The Micro, Small, and Medium Enterprises (MSMEs) sector is the backbone of an India’s robust economy contributing toward its growth and development. The extent of its contribution to the economy can be measured by the fact that it shares 48 percent of the total exports. The Indian government, in its Budget 2024, reiterated its commitment to strengthening the growth of MSMEs, which is very much important for becoming Atma Nirbhar. The government has provided Rs 22000 Cr. to this MSME sector, which is not only capable enough to create a huge capacity for expansion in this particular sector, but will also facilitate new growth avenues and innovation in this sector. Apart from Exports, other sector giants, where MSME has improved the Indian Economy are:
- Contributes around 30% to the Indian GDP.
- MSMEs employ more than 110 million people in India.
- MSME account for about one-third of the manufacturing output of India.
This means, therefore, that for MSMEs to be competitive and to highlight their input into the economic cycle, VALUATION is a critical financial tool, as it involves calculating the financial position. However, it is also faced with aligning debt and equity levels, while ensuring effective utilization of their funds.
MSMEs require investment by way of financing that is primarily entering through involvement of private finance & bank credits. Therefore, to maintain MSME’s viability to access credit as well as capital support from the banking and equity, proper Valuation process and reporting is an important tool. Major key benefits of Valuation for MSMEs are summarized below: –
1. Collateral Valuation: The Valuation process helps in determining the amount that MSMEs may offer as collateral to lend against, which is an important requirement for credit to be available.
2. Amount of Loans Computation: The Valuation process directly impacts the number of loans that banks/investors would advance, and thus affects the pools of funds available to MSMEs.
3. Perceived Risks Reduction: A credible Valuation process instils confidence into banks/investors regarding the availability and sufficiency of collateral, reducing perceived risks of lending.
4. Interest Rate Effect: The interest rates that banks/investors can offer can be influenced by valuation. When the valuation is high, the interest rates accorded are lower with more affordable loans/finances for MSMEs.
5. Creditworthiness: In the proper Valuation report, an MSME strengthens its creditworthiness, which enhances the possibility of approval for loans.
6. Due Diligence: Through Valuation reports, the banks who carry out due diligence while making considerations for loan applications enhances the possibilities of approval for correctly documented cases.
7. Strategic Planning Consistency: Proper valuation establishes an alignment of strategies between business planning and investor expectations as to how MSME is going to execute growth and maximize returns.
This importance to transparency, credibility, and fact-based reporting calls for a Valuer’s responsibility not to arrive at influenced valuations and, thus, work towards bringing the correct value into the report. Naturally, such an approach only serves to strengthen the profession while supporting access to finance for driving MSME’s growth.
The following are some effective valuation strategies for raising equity capital and attracting investors to such MSMEs in a competitive market:
1. Asset-based valuation approach: It usually focuses on the value of both tangible and intangible assets, portraying a comprehensive picture of the MSMEs worth.
2. Market Position Valuation: Competitive advantages with a solidly based market positioning are drivers that boost the confidence of the investor, thereby making the MSME more attractive for financing. This includes the application of the Discounted Cash Flow (DCF) method to project the future cash flows, which should be emphasized for the long-term value as well as growth of MSMEs.
3. ESG Compliance: MSMEs that have adopted ESG practices in their business are utilized for greater ratings and valuations. MSMEs that practice ESG norms are said to offer sustainability, which reflects the socially responsible enterprising nature of MSMEs, and hence they command higher valuations than their peers that are not ESG compliant. Generally, MSMEs following ESG practices will have stronger asset profiles and hence tend to enhance the financial status when compared with their peers.
Valuation can act as a barometer to MSMEs; measuring their current market standing and growth potential. It is a practically fact-based process that gives MSMEs a credible foundation toward achieving their financial goals. Trustworthy and accurate Valuation reporting not only enhances the credibility of the MSME but also strengthens their position within the financial ecosystem.
By maintaining high standards in Valuation, Valuers can assist MSMEs in realizing their aspirations and play an even more enhanced role in India’s economic development.
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