Tax consulting

Small and medium enterprises (SMEs), particularly in developing countries like India are the backbone of the nation’s economy. MSMEs contribute 8% of the country’s Gross Domestic Product (GDP), 45% of the manufactured output and 40% of our exports. It provides employment to about 6 crore people through 2.6 crore enterprises. It forms a major portion of the industrial activity.

With this huge potential – backed up by strong government support– Indian SMEs continue to post their growth stories. However, despite this strong growth, there is still a huge potential amongst Indian SMEs that remains untapped. Once this untapped potential becomes the source for growth of these units, there would be no stopping India from posting a GDP higher than that of US or China and becoming the world’s economic powerhouse.

The Prime Minister’s Task Force (Jan. 2010) had recommended the setting up of      a dedicated Stock Exchange/ Platform for SMEs. SEBI has also laid down the regulations for the governance of SME Platform.

To this initiative, the Bombay Stock Exchange and the National Stock Exchange have established BSE SME Platform and EMERGE respectively. The Stock Exchanges are continuously working towards making the platform most suitable for companies to become big from small by raising funds from Capital Market.

At present, there are only two SME Exchanges in India i.e. BSE SME platform (BSE) and EMERGE Platform

(NSE). Both have their own eligibility norms in addition to SEBI norms for listing.

A public Limited Company can only be listed. Both BSE SME Exchange and EMERGE NSE Exchange have their separate eligibility criteria for SME Listing along with SEBI norms for listing.

BSE SME Norms:

EMERGE NSE Exchange Norms:

The following criteria should be complied with on the date of filing the Draft Red-Herring Prospectus (DRHP) with NSE as well as when the RHP is filed with ROC and SEBI.

BENEFITS

1. Future Financing for company

Getting listed with SME Platforms will provide the SME’s with equity financing opportunities to grow their business. The option of equity financing through equity market allows the company to raise long-term capital and also get further credits from banks or other financial institutions on the basis of additional equity infusion. The issuance of public shares expands the investor base, and this in turn will help set the stage for secondary equity financings, including private placements.

In addition, companies often receive more favourable lending terms when borrowing from financial institutions. Moreover, equity financing lowers the debt burden leading to lower financing costs and healthier balance sheets for the firms.

The continuing requirement for adhering to the stock market rules for the issuers lowers the on-going information and monitoring costs for the banks. Equity financing also lowers the debt burden leading to lower financing costs and healthier balance sheets for the firms.

2. Increased visibility and prestige

Going public is likely to enhance the company’s visibility. Greater public awareness gained through media coverage, publicly filed documents and coverage of stock by sector investment analysts can provide the SME with greater profile and credibility. This can result in a more diversified group of investors, which may increase the demand for that company’s shares leading to an increase in the company’s value.

3. Venture Capital (VC)

It has been seen that there is greater vitality of venture capital in stock market centered systems. The underdeveloped equity culture has made it difficult for companies to get into the VC phase as well