Finance Minister Nirmala Sitharaman on May 13 announced Rs 50,000-crore equity infusion through Fund of Funds for MSMEs, as she shared the details of the Rs 20-lakh-crore stimulus package Prime Minister Narendra Modi had talked about a day earlier.
Micro, small and medium enterprises (MSMEs) are facing a severe shortage of capital. The Fund of Funds will be set up with a corpus of Rs 10,000 crore.
"The Fund of Funds will be operated through a mother fund and a few daughter funds. The government will provide equity funding for MSMEs with growth potential and viability," said Sitharaman.
The fund structure will help leverage Rs 50,000 crore at daughter-fund levels. This will help MSMEs expand size as well as capacity. It will encourage MSMEs to get listed on main board of stock exchanges, the government said.
Based on the recommendations of UK Sinha Committee, the Fund of Funds was first announced in the Union Budget on February 1, 2020. An investment of Rs. 10,000 crore was proposed in the Budget for the scheme.
The fund is meant to address the problem of shortage in growth capital for MSMEs, helping those companies in nascent and initial stages as there are no prospects for such units to raise funds through venture capitalists and professional corporations.
The FoF scheme proposes to buy up to 15 percent equity in MSMEs, with high credit rating. The scheme was approved by the finance ministry in April, pending Cabinet approval.
The government further announced Rs 3 lakh crore automatic collateral-free loans for MSMEs and Rs 20,000 crore subordinate debt for stressed businesses.
MSMEs provide employment to around 120 million people.
Once operations resume, there will be issues with the sustainability of MSMEs leading to a large number of layoffs, a report by KPMG has said.
MSMEs have been hit badly due to the coronavirus outbreak and the lockdown and need funds to meet operational liabilities built up, buy raw materials and restart business.
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