Corporate governance among SMEs has been absent for the most part. They cannot be blamed when even some of the bigger firms lack it. But now some steps are being taken which can radically alter the scenario
(prHWY.com) April 15, 2011 - Mumbai, India -- Small and medium enterprises (SME), which are the largest
CFO job creators in the country, can look forward to greater access to credit by the end of the year. The ministry of corporate affairs will remove certain ambiguities in the limited liability partnership (LLP) bill to ensure that besides entities in the services sector, firms in the manufacturing sector too can get converted to LLPs.
An LLP structure will ensure a better corporate entity than now. This will enable them to raise funds faster, both from banks and other financial institutions. This facility will come with a set of corporate governance norms to be introduced. These will ensure a structure that will make it easier for banks to take them more seriously.
Recently, CB Bhave, chairman, Securities & Exchange Board of India (SEBI) released a White Paper on Good Governance, Business Ethics and SME Stock Exchange, on the occasion of 15th Foundation Day of SME Chamber of India. This White Paper, prepared by SuperCFO Services, was released to create awareness about Good Governance as well as to highlight benefits to SME's by becoming a public company on the proposed SME Stock Exchange.
At present most SMEs are partnerships, making it difficult for them to tap funds. Banks prefer lending to companies, as defined by law. Now, 95% of industrial units in the country are SMEs and about 40% of value addition in the manufacturing sector takes place in the segment. Over 90% of SMEs are registered as proprietorships, about 2-3% as partnerships
and less than 2% as companies as per a survey conducted by the ministry of MSME.
Ministry officials say that the bill would be introduced this year itself in the winter session of Parliament after a parliamentary committee clears it. To make sure that corporate governance is adhered to, The National Foundation for Corporate Governance, an initiative of the ministry and the industry, is now evolving corporate governance norms for SMEs. "This is meant to be adopted voluntarily and would go a long way in satisfying lenders," said an official. However, experts feel it will take more time before as SMEs might be sceptical initially.
Taking it one step further, SEBI has announced rules for setting up SME Stock Exchange on the lines of similar exchanges in certain other countries. One benefit of listing would be adherence to various corporate governance norms.
Bhave said that good governance practices enhance companies' value and uphold stakeholders' trust. This results in robust development of capital market, the economy, and also helps in the evolution of a vibrant and constructive shareholders' interest in the company, including cases of activism when required.
The biggest advantage of a listing is of course, the ability to raise huge funds from the market which every SME dreams of. The only stumbling block is corporate governance, or rather, its absence. Once this is addressed, raising funds will be easier and more importantly, they will be taken more seriously and with much more respect than now.
Corporate governance has always been subject to a lot of scrutiny. For example in the Satyam scandal, it was poor governance to blame. In the grand success of Infosys, it was the credit of good governance, which has continued.
After the setting up of the SME Exchange, governance is expected to get a boost for the long term. As Bhave says, it will also be a catalyst for other non-listed firms to incorporate governance principles and be in line to become world-class firms.
SMEs are at the right stage to incorporate governance. After all, when you are a team of 10, values diffuse more evenly and are soaked better than educating a team of 10,000. If a company implements governance as it grows, at each stage, then by the time it is big, it is also a well governed corporation. "Many times this is the mistake. You do not start off early and then it's too late to implement as it might involve changing core practices," says a CII official. He adds that it is always better to implement good governance right from the start. The new stock exchange and LLP guidelines will achieve just that.
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