% of India’s total exports.
• MSMEs promote inclusive growth by creating job opportunities, especially for people from lower socioeconomic backgrounds in rural areas.
• MSMEs in tier-2 and tier-3 cities contribute to the creation of opportunities for people to use banking services and goods, which can result in the final accounting of MSMEs’ contribution to the economy.
• MSMEs encourage creativity by assisting aspiring entrepreneurs in developing innovative goods, thereby increasing market competitiveness and fueling growth.

• Startup India Seed Fund Scheme (SISFS): Easy availability of capital is essential for entrepreneurs at the early stages of growth of an enterprise. The capital required at this stage often presents a make or break situation for startups with good business ideas. The Scheme aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization. Rs. 945 crore has been sanctioned under the SISFS Scheme for period of 4 years starting from 2021-22. It will support an estimated 3,600 entrepreneurs through 300 incubators in the next 4 years.
• Fund of Funds for Startups (FFS) Scheme: The Government has established FFS with corpus of Rs. 10,000 crore, to meet the funding needs of startups. DPIIT is the monitoring agency and Small Industries Development Bank of India (SIDBI) is the operating agency for FFS. The total corpus of Rs. 10,000 crore is envisaged to be provided over the 14th and 15th Finance Commission cycles based on progress of the scheme and availability of funds. It has not only made capital available for startups at early stage, seed stage and growth stage but also played a catalytic role in terms of facilitating raising of domestic capital, reducing dependence on foreign capital and encouraging home grown and new venture capital funds.
• Ease of Procurement: To enable ease of procurement, Central Ministries/ Departments are directed to relax conditions of prior turnover and prior experience in public procurement for all Startups subject to meeting quality and technical specifications. Further, Government e-Marketplace (GeM) Startup Runway; a dedicated corner for startups to sell products & services directly to the Government.
• Self-Certification under Labour and Environmental laws: Startups are allowed to self-certify their compliance under 6 Labour and 3 Environment laws for a period of 3 to 5 years from the date of incorporation.
• Income Tax Exemption for 3 years: Startups incorporated on or after 1st April 2016 can apply for income tax exemption. The recognised startups that are granted an Inter-Ministerial Board Certificate are exempted from income-tax for a period of 3 consecutive years out of 10 years since incorporation.
• Exemption for the Purpose Of Clause (VII)(b) of Sub-section (2) of Section 56 of the Act: A DPIIT recognized startup is eligible for exemption from the provisions of section 56(2)(viib) of the Income Tax Act.
• Faster Exit for Startups: Ministry of Corporate A­ffairs has notified Startups as ‘fast track firms’ enabling them to wind up operations within 90 days vis-a-vis 180 days for other companies.
• Support for Intellectual Property Protection: Startups are eligible for fast-tracked patent application examination and disposal. The Government launched Start-ups Intellectual Property Protection (SIPP) which facilitates the startups to file applications for patents, designs and trademarks through registered facilitators in appropriate IP offices by paying only the statutory fees. Facilitators under this Scheme are responsible for providing general advisory on diff­erent IPRs, and information on protecting and promoting IPRs in other countries. The Government bears the entire fees of the facilitators for any number of patents, trademark or designs, and startups only bear the cost of the statutory fees payable. Startups are provided with an 80% rebate in filing of patents and 50% rebate in filling of trademark vis-a-vis other companies.
• Startup India Hub: The Government launched a Startup India Online Hub on 19th June 2017 which is one of its kind online platform for all stakeholders of the entrepreneurial ecosystem in India to discover, connect and engage with each other. The Online Hub hosts Startups, Investors, Funds, Mentors, Academic Institutions, Incubators, Accelerators, Corporates, Government Bodies and more.
• International Access to Indian Startups: One of the key objectives under the Startup India initiative is to help connect Indian startup ecosystem to global startup ecosystems through various engagement models. This has been done though international Government to Government partnerships, participation in international forums and hosting of global events. Startup India has launched bridges with over 13 countries (Brazil, Sweden, Russia, Portugal, UK, Finland, Netherlands, Singapore, Israel, Japan and South Korea, Canada, Croatia) that provides a soft-landing platform for startups from the partner nations and aid in promoting cross collaboration.
• National Startup Awards: National Startup Awards is an initiative to recognize and reward outstanding startups and ecosystem enablers that are building innovative products or solutions and scalable enterprises, with high potential of employment generation or wealth creation, demonstrating measurable social impact.

Raw Material Assistance Scheme aims at helping MSMEs by way of financing the purchase of Raw Material (both indigenous & imported). This gives an opportunity to MSMEs to focus better on manufacturing quality products.

