RCA 204, Innovation & Entrepreneurship

UNIT IV: (8 HRS)

Role of Government in promoting Entrepreneurship, MSME policy in India, Agencies for Policy
Formulation and Implementation: District Industries Centers (DIC), Small Industries Service Institute
(SISI), Entrepreneurship Development Institute of India (EDII), National Institute of Entrepreneurship &
Small Business Development (NIESBUD), National Entrepreneurship Development Board (NEDB),
Financial Support System: Forms of Financial support, Long term and Short term financial support,
Sources of Financial support, Development Financial Institutions, Investment Institutions

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Role of Government in promoting Entrepreneurship

Government plays a very important role in developing entrepreneurship. Government develops

industries in rural and backward areas by giving various facilities with the objective of balances regional
development. The government set programmes to help entrepreneurs in the field of technique, finance,
market and entrepreneurial development so that they help to accelerate and adopt the changes in
industrial development. Various institutions were set up by the central and state governments in order
to fulfill this objective.

Key recommendations for Government Policy:

In summary, key recommendations for government policy in the fostering of entrepreneurial

ecosystems are:

 Make the formation of entrepreneurial activity a government priority – The formulation of

effective policy for entrepreneurial ecosystems requires the active involvement of Government
Ministers working with senior public servants who act as ‘institutional entrepreneurs’ to shape
and empower policies and programs.
 Ensure that government policy is broadly focused – Policy should be developed that is holistic
and encompasses all components of the ecosystem rather than seeking to ‘cherry pick’ areas of
special interest.
 Allow for natural growth not top-down solutions – Build from existing industries that have
formed naturally within the region or country rather than seeking to generate new industries
from green field sites.
 Ensure all industry sectors are considered not just high-tech – Encourage growth across all
industry sectors including low, mid and high-tech firms.
 Provide leadership but delegate responsibility and ownership – Adopt a ‘top-down’ and
‘bottom-up’ approach devolving responsibility to local and regional authorities.
 Develop policy that addresses the needs of both the business and its management team –
Recognize that small business policy is ‘transactional’ while entrepreneurship policy is
‘relational’ in nature.

Institutions set up by Central Government

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1. Small industries development organization (SIDO)

2. Management development Institute(MDI)
3. Entrepreneurship development institute of India (EDI)
4. All India Small Scale Industries Board(AISSIB)
5. National Institution of Entrepreneurship and Small Business Development(NIESBUD),New Delhi
6. National Institute of Small Industries Extension Training
7. National Small Industries Corporation Ltd. (NSIC)
8. Risk Capital and Technology Finance Corporation Ltd.(RCTFC)
9. National Research and development corporation (NRDC)
10. Indian Investment Centre
11. Khadi and village industries Commission(KVIC)
12. Indian Institute of Entrepreneurship(IIE)
13. Miscellaneous Organization
14. National Alliance of Young Entrepreneurs(NAYE)
15. Centre for Entrepreneurial Development(CED) Ahmadabad
16. Institute for Entrepreneurial Development (IED)
17. Technical Consultancy Organization (TCOs)
18. Public Sector Banks
19. Institutions set up at State Level

Reference: http://www.simplynotes.in/mbabba/role-of-government-in-promoting-entrepreneurship/

MSME Policy in India

The Government through the Ministry of Micro, Small and Medium Enterprises (MSME) has been
implementing a number of schemes with the objective of having a vibrant MSME sector through the
promotion of growth and development of micro, small and medium enterprises including khadi, village
and coir industries in cooperation with concerned Ministries/Departments, State Governments and
other stakeholders by providing support to existing enterprises and encouraging creation of new
enterprises.

The major thrust among the MSME segments include providing assistance in the form of margin money
subsidy to first generation entrepreneurs to set up new micro enterprises through bank credit under
Prime Minister’s Employment Generation Programme (PMEGP), facilitating adequate availability of bank
credit through Credit Guarantee Fund scheme, promotion of MSMEs through cluster based approach
and adequate skill development.

The role of micro, small and medium enterprises (MSMEs) is well established in the economic and social
development of the country. This sector contributes 8 per cent of the country’s GDP, 45 per cent of the
manufacturing output and 40 per cent of its export. The MSMEs provide employment to about 60
million persons through 26 million enterprises.

