SME Listing

SME PLATFORM

In any developing nation, Small and Medium Enterprises (SMEs) play a large role in enhancing the economy. A bulk of the manufacturing base is made up of SMEs and they contribute significantly to exports too. India too is no exception and the Micro, Small and Medium Enterprises (MSME) sector remains the largest employment generator as well as a significant contributor to industrial activity. 45% of the manufactured output in the country is thanks to MSMEs and these firms are also responsible for 40% of the exports. It also provides employment to 70 million people in the country and contributes 8% to the GDP of the nation.

Both Debt and Equity are necessary

Benefits of lising on SME platform

  • In order to keep their balance sheets healthy, each SME requires to maintain a good debt and equity ratio.
  • The roles of debt and equity have to be complementary, since SMEs need a constant flow of funds for expansion.
  • While banks provide debt capital, equity capital can be enhanced by using the SME platform.

The difference between Debt and Equity capital

DEBT

  • SMEs require debt capital for very long periods of 10-20 years.
  • SMEs need to provide collateral to the lenders in order to finance their needs.
  • Interest rates of 15% p.a are applicable to SME loans which need to be repaid over a long gestation period.
  • If an SME is unable to make timely repayments, its assets may be subject to recovery.

EQUITY

  • Firstly, it is a cost effective way for a SME to raise capital
  • A one time cost of raising equity is all that is required.
  • If a long period is considered for apportioning the cost, the per annum cost of raising equity becomes insignificant.
  • Unlike debt financing, there is no obligation to pay interest on the capital raised.
  • Neither is there any compulsion to refund amount to investors.
  • An investor in equity capital becomes a partner in growth for SME.

Benefits of Listing on SME Platform

Opening doors for future financing

Long term capital which is a necessity for SMEs. Accessing the equity markets gives SMEs the much needed capital. An equity infusion also helps them getting further credit from banks and other financial institutions at favourable lending terms.

Increase in credibility

By going public and SME increases its own visibility through media coverage and a host of documents that must be made public. This increases the scope of greater investment analysis and increases its credibility.

Increase in liquidity

By going public an SME decides to give its investors and efficient and regulated vehicle to trade their shares, thereby increases its liquidity.

Access to greater venture capital participation

By listing on an SME platform, an SME provides a definite exit route for venture capitalist. This gives them greater access to VC participation and an opportunity to become internationally competitive.

An efficient acquisition currency:

If a brownfield expansion (a merger or acquisition) is considered by an SME, it can utilize its shares as an acquisition currency instead of offering direct cash. It is a cost effective and tax efficient method to acquire another company.

Providing greater incentives to employees

By giving employees the opportunity of ownership of shares SMEs can make them greater stakeholders in their success. A sense of ownership gives employees the impetus to work with commitment and take the company on a growth trajectory.

Efficient risk distribution

The presence of a well-developed capital market ensures that the risk is distributed efficiently to those who have the wherewithal to bear it.

Tax benefits

SME exchanges provide several tax benefits to SMEs that choose to list (discussed separately *)

Easy migration to main board

When the time is ripe, an SME company can choose to migrate to the main board, provided the necessary approvals are in place.

Innovation and Entrepreneurial spirit

The opportunity to access funds from the equity market in the early stages of their development helps SME firms to grown in leaps and bounds in their first few years. This gives them the headroom to bring in greater innovation in their processes and technologies thus giving a veritable boost to the entrepreneurial spirit in the nation.

*TAX BENEFITS OF SME LISTING

Tax planning is an important part of SME finances. Listing on SME exchanges can also prove beneficial in this regard.

No Long Term Capital Gains Tax and significant decrease in short term capital gains tax
Capital Gains Tax Unlisted Listed
Long term capital gains 20% NIL
Short term capital gains 30%** 15%

** depending upon the income slab of the assesse.

No Fresh Equity Infusion Tax

If an unlisted company makes a fresh issuance to investors at a value that is more than its fair value it attracts a heavy tax rate. Therefore this means of raising funds proves to be rather expensive for any unlisted company. However, listed companies including SMEs are exempt from this tax.

No tax on the purchase of distressed businesses

If an unlisted company purchases a distressed business (where the shares of the distressed company sold are lesser than its book value) it attracts a heavy tax liability on such an acquisition. In case of a listed company including SMEs, making such a purchase no such tax is imposed

Other pertinent questions

How does the SME platform differ from the main board?

