For MSMEs, legal constitution can lead to customer stability, faster growth

Micro, small and medium enterprises (MSMEs) registered as companies (private limited and public limited) tend to perform better than those operating as firms (proprietorship and partnership).

CRISIL analysed about 4,500 MSMEs, comprising companies and firms in equal measure, over fiscal 2013-15. The analysis revealed that the companies saw a compound annual growth rate (CAGR) of 16 per cent, while the firms grew at 10 per cent. Furthermore, about 67 per cent of the companies had a stable customer base, with a vintage of more than five years, as against 50 per cent for firms. Notably, about 85 per cent of CRISIL's top-rated MSMEs have shown stability in their customer base with a vintage of more than five years, as it is one of the rating yardsticks for evaluating the performance of an entity.

CRISIL believes this could be a plausible reason large corporates prefer to deal with companies -– they are perceived to be more transparent in their transactions. A legal constitution will usher in greater transparency in the sector, helping MSMEs raise funds and build stronger relationships with stakeholders.