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In accordance with micro small and medium enterprises development (MSMED) Act 2006 the MSME are
classified into:-

1. 1.Manufacturing/Production of goods
2. 2.Providing/Rendering of services

The Manufacturing Enterprises have been defined in terms of investment in plant and machinery
(excluding land and building) and further classified into:-

 Micro Enterprises-investment up to Rs25 lakh

 Small Enterprises-investment above Rs25 lakh and upto Rs5 crore
 Medium Enterprises-investment above Rs5 crore and up to Rs10 crore

The Service Enterprises have been defined in terms of their investment in equipment(excluding land and
building) and further classified into:-

 Micro Enterprises-investment up to Rs10 lakh

 Small Enterprises-investment above Rs10 lakh and up to Rs2crore
 Medium Enterprises-investment above Rs2 crore and up to Rs5 crore

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District Industries Centre, DIC

The 'District Industries Centre' (DICs) programme was started by the central government in 1978 with
the objective of providing a focal point for promoting small, tiny, cottage and village industries in a
particular area and to make available to them all necessary services and facilities at one place. The
finances for setting up DICs in a state are contributed equally by the particular state government and the
central government. To facilitate the process of small enterprise development, DICs have been
entrusted with most of the administrative and financial powers. For purpose of allotment of land, work
sheds raw materials etc., DICs functions under the 'Directorate of Industries'. Each DIC is headed by a
General Manager who is assisted by four functional managers and three project managers to look after
the following activities:

Activities of District Industries Centre (DIC):

o Economic Investigation
o Plant and Machinery
o Research, education and training
o Raw materials
o Credit facilities
o Marketing assistance
o Cottage industries

Objectives of District Industries Centre (DIC): The important objectives of DICs are as follow:

o Accelerate the overall efforts for industrialization of the district.

o Rural industrialization and development of rural industries and handicrafts.
o Attainment of economic equality in various regions of the district.
o Providing the benefit of the government schemes to the new entrepreneurs.
o Centralization of procedures required to start a new industrial unit and minimization- of
the efforts and time required to obtain various permissions, licenses, registrations,
subsidies etc.

Functions of District Industries Centre (DIC):

o Acts as the focal point of the industrialization of the district.

o Prepares the industrial profile of the district with respect to: Statistics and information
about existing industrial units in the district in the large, medium, small as well as co-
operative sectors.
o Opportunity guidance to entrepreneurs.
o Compilation of information about local sources of raw materials and their availability.
o Manpower assessment with respect to skilled, semi-skilled workers.
o Assessment of availability of infrastructure facilities like quality testing, research and
development, transport, prototype development, warehouse etc.
o Organizes entrepreneurship development training programs.

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o Provides information about various government schemes, subsidies, grants and

assistance available from the other corporations set up for promotion of industries.
o Gives SSI registration.
o Prepares techno-economic feasibility report.
o Advices the entrepreneurs on investments.
o Acts as a link between the entrepreneurs and the lead bank of the district.
o Implements government sponsored schemes for educated unemployed people like
PMRY scheme, Jawahar Rojgar Yojana, etc.
o Helps entrepreneurs in obtaining licenses from the Electricity Board, Water Supply
Board, No Objection Certificates (NOC) etc.
o Assist the entrepreneur to procure imported machinery and raw materials.
o Organizes marketing outlets in liaison with other government agencies.

Small Industries Service Institutes (SISI)

The SISIs were set up in state capitals and other industrial cities in the country. There are all together 28
SISIs and 30 branch SISIs in India. Their performances are overseen by the office of the Development
Commissioner (DC-SSI).

Functions of SISI

 To assist existing and prospective entrepreneurs through technical and managerial counseling
such as help in selecting the appropriate machinery and equipment, adoption of recognized
standards of testing, quality performance etc;
 Conducting EDPs all over the country;
 To advise the Central and State governments on policy matters relating to small industry
development;
 To assist in testing of raw materials and products of SSIs, their inspection and quality control;
 To provide market information to the SISI’s;
 To recommend SSI’s for financial assistance from financial institutions;
 To enlist entrepreneurs for partition in Government stores purchase programme;
 Conduct economic and technical surveys and prepare techno-economic feasible reports for
selected areas and industries.
 Identify the potential for ancillary development through sub-contract exchanges;
 Organize seminars, Workshops and Industries Clinics for the benefit of entrepreneurs.

The Small Industries Service Institutes have been generally organizing the following types of EDPs on
specialized courses for different target groups like energy conservation, pollution control, Technology
up-gradation, Quality improvement, Material handling, Management technique etc. as mentioned
earlier.

