Equity in most of the MSMEs in
India are simply held by the promoters. Debt is the only leverage of these
entities for capital requirements. This makes it difficult for them to expand
as high debt-equity ratio is deterrent to the health of the organisation,
especially in difficult business conditions. Apart from this, it becomes
difficult to find suitable person to whom baton has to be passed on after
ageing promoters
With leveraged equity, the
management can offer better debt-equity ratio to the lenders. The equity forms
a permanent capital, which provides comfort to the lenders to repay the debt.
Most of the large organisations and capital intensive industries have been set
up by raising equity instead of raising debts. Recent example being Reliance.
If more businesses grow by
leveraging equity, they can give competition to very few large enterprises in
India. This provide depth to the market and ultimately benefit the society as a
whole by more number of business enterprises to serve.
Some business houses specially
the infrastructure companies of late took the debt-leverage route to grow
quickly instead of equity-leverage. This has resulted in large amount of NPAs.
The lenders preferred to provide debt instead of equity. This prevented them
from intervening in the management, when things were not moving well. If
lenders would have equity exposure too, they could have easily roped in fresh
management team to protect their debt.
