Diminishing

Micro Equity
NewFinancial
New Financial
Product
Product
for
for
IndianEconomy
Indian Economy

Economic Initiatives
Lilac 703, Green Park Complex CHS Ltd. Shillphata, Navi Mumbai 421204, India
Mobile 091 9769249406 E mail economicinitiatives@gmail.com
 Sources of finance for Indian
Establishments
1. According to All India Report on Sixth Economic Census 2016,
there are around 58.49 millions establishments providing
employment for 131.29 million workers in activities excluding
crop production, plantation, public administration, defense,
and compulsory social security in India.
2. Major source of finance for 80.1% Indian establishments is
Selffinance. Just 2.2% urban establishments are financed
through borrowings from financial institutions against 2.4%
rural establishments financed by this source.
3. Just 1.36% establishments (7,93,446 out of 5,84,95,359) are
registered as companies under Ministry of Corporate Affairs
(MCA). It means still 98.64% Indian establishments are
unable to access stock market for capital support.
4. The equity support for MSMEs from SME Exchange is
negligible because during 2015-16 only 50 companies out of
registered 21,33,885 Udhyog Aadhar succeeded raising
amount of Rs. 379 crores through SME platform.
5. Indian Banks being constrained for investing less than 30%
 Private equity is gaining grounds in
India
1. Generally equity is considered as tradable stocks in the capital market. But
recent growth trend in private equities for unlisted companies outside stock
market opened gateway for equity business to serve unlisted companies.
2. While Indian stock exchange observed 6.5% decline (Rs. 19,36,844 crores)
in market capitalisation during 2015-16 compared to 2014-15, India
registered 36% growth in FDI (Rs. 1,44,674 crores) during April to
September 2016, mainly due to private equities.
3. The performance of SME Exchange to support only 50 companies raising
Rs. 379 crores with no trading during 2015-16 shows that 99% smaller and
micro establishments are still looking to access private equity for their
growth.
4. According to Report on Fifth Annual Employment Unemployment Survey
2015-16 average monthly income for 94.7% Workers in India is less than
Rs. 20,000. Indias 45% workers with monthly income below Rs. 20,000
through Self-Employed Establishments are deprived of equities from any
source.
5. Since private equity players have yet not reached 41.9 million Own
Account Establishments in India, banks (with restriction to invest less than
30% paid up capital in any company) can opt strategy to invest in MFIs
with intention to use their network for reaching potential establishments
with micro equity.
 Diminishing Micro Equity for Micro
Enterprises
1. The micro and tiny establishments in the unorganized sector with
inability to access the SME exchange are facing shortage of required
capital for growth.
2. Notably banks in general dont prefer targeting customers who seek
loan under Rs. five lakhs; and MFIs in rare cases extend loan over Rs.
50,000 and in no case sanction loan above Rs. five lakh.
3. Thus the financial needs of micro and tiny enterprises ( for amount
between Rs. 50,000 to Rs. 5 lakhs) in general is not fulfilled through
stock market. For banks they are smaller ticket size whereas for MFIs
they are too large.
4. 60 millions Self Employed Workers engaged in Micro or Tiny
Establishments with financial need between Rs. 50,000 to Rs. 5 lakhs is
too big to ignore. There is huge untapped market for MFIs in India who
could arrange supply of formal finance under ticket size in range of Rs.
50,000 to 5 Lakh. Still private equity players are not tapping this
market, so MFIs could easily tap them.
5. Considering the fact that 27.46% establishments (16 out of 58 millions)
are engaged into sales and trade activities in India where rate of profit
could be higher; MFIs should prefer using Diminishing Micro Equity so
as to earn better returns over investments against interest rate
changed over loan under present regulations for MFIs in India.
 Defining the Product of Diminishing
Micro Equity
The Diminishing Micro Equity Finance may be defined as
participative finance product used to support micro enterprises
through providing capital on terms of sharing floated risk and
reward in the enterprise.