The following benefits are provided under the scheme:

• Financial assistance (Credit) for procurement of raw material up to 90 days.
• Materials facilitated under Bulk supplies arrangements are provided at bulk supplier’s rate by eliminating the middlemen and thus goods are procurred at a lower price.
• Discounts received under bulk supplies arrangements are shared with MSMEs, enabling them to reduce cost of purchase of materials (Economies of Scale).
• Availability of raw material on credit and enabling MSMEs to execute the orders in hand.

Any manufacturing MSME having Udyog Aadhaar Memorandum (UAM) can apply for the assistance under the Scheme.

The The Entrepreneurs and any MSME needs raw material through NSIC may apply to any of the NSIC field office for Raw Material Assistance in the prescribed application forms, which can be downloaded from NSIC’s web site (www.nsic.co.in) or may be obtained free of cost from any of the field offices. The duly filled in application form along with prescribed documents can be submitted with the nearest branch office of NSIC. Details of NSIC offices are available on www.nsic.co.in.

Process of Disbursement

NSIC will make a visit to the applicant’s unit for the purpose of preliminary appraisal after submitting the form. Then, the agency will sanction a limit for the unit post inspection. After getting the sanction, the prospective beneficiary will be required to sign the agreement with NSIC. After signing the agreement, NSIC will disburse the assistance for the unit, provided that a security in the form of Bank Guarantee from approved or nationalized banks is furnished by the applicant.

Scheme for Assistance in Rent to MSMEs

Micro, Small and Medium Enterprises (MSEs) play a significant role in the economic growth of the country owing to their contribution to production and employment. In the recent years, there is a sharp increase in the cost of land and building in the country and therefore Micro, and Small Enterprises having minimal financial resources could not able to start their manufacturing enterprises. Government of Gujarat has decided to provide financial assistance through Scheme for assistance in Rent to MSMEs for shed and plot developed by private developers for the generation of employment and development of MSMEs in the state. The task of administering and implementing this Scheme is entrusted with the Gujarat Industries Commissionerate. In this article, we will look at the Scheme for Assistance in Rent to MSEs

Features of the Scheme

Under this Scheme, the Government provides financial assistance to Private Developer for developing readymade sheds in Mini Estate.

Gujarat Government has felt that there is a need for small estates having a small row house type (Gala type) shed for MSEs which will provide basic infrastructure to set up MSEs. This type of mini Estate can be developed by a private developer for MSEs.

The government also offers financial Assistance in rent to MSEs

The Government felt that the MSE Industrial units have to keep more margins for purchase of land and building while approving the loan from the financial Institution/ bank. This will affect the working capital requirement and also adversely affect the overall viability of the entire project. In view of above, the government has decided to assist MSEs units in rent which will improve the initial liquidity of the project and also help the financial institution/bank to sanction the term loan on plant and machinery required for the project.

Note on Private Developer

Private Developer

Private Developer means any registered Private, Public Limited Company or Industrial Association, Individual industries, Group of industries or Cluster

Mini Estate

Mini Estate is an industrial estate having necessary infrastructure facilities like developed plot, water distribution facilities, internal roads, power distribution and such other facilities or services as may be required designed for the establishment of MSEs in manufacture any product

Eligibility Criteria

The eligibility criteria to obtain the financial benefit under the Scheme for Assistance in Rent to MSEs for Shed and Plot developed By Private Developer are explained in detail below:

The New Micro and Small Enterprise registered as an industrial unit under the MSME Development Act, 2006 with respective Director of Industries Commerce (DIC) as a manufacturing enterprise and obtained term loan from the Financial Institution.

Eligible new unit

For availing the grant under the Scheme for Assistance for in Rent to MSEs, the new unit has to commence production during the operative period of this Scheme.

Eligible Fixed Capital Investment

The eligible fixed Capital investment of the project will be decided based on the following criteria:

Cost of Land

The cost of land will be decided on the basis of prevailing jantri price of the area or the actual price paid by the private Developer, including the stamp duty and registration charges.

Cost of Building

The cost of the building is fixed up by SLEC for the industrial building and SOR of the Roads and Building Department.

Other Infrastructure Facilities

The cost of other infrastructure facilities will be as decided by the SLEC.

Assistance in Rent to MSEs

The Government felt that the MSE Industrial units have to keep more margins for purchase of land and building while approving the loan from the Financial Institution. This will affect the working capital requirement and also adversely affect the overall viability of the entire project. In view of above, the government has decided to assist MSEs units in rent which will improve the initial liquidity of the project and also help the financial Institution or bank to sanction the term loan on plant and machinery required for the project.