Practice Questions:

1. What are the problems faced by small scale Entrepreneurs?

2. What is the Importance of Small Entrepreneurs in Indian Economy?
3. What are the main ingredients of modern industries?

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4. Here are the two main criteria used to define the concept of small business
5. How to get venture capital for starting your business in India?
6. What is the difference between Large and Small Scale Entrepreneur?

Entrepreneurship Development Institute of India, EDII

Entrepreneurship Development Institute was set up in May 1933 at Ahmedabad by All India Financial
Institutions like Industrial Development Bank of India, Industrial Credit & Investment Corporation of
India, Industrial Finance Corporation of India and the State Bank of India.
EDII has emerged from the Centre for Entrepreneurship Development (CED) of the Gujarat Industrial and
Technical Consultancy Organization. The entrepreneurship development institute of India (EDI) is
established in 1983 and helps the unemployed to get job where they provide employment for others
also.

Role of EDII

 Entrepreneurship Development Institute of India (EDI), an autonomous and not-for-profit

institute, set up in 1983, is sponsored by apex financial institutions – the IDBI Bank Ltd., IFCI Ltd.,
ICICI Bank Ltd. and the State Bank of India (SBI).

 EDI has helped set up twelve state-level exclusive entrepreneurship development centres and
institutes.

 These achievements was taking entrepreneurship to a large number of schools, colleges, science
and technology institutions and management schools in several states by including
entrepreneurship inputs in their curricula.

 In the international arena, efforts to develop entrepreneurship by way of sharing resources and
organizing training programmes, have helped EDI earn accolades and support from the World
Bank, Commonwealth Secretariat, UNIDO, ILO, British Council, Ford Foundation, European
Union, ASEAN Secretariat and several other renowned agencies.

 EDII has also set up Entrepreneurship Development Centre at Cambodia, Lao PDR, Myanmar and
Vietnam and is in the process of setting up such centres at Uzbekistan and five African countries.

Functions of EDII

 It trains to new generation of entrepreneurs.

 It identifies and selects the individual with some entrepreneurial traits and potential for the
purpose of training.
 It conducts result oriented development programmes in enterpriser, lacking regions like the
Andaman, Kerala, Goa, Sikkim, Bihar and Arunachal Pradesh in a systematic and methodical
manner.
 It is promoting Small Scale Industries in industrially backward and rural areas by developing
local, and human resources.
 It conducts special programmes for^ Science and Technical graduates for self employment anci
for. existing entrepreneurs.

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 It conducts extension motivation programmes for officers of financial institutions and

development organizations.
 It offers exciting aveneus for self help, for Ex-serviceman, war widows, sons and daughters of
dead soldiers.

National Institution of Entrepreneurship and Small Business Development (NIESBUD), New Delhi

It was established in 1983 by the Government of India. It is an apex body to supervise the activities of
various agencies in the entrepreneurial development programmes. It is a society under Government of
India Society Act of 1860.

Objectives

 To evolve standardized materials and processes for selection, training, support and sustenance
of entrepreneurs, potential and existing.
 To help/support and affiliate institutions/organizations in carrying out training and other
entrepreneurship development related activities

 To serve as an apex national level resource institute for accelerating the process of
entrepreneurship development ensuring its impact across the country and among all strata of
the society.
 To provide vital information and support to trainers,promoters and entrepreneurs by organizing
research and documentation relevant to entrepreneurship development.
 To train trainers, promoters and consultants in various areas of entrepreneurship development.
 To provide national/international forums for interaction and exchange of experiences helpful for
policy formulation and modification at various levels.
 To offer consultancy nationally/internationally for promotion of entrepreneurship and small
business development.
 To share internationally experience and expertise in entrepreneurship development.

Activities of NIESBUD:

• Assisting/supporting EDPs
• Training for trainers/promoters
• Creation & capacity building of EDP Institutions.
• Small business focus
• National/international forum for exchange of ideas & expressions.
• Developing entrepreneurial culture.
• National entrepreneurship development board (NEDB)
• Services to affiliate members.
• Sustaining entrepreneurship

The major activities of institute are:

 To make effective strategies and methods
 To standardize model syllabus for training
 To develop training aids, tools and manuals
 To conduct workshops, seminars and conferences.

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 To evaluate the benefits of EDPs and promote the process of Entrepreneurial

Development.
 To help support government and other agencies in executing entrepreneur
development programmes.
 To undertake research and development in the field of EDPs.