In India the amount of equity finance in range between Rs.
50,000 to Rs. 5,00,000 could be set limit for Diminishing Micro
Equity which may be appropriate to serve as much as 90%
credit accounts.
The process of Diminishing Micro Equity starts with collective
investment in any enterprise by two or more parties; but ends
with complete conversion of ownership for one party who
purchasesthe sharesof other/s in that particular enterprise
during a time frame.
Whole process needs three different set of contracts defining
Collective Investment in any project / enterprise by two or
more parties
Terms of diminishing share in enterprise / project for
different partners
 Stages under Diminishing Micro
Equity
Initial
 Micro Equity Finance may help
National Accounting
Under Micro Equity Finance it may be possible for financier to
envisage how much value addition is created, how much
income is earned and how much capital accumulation is done
through equity finance. Under debt financing we may not be
able to on
Lending calculate
interestnet value addition,
terms incomeFinance
Micro Equity or capital
formation.
Loan Amount in Rs. 1,20,0 Equity Investment in 1,20,000
00 Rs.
Rate of Interest 24% Profit / Loss Sharing 24% to
Ratio 0%
Interest charged over Princip Profit / Loss Shared Profit
al from
Total Repayable 1,48,8 Total Receivable by end 1,59,000
Amount 00
Max. Monthly 12,400 Max. Monthly 16,000
Installment Installment
Min. Monthly 12,400 Min. Monthly 10,500
Installment Installment
Months for Repayment 12 Months for Repayment 12
 Diminishing Micro Equity
encash flow)
(Hypothetical
Equity
M MFIs Custom Profit Total
Buy Net MFIs
on Capita ers through Instalm
Back Profit Profit
th l Capital Enterpri ent to
Per to MFI Share
s Share Share se MFI
month
1,20,0
1 2,50,000 25,000 16,000 10,000 6,000 24%
00
1,10,0
2 2,60,000 25,000 15,500 10,000 5,500 22%
00
1,00,0
3 2,70,000 25,000 15,000 10,000 5,000 20%
00
4 90,000 2,80,000 25,000 14,500 10,000 4,500 18%
5 80,000 2,90,000 25,000 14,000 10,000 4,000 16%
6 70,000 3,00,000 25,000 13,500 10,000 3,500 14%
7 60,000 3,10,000 25,000 13,000 10,000 3,000 12%
8 50,000 3,20,000 25,000 12,500 10,000 2,500 10%
9 40,000 3,30,000 25,000 12,000 10,000 2,000 8%
10 30,000 3,40,000 25,000 11,500 10,000 1,500 6%
11 20,000 3,50,000 25,000 11,000 10,000 1,000 4%
12 10,000 3,60,000 25,000 10,500 10,000 500 2%
3,70,00 3,00,00 1,59,00 1,20,00
Total 39,000 0%
0 0 0 0
 Process involved in Diminishing
Micro Equity
1. Identifying the geography after economic survey of the
village / town area.
2. Explaining the model to the target group, identification of
potential customer, analyzing constraints and prospects for
customers livelihood.
3. Prepare the customer realize the significance of equity to
increase income through existing livelihood; and eagerness to
share returns with the investor.
4. Filling Application, appraisal of applicant, counter party check
and explaining the transactional cash flow to the customer,
fixing co-obligant and finalizing sought measures to mitigate
the financial risk; and approving application and approving
amount for finance against collateral.
5. Signing the Micro Equity agreement between the investor and
Customer; Transferring sought amount into customers
account after handing estimated repayment schedule to
customer with option to buy back investors share.
6. The customer periodically buys back investors unit share.
 Banks and MFIs can execute Micro
Equity
1. With no source of equities between Rs. 50,000 to Rs. 5 Lakhs
for 50 millions micro enterprises, Indian banks / MFIs should
try exploring this opportunity.
2. Considering the limitation about investment and limited
exposure to the micro and tiny enterprises, it would be better
for banks to invest in MFIs for reaching the micro and tiny
enterprises. This may allow banks get better returns with
lesser hassle and lower chances for NPAs.