Quantum of assistance

The Scheme intends to provide assistance to set up MSEs by small entrepreneurs having limited financial resourced, the Government will assist with rent to strengthen the MSEs in the initial period of establishment.

• The assistance at 50% of rent paid or Rs.50000/- per annum, whichever is less in Municipal Corporation area and areas under the Urban Development Authority
• The assistance at 50% of rent paid or Rs.25000/- per annum, whichever is less except mentioned above
• The financial assistance will be provided for three years

Not all entrepreneurs are from a sound financial background. Most will need initial loans on reasonable interest rate in order to generate capital to start their venture or enterprise. It is self-explanatory but without funds, entrepreneurs cannot grow, and this is where banks, particularly commercial banks play a significant role in the lives of entrepreneurs. Once an enterprise or business is set-up, then comes the important part, funding the cash cycle.

There will be a delay in cash after selling products due to credit period provided to customers. But entrepreneurs will have to make payments upfront to service providers. Banks will help in providing working capital assistance that becomes the lifeline of companies. Apart from that, banks will also provide financial help on regular basis like during expansion or play the role of middleman to connect entrepreneurs. Banks can connect people with huge pockets to people with great ideas. Banks are great advisers as well, they can suggest young entrepreneurs invest their money on shares or commodities to earn more and without any interest rate.

Ethical manufacturing is a holistic approach to the manufacturing process that focuses on good health for all involved. This means that a product’s design, creation, and use maintain sustainable standards and that the item and the process of making these have a positive impact on communities.

An ethical manufacturer has oversight and cares about each section of their business and their own supply chain, prioritising the well-being of both customers and staff, as well as the environment in which they work, shop, and source materials.

Ethical businesses want to operate in the best interest of workers. The health and happiness of staff become priorities, going beyond the standard legal requirements. This means that safety is not sacrificed, and workers are treated fairly. In turn, this can benefit a business through a boost in productivity and staff retention.

Ethics in production is a subset of business ethic that is meant to ensure that the production function or activities are not damaging to the consumer or the society. Like other ethics there is a certain code of conduct or standards to be followed, however ensuring that the ethics are complied with is often difficult.

One of the most important characteristic of the business today is that there is a great degree of interdependence between various business functions. Production cannot happen without marketing and sales and vice versa.

In order to survive in the competitive sphere organizations try to reduce the costs involved in production processes. This cost efficiency is sometimes achieved at the cost of quality. Poor processes and technology is used to keep the cost down, this is especially true for small players who cannot afford economies of scale. Having said this there are also examples of industry giants that compromised on certain production processes, cola companies make up for a good example.

All the production functions are governed by production ethics but there are certain that are severely harmful or deleterious which need to be monitored continuously. The following are worth mentioning:

1. There are ethical problems arising out of use of new technologies that are deleterious to health, safety and environment. Technological advancements like genetically modified food, radiations from mobile phones, medical equipment etc are less problems are more of dilemmas.
2. Defective services and products or products those are innately deleterious like alcohol, tobacco, fast motor vehicles, warfare, chemical manufacturing etc.
3. Animal testing and their rights or use of economically or socially deprived people for testing or experimentation is another area of production ethics.
4. Ethics of transactions between the organization and the environment that lead to pollution, global warming, increase in water toxicity and diminishing natural resources.

Dilemma of Ethics in Production

There are certain processes involved in the production of goods and a slight error in the same can degrade the quality severely. In certain products the danger is greater i.e. a slight error can reduce the quality and increase the danger associated with consumption or usage of the same exponentially. The dilemma therefore lies in defining the degree of permissibility, which in turn depends on a number of factors. Bhopal gas tragedy is one example where the poisonous gas got leaked out due to negligence on the part of the management.

Usually many manufactures are involved in the production of same good. They may use similar or dissimilar technologies for the same. Setting a standard in case of dissimilar technologies is often very difficult. There are many other factors that contribute to the dilemma, for example, the involvement of the manpower, the working conditions, the raw material used etc.

Social perceptions also create an impasse sometimes. For example the use of some fertilizer by cola companies in India recently created a national debate. The same cold drinks which were consumed till yesterday became noxious today because of a change in the social perception that the drinks are not fit for consumption.

A Subsidiary must be excluded from the consolidation when:

• Control is planned to be temporary since the subsidiary was taken over and was held exclusively for disposal in the near future, or
• The subsidiary is operating under severe long-standing restrictions that considerably impair the subsidiary’s ability to transfer funds to its parent

In a consolidated financial statement, investments in such subsidiaries must be accounted for as per AS 13 Accounting for Investments.

Reasons for which a subsidiary isn’t included in the consolidation must be disclosed in such consolidated financial statements.

