Shipra Singhal(Student of AMPPP Class 2023)
Leading Policy and Partnerships at Pan IIT Alumni Foundation
Until now, all the efforts by the government to promote entrepreneurship among the poor have been debt-driven with interest subvention/ subsidy/ credit guarantee through schemes such as PMEGP, Mudra, Stand up India etc. Alongside most micro-entrepreneurs dive into their minuscule savings and borrow from family and friends to start an enterprise. However, there are inherent risks in entrepreneurship, due to which half of the small firms are likely to die in the first six years. Pure debt funding lays the entire financial risk on entrepreneurs who are already poor, thereby burdening them further, highlighting the core reason for the failure of micro-entrepreneurship among the poor at scale.
Equity investments have mainly been the preserve of larger firms in urban areas. Access to such investments is usually to entrepreneurs who have the right networks and pedigree. Many of these companies are debt-free and run only on equity financing. Therefore, there is a need for innovation in the capital structure of a micro-enterprise by bringing in equity funding.
What is micro-equity?
Micro-equity is an equity-oriented investment in collective village entrepreneurship in rural areas, facilitating industrial development and employment generation. This would reduce the pressure of migration from rural to urban areas. In the current environment of COVID-19-induced reverse migration, this would be more productive because several skilled workers have returned to their homes, and their skill sets could be well utilised.
Similar to the concept of equity financing happening with Ola, Zomato, Swiggy, etc., the investment firms (Venture Capitalists) bring in all the money in return for equity. At the same time, the start-up founders’ worth is measured in terms of their sweat equity. For micro-entrepreneurship to be successful at scale, there is a need for the government to initiate the fund for micro-equity for entrepreneurship in rural areas (Private venture capital firms may be less interested in creating this as they are profit-oriented, but once the village entrepreneurship picks up with government support and gets a reasonable valuation, it will automatically attract the likes of the private VCs). This will provide the risk appetite to the entrepreneurs who wouldn’t be burdened with the loans while concentrating on the efficiency of their enterprise- thus bringing a win-win situation for them and their investors.
For instance, rural women (maybe existing Self-Help Group members) may come together to start a venture of ready-made garments with this equity fund to support their working capital needs. When this venture starts operating efficiently with good technology and market linkages, it would have a better valuation to attract private investors. With the Social Stock Exchange/SME Exchange/ESG Funds coming up, these enterprises can also be listed, providing an exit for investors to get returns. In the case of a buyback, exit could be through income/ revenue sharing or share buyback after a cooldown period.
In terms of input, output and outcomes of the intervention, the input is proposed to be raised from central & state government bodies, multilateral donors, philanthropists, CSR partners, and other contributors. The programme’s output is establishing enterprises/collective enterprises in villages and rural areas. The programme’s outcome would be wealth generation for agro and rural entrepreneurs, direct employment generation, and a substantial secondary social impact with a greater thrust on environmental and social outcomes than on economic returns.
The way forward
The plan of action to execute this would comprise of the following three steps-
- Support from government – An impact fund needs to be created with grant contributions from government that would fund the micro-entrepreneurship collective. Next, selecting non-profit players to run the entire show of handholding such collectives from incubating them to providing financial/technological/market linkages, is another task that requires proper due diligence. Most importantly, the government needs to support micro-equity funding as low returns and exit issues dissuade most investors to fund such enterprises.
- Regulatory considerations– Thus created impact fund needs to be listed under SEBI as an Alternative Investment Fund. SEBI allows investments from such funds only into social impact ventures owned by poor, who can only bring in sweat equity, thus mandating the ‘impact creation’ objective. Also, registering with SEBI would provide a standardised method of funding to the investors, in micro-enterprises along with providing administrative and governance framework to the fund.
- Policy considerations– Social Stock Exchange launched by SEBI is a welcome step, however it doesn’t mention entities owned by disadvantaged/women, which maybe profit making but deserve to be counted as eligible entities for listing, because of the social nature of the membership of the group.
Another is the recognition of sweat in place of cash/land/capital, as an accepted contribution from producers in exchange for equity in the enterprise. As well as, currently they can’t accept outside equity ownership, which also needs relaxation to ensure investments from VCs, philanthropists, etc. into the fund.
Micro-equity (and not micro-credit) is the future of micro-entrepreneurship that can bring self-reliance to the rural poor and elevate them from being workers to owners. It would bring a revolution in terms of creating an ‘Uber-like’ company in rural areas, with the drivers being the literal ‘partners’.
DISCLAIMER : “The views expressed in this blog/article are personal. Shipra Singhal is a student of the Advanced Management Programme in Public Policy at the Indian School of Business.”