Are small and medium enterprises constrained by the inability to raise funds from the equity markets? Evidence from the creation of a new platform in the Bombay Stock Exchange

This project addresses to what extent lack of access of outside finance impedes the growth, investment, productivity, technological innovation and size of Small and Medium sectors (SMEs) in India. Specifically, it examines the impact of the introduction of a platform exclusively reserved for the SMEs for the purpose of raising equity finance in the Bombay Stock exchange on financial constraints, growth and competitiveness of the sector. The issue of financial constraints for the SMEs acquires supreme importance as the sector employs 40% of India’s workforce and contribute 45% to the country’s manufacturing output and account for 40% of  total exports.

However, their size is overwhelmingly small - out of the country's 1.3 million SME units, only 4.9% employ between 10 to 100 people. Moreover, the sector’s productivity is very low as they contribute only 17% to the Indian GDP while employing 40% of the people. Too many firms stay small, unregistered and un-incorporated and remain within the unorganised sector. The picture is not much different from the other developing countries where a large number of studies show that the size of the SMEs tend to inordinately small due to both limited access to finance and a very large costs of outside funds.

Set in this context, the project assesses the impact of this exclusive platform provided by the Bombay Stock exchange meant for SME financing on the production, investment and technological upgrades. Specifically, it intends to find answers to the following questions: To what extent has the BSE SME platform helped (a) alleviate finance constraints of the SMEs (b) influence growth of such firms over time (c) bridging the gap between small and Medium firms in similar sectors (d) to compete export markets and (e) quality upgradation of their product.