Consolidation Procedures

While preparing a consolidated financial statement, the parent company’s financial statements and its subsidiaries must be combined line by line by totaling together similar items such as assets, liabilities, income, and expenses.

For consolidating financial statements in a way to present financial information about a group as that of a lone enterprise, the below-motioned steps must be taken:

1. Eliminate the cost to the parent of its investment made in each of its subsidiaries and such parent’s equity portion of each of its subsidiaries, at the date when the investment in such subsidiaries are made
2. any additional cost to the parent company of the investment in the subsidiary over the parent company’s share of the equity of subsidiary, at the date on which the investment in such subsidiary is done, must be shown as goodwill for recognizing as the asset in its consolidated financial statements
3. when the cost to the parent of the investment in the subsidiary is lower than the parent company’s share of the equity of subsidiary, a date on which the investment in such subsidiary is done, the difference must be treated as the capital reserve in its consolidated financial statements
4. a portion of minority interests in net income of the consolidated subsidiary for reporting period must be recognized and adjusted against income of the group for arriving at the net income which is attributable to owners of such parent company; and
5. a portion of minority interests in net assets of the consolidated subsidiaries must be recognized and provided for in consolidated balance sheet distinctly from the equity and liabilities of the parent company.
6. Minority interests in net assets comprise of:

• amount of equity which is attributable to the minorities at the date on which such investment in the subsidiary is done; and
• minorities’ share of the movements in equity from the date the relationship of parent-subsidiary came in to force

1. Where carrying investment amount in a subsidiary is different from the cost, such carrying amount is to be considered for the above calculations.

Accounting for Investments in the Subsidiaries in Separate Financial Statement of the Parent

In a parent company’s separate financial statements, the investments made in subsidiaries must be accounted for as per AS 13 – Accounting for Investments.

Disclosures in the Financial Statements

Following disclosures must be made w.r.t. AS 21 Consolidated Financial Statements:

1. in the consolidated financial statements the list of all the subsidiaries of the parent company which includes the name, country of residence or incorporation, the share of ownership interest and, in case different, the share of voting power held
2. In case the consolidation of a particular subsidiary hasn’t been made according to the grounds permissible in the accounting standard, reasons for which such subsidiary isn’t included in the consolidation must be disclosed in such consolidated financial statements
3. in the consolidated financial statements, where valid:

• type of relationship between a parent and its subsidiary, whether direct control or indirect control through the subsidiaries
• effect of acquisition and disposal of the subsidiaries on the financial position at the date of reporting results for the reporting period and on corresponding amounts for the preceding period; and
• Name of the subsidiary(s) of which reporting date(s) is different

IAS 27 Consolidated and Separate Financial Statements outlines when an entity must consolidate another entity, how to account for a change in ownership interest, how to prepare separate financial statements, and related disclosures. Consolidation is based on the concept of ‘control’ and changes in ownership interests while control is maintained are accounted for as transactions between owners as owners in equity.

IAS 27 was reissued in January 2008 and applies to annual periods beginning on or after 1 July 2009, and is superseded by IAS 27 Separate Financial Statements and IFRS 10 Consolidated Financial Statements with effect from annual periods beginning on or after 1 January 2013.

Objectives of IAS 27

IAS 27 has the twin objectives of setting standards to be applied:

• In the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent;
• In accounting for investments in subsidiaries, jointly controlled entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.

Definitions [IAS 27.4]

Consolidated financial statements: the financial statements of a group presented as those of a single economic entity.

Subsidiary: an entity, including an unincorporated entity such as a partnership that is controlled by another entity (known as the parent).

Parent: an entity that has one or more subsidiaries.

Control: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Scope

This Standard shall be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent.

This Standard does not deal with methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (see Ind AS 103 Business Combinations).

This Standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by law, to present separate financial statements.

Definitions

The following terms are used in this Standard with the meanings specified:

Consolidated financial statements are the financial statements of a group presented as those of a single economic entity.

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

A group is a parent and all its subsidiaries.

Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent.

A parent is an entity that has one or more subsidiaries.

Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.

A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).

A parent or its subsidiary may be an investor in an associate or a venturer in a jointly controlled entity. In such cases, consolidated financial statements prepared and presented in accordance with this Standard are also prepared so as to comply with Ind AS 28 Investments in Associates and Ind AS 31 Interests in Joint Ventures.

6 For an entity described in paragraph 5, separate financial statements are those prepared and presented in addition to the financial statements referred to in paragraph 5. Separate financial statements need not be appended to, or accompany, those statements, unless required by law.

The financial statements of an entity that does not have a subsidiary, associate or venturers interest in a jointly controlled entity are not separate financial statements.

8 [Refer to Appendix 1]