The SME platforms differ from the main stock exchanges on the following counts

  • Companies with a post issue paid up capital ranging from Rs 1 crore to Rs 10 crore are eligible for the SME platform as compared to the main board where a paid up capital of Rs10 crore is mandatory.
  • The listing norms of SMEs has been simplified. A merchant banker can file the Draft Red Herring Prospectus (DRHP) directly with the exchange and seek its approval. The in-principle approval from the market regulator SEBI and the public notice of one month is waived off in case of SME listing. As result the listing process can be completed in 2-3 month’s time as compared to a time frame of 8-9 months on the main board.
  • Issue expenses are nominal for the SMEs and are restricted to advertisement and stationery.
  • Underwriting, sub underwriting and market making charges are however charged to the issuer.

Compliance norms too are simplified with regards to SMEs.

Instead of quarterly compliance, SMEs need half yearly compliance.

Instead of sending the whole annual report to investors SMEs can send an abridged version to its investors and keep the soft copy on its website.

Market Making- How does it work?

  • Market making is mandatory for three years for any company listed on the SME exchange.
  • This is an activity where all member brokers registered as “market makers” agree to support the scrip by providing two way quotes.
  • All market makers provide two way quotes for 75% of the time on a single trading day.
  • At the time of allotment and before commencing market making activity, all market makers must hold 5% of the specified scrip.
  • The market makers can either buy or sell the required number of shares to the nominated investor.
  • The merchant banker and the nominated investor must get into an agreement for the same.

Protecting SMEs from Hostile Takeovers:

  • The Takeover Code of SEBI has put in stringent measures that can prevent SMEs from such events.
  • Any acquisition of shares of 5% or above of a target company needs to be declared to the Stock Exchange and the company.
  • Thereafter, any further acquisition or disposal of shares representing 2% or more of the target company must be declared to the Stock Exchange as well.
  • Any acquisition that amounts to 25% or more shares of the target company, will require the acquirer to make an open offer to purchase 26% of the target company’s capital.
  • The Takeover Code is not applicable to the market makers thus all market making activities are exempt from it.
  • The Takeover code is applicable to all investors in an SME, so as to prevent a hostile takeover.
  • If any fraudulent attempts for a hostile takeover is noticed, a promoter can report the same to the exchange.

Finally, the provision of IPF or Investor Protection Fund is applicable to SME platform as well.

Investor Protection Fund

http://www.bseindia.com/investors/invGrievances.aspx?expandable=2#protection BSE set up an Investor Protection Fund (IPF) on July 10, 1986 to compensate the clients who suffer financial loss due to their member being declared as defaulter, in accordance with the Guidelines issued by the Ministry of finance, Government of India. IPF is managed by the Trustees appointed by BSE.

The Fund corpus is created as follows

The Members contribute Re. 0.01 per Rs.1 lakh of gross turnover, which is debited to their General Charges Account. BSE contributes, on a quarterly basis, 1% of the listing fees collected by it. The entire interest earned by BSE on 1% security deposit kept with it by companies making public/rights issues is credited to the Fund. As per the SEBI directive, auction proceeds that have been impounded in certain cases where price manipulation / rigging was suspected are transferred to the Fund. The surplus lying in the account of the defaulters after meeting their liabilities on BSE is released to them after transferring 5% of the surplus amount to this Fund. The interest received on amounts invested from the corpus of the fund is credited to the fund at the end of each financial year.

Compensation Policy

At present the Exchange compensate to the maximum extent of Rs. 15,00,000/- to the client of a defaulter from its Investors Protection Fund (IPF). The amount is paid to the extent of award amount or Rs. 15,00,000/-, whichever is lower. The revised amount of Rs. 15,00,000/- shall be applicable to the clients of the Trading Member of the Exchange, who are declared Defaulter after 5th December, 2009. (This amount has been progressively raised by BSE from Rs.10,000 in 1988 to the present level).

The arbitration Award obtained by investors against defaulters are scrutinized by the Defaulters Committee, a Standing Committee constituted by BSE, which may recommend to the Trustees of the Fund for release the payment as per the applicable limits to the clients of Trading Members which have been declared Defaulter. After the approval of the Trustees of the Fund, the amount is disbursed to the investors from the Fund. Those claims which are permissible for payment from IPF as per the Trust Deed are considered by the Defaulters' Committee for recommending payment from the fund.
For Further details you can reach to us :

Concern Person: Mr.Nikhil Shah
Mobile no : 9227443340
Email id: nikhil@beelinebroking.com

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