3. Considering the growth trend in private equities, if banks
pass on equities to MFI asking to finance micro equities, it
may open avenues for banks to draw private equity investors
to subscribe banks capital.
4. Equity support from banks to MFI for micro equity finance
may open avenues to earn better returns through micro
equity at one hand and get additional loans through banks
equities on other hand.
5. According to Section 19 (2) of Banking Regulation Act, any
bank can invest any amount less than 30% of paid up capital
 Weighted Risk for Diminishing Micro
Equity
Since the returns under Diminishing Micro Equity is linked
with actual profit / loss of enterprise, the Weighted Risk for
this product could be 100%.
It should not be used as general financial product. It should
only be used for customers with potential to yield better
returns over investment duly supported with relevant source
to prove the transactional account genuine.
There may be customers seeking this product to cheat
financier with false / manipulated cash flow to draw attention
of financier / investor. Thus it is always required to check and
verify the transactional accounts as genuine.
Investor needs to guide the customer transact digitally. In
case where digital transaction is not feasible, there should be
receipts and vouchers to check and verify the genuineness of
submitted transactional account.
Further it is expected that genuine transactional account may
vary from the proposed transactional account and accordingly
the received amount may keep varying from proposed
 Precautions under Micro Equity
Finance
Since the return over investment under Diminishing Micro Equity may not
be fixed, but just predicted according to submitted business plan, there is
high probability that on monthly basis the actual repayment may differ
from scheduled repayment. In such cases the team has to -
1. Check and verify all related receipts and vouchers to ensure that transactional
account submitted by the customer is not fake / scripted.
2. Adjust customers ledger to update the entries about equity buy back,
retrieved profit / loss share and percentage of profit / loss to share according
to outstanding percentage share in the enterprise / project.
3. Field staff need to periodically visit and observe performance of customers
activity to ensure that business is going smoothly. They need to behave like
sleeping but aware partner in customers enterprise.
4. Periodically update the customer about investors outstanding share in
customers enterprise and accordingly liable percentage of profit / loss
sharing ratio from actual retrieved profit.
5. There should be counter checking system at field level staff so as to ensure
that field level staff could not find any chance to take bribe from customer by
making undue favour for the customer and ditch the investor. On random
basis the filed executive may check their sub ordinates and similarly the
manager should check the filed executive.
6. Before signing the agreement, it should be ensured that the customer has no
problem in appointing the common arbitrator referred by the investor.
Micro Equity may help building
Capital for India
 Micro Equity may support
transactional tax system
1. Diminishing Micro Equity may be a better product than
subsidized loans for micro enterprises as it needs no subsidy;
and also helps to develop transparent accounting system
where customers may be asked to transact digitally.
2. Since under Diminishing Micro Equity, the returns are linked
with actual cash flow of the customers business only, the
Banks / MFIs would be required to obtain record of actual
transactions held in customers livelihood activity.
3. The transactional records provided by the customer to Banks /
MFIs would ultimately help us calculate the volume of
transactions, value additions, income generation, capital
accumulations and paid taxes. This may help us retrieve better
estimates required under national accounting and taxation.
4. India may need to develop technical support system for micro
and tiny entrepreneurs to use mobile app to maintain
transactional records along with financial entries related to
investment, sale purchase and taxation. The cost of the app
may be borne by Government through taxes raised under this
 References for source of data
1. http://www.mca.gov.in/MinistryV2/paidupcapitalreports.html
2. Report on Fifth Annual Employment Unemployment Survey
2015-16
3. All India Report on Sixth Economic Census 2016 (Table 3.9 &
4.12)
4. https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications
5. https://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/PPT11021
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Economic Initiatives
Lilac 703, Green Park Complex CHS Ltd. Shillphata, Navi Mumbai 421204, India
Mobile 091 9769249406 E mail economicinitiatives@gmail.com