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.
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.
By going public an SME decides to give its investors and efficient and regulated vehicle to trade their shares, thereby increases its liquidity.
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.
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.
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.
The presence of a well-developed capital market ensures that the risk is distributed efficiently to those who have the wherewithal to bear it.
SME exchanges provide several tax benefits to SMEs that choose to list (discussed separately *)
When the time is ripe, an SME company can choose to migrate to the main board, provided the necessary approvals are in place.
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 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.
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.
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
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.
Finally, the provision of IPF or Investor Protection Fund is applicable to SME platform as well.
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 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.
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.
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