Note: NIESBUD also serves as the secretariat for National Entrepreneurship development Board(NEDB)
,the apex body which determines policy for entrepreneurship development in the country. The institute,
therefore, performs the task of processing the recommendations made by the Board.

National Entrepreneurship Development Board (NEDB)

The main objective of the National Entrepreneurship Development Board (NEDB) is promotion of
entrepreneurship for encouraging self-employment in small scale industries and small business.

Activities of NEDB

1. To focus on existing entrepreneurs in micro, tiny and small sector and identify and remove
constraints to survivals, growth and continuously improve performance.
2. To facilitate the consolidation, growth and diversification of existing entrepreneurial venture in
all possible ways.
3. To support skill up gradation and renewal of learning processes among practicing entrepreneurs
and managers of micro, tiny, small and medium enterprises.
4. To support agencies in the area of entrepreneurship about the current requirement of growth.
5. To act as catalyst to institutionalize entrepreneurship development by supporting and
strengthening state level institutions for entrepreneurship development as most
entrepreneurship related activities take place at the grass root level and removing various
constraints to their effective functioning.(
6. Setting up of incubators by entrepreneurship development institutions and other organizations
devoted to the promotion of entrepreneurship development

Financial Support System: Sources of Finances

ACCORDING TO TIME-PERIOD:

Sources of financing a business are classified based on the time period for which the money is required.
Time period is commonly classified into following three:

LONG TERM SOURCES OF FINANCE

Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or
maybe more depending on other factors. Capital expenditures in fixed assets like plant and machinery,
land and building etc of a business are funded using long-term sources of finance. Part of working capital
which permanently stays with the business is also financed with long-term sources of finance. Long term
financing sources can be in form of any of them:
 Share Capital or Equity Shares
 Preference Capital or Preference Shares
 Retained Earnings or Internal Accruals

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 Debenture / Bonds
 Term Loans from Financial Institutes, Government, and Commercial Banks
 Venture Funding
 Asset Securitization
 International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc.

MEDIUM TERM SOURCES OF FINANCE

Medium term financing means financing for a period of 3 to 5 years. Medium term financing is used
generally for two reasons. One, when long-term capital is not available for the time being and second,
when deferred revenue expenditures like advertisements are made which are to be written off over a
period of 3 to 5 years. Medium term financing sources can in the form of one of them:
 Preference Capital or Preference Shares
 Debenture / Bonds
 Medium Term Loans from
 Financial Institutes
 Government, and
 Commercial Banks
 Lease Finance
 Hire Purchase Finance

SHORT TERM SOURCES OF FINANCE

Short term financing means financing for a period of less than 1 year. Need for short term finance arises
to finance the current assets of a business like an inventory of raw material and finished goods, debtors,
minimum cash and bank balance etc. Short term financing is also named as working capital financing.
Short term finances are available in the form of:
 Trade Credit
 Short Term Loans like Working Capital Loans from Commercial Banks
 Fixed Deposits for a period of 1 year or less
 Advances received from customers
 Creditors
 Payables
 Factoring Services
 Bill Discounting etc.

Sources of finances are classified based on ownership and control over the business. These two
parameters are an important consideration while selecting a source of finance for the business.
Whenever we bring in capital, there are two types of costs – one is interest and another is sharing of
ownership and control. Some entrepreneurs may not like to dilute their ownership rights in the business
and others may believe in sharing the risk

ACCORDING TO OWNERSHIP AND CONTROL:

OWNED CAPITAL

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Owned capital is also referred as equity capital. It is sourced from promoters of the company or from
the general public by issuing new equity shares. Business is started by the promoters by bringing in the
required capital for a startup. Owners capital is sourced from following sources:

 Equity Capital
 Preference Capital
 Retained Earnings
 Convertible Debentures
 Venture Fund or Private Equity

Further, when the business grows and internal accruals like profits of the company are not enough to
satisfy financing requirements, the promoters have a choice of selecting ownership capital or non-
ownership capital. This decision is up to the promoters. Still, to discuss, certain advantages of equity
capital are as follows:

 It is a long term capital which means it stays permanently with the business.
 There is no burden of paying interest or installments like borrowed capital. So, the risk of
bankruptcy also reduces. Businesses in infancy stages prefer equity capital for this reason.

BORROWED CAPITAL

Borrowed capital is the capital arranged from outside sources. These include the following:

 Financial institutions,
 Commercial banks or
 The general public in case of debentures.

In this type of capital, the borrower has a charge on the assets of the business which means the
borrower would be paid by selling the assets in case of liquidation. Another feature of borrowed capital
is regular payment of fixed interest and repayment of capital. Certain advantages of borrowing capital
are as follows:

 There is no dilution in ownership and control of business.

 The cost of borrowed funds is low since it is a deductible expense for taxation purpose which
ends up saving on taxes for the company.
 It gives the business a leverage benefit.

ACCORDING TO SOURCE OF GENERATION:

INTERNAL SOURCES

Internal source of capital is the capital which is generated internally from the business. Internal sources
are as follows:

 Retained profits
 Reduction or controlling of working capital
 Sale of assets etc.

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The internal source has the same characteristics of owned capital. The best part of the internal sourcing
of capital is that the business grows by itself and does not depend on outside parties. Disadvantages of
both equity capital and debt capital are not present in this form of financing. Neither ownership is
diluted nor fixed obligation / bankruptcy risk arises.

EXTERNAL SOURCES

An external source of finance is the capital which is generated from outside the business. Apart from the
internal sources finance, all the sources are external sources of capital.

Deciding the right source of finance is a crucial business decision taken by top-level finance managers.
The wrong source of finance increases the cost of funds which in turn would have a direct impact on the
feasibility of project under concern. Improper match of the type of capital with business requirements
may go against the smooth functioning of the business. For instance, if fixed assets, which derive
benefits after 2 years, are financed through short-term finances will create cash flow mismatch after
one year and the manager will again have to look for finances and pay the fee for raising capital again.

TOP 10 SOURCES OF FUNDING FOR START-UPS

1. Bootstrapping. Self-funding from your savings (if you have it) is always preferred. Advantages:
no time going hat-in-hand to investors and you don’t have to relinquish any control in your
company. For more on how to bootstrap, check out Bootstrap Business by Rich Christiansen,
who has launched nearly 30 companies by that method.

2. Friends and family. Tap your inner circle before expanding your horizons. As a rule of thumb,
professional investors like to see real skin in the game–your own, of that of people who trust
you.

3. Small business grants. This bucket often gets overlooked, but it should be a major focus thanks
to the Obama administration’s initiatives to foster new alternative-energy sources and other
technological breakthroughs. Nabbing federal or state funds can be an exhausting gauntlet
(check out “One Energy start-up’s Tireless Quest For Capital“), but at least the government
doesn’t charge interest or demand control. One smart approach: Team with a professor at your
local university. Grants associated with commercializing products are favored over ones
allocated for academic study only. If a professor does the application with you and get to publish
the results, that’s a win-win situation.

4. Loans or lines of credit. If your company needs only a temporary or small infusion of cash, try for
a Small Business Administration loan (offered at a lower interest rate because it is guaranteed
by the government) or a bank line of credit.
5. Incubators. A start-up incubator is a company, university or other organization that ponies up
resources–laboratories, office space, consulting, cash, marketing–in exchange for equity in
young companies when they are most vulnerable. Angel investors. For those looking for $25,000
to $250,000, angel networks can come in handy. Networking is critical here, and you need to
find angels who understand your industry and share your passion. I’ve been on the selection
committee of an angel group for years.

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6. Venture capital. As a rule of thumb, don’t try this one in the earlier stages; in fact, don’t try it
unless you need more than $1 million. VCs take their pound of flesh in equity and control. It’s
not the most efficient route, either: Prepare to spend at least six months searching for and
closing the deal. Start your search within your local network of entrepreneurs. After that, hit the
National Venture Capital Association Web site.

7. Bartering. Exchanging goods or services as a substitute for cash can be a great way to run on a
little wallet. Example: trading free office space by agreeing to be the property manager for the
owner. This technique can also work with legal, accounting and engineering services. (For more,
see “Nine Effective Bartering Techniques.”)

8. Form a partnership. A more established company may have a strategic interest in helping to
develop your product—and be willing to advance funding to make it happen. I know several
companies that develop customized social networks for large enterprises, with the expectation
of using that funding and experience to compete in the consumer market some day. Licensing
may not be as sexy as being a consumer brand, but it will cost you a lot less
9. Commit to a major customer. Some customers would be willing to cover your development
costs in order to be able to buy your product before the rest of the world can. Their advantage:
control over your production process (to make sure it meets their requirements) and the
promise of dedicated support. Even large companies look to their best customers to fund new
projects–this is the essence of good business development.

Reference: https://gradestack.com/Class-11th-Commerce/Sources-of-Business/Financial-
Institutions/17625-3452-28660-study-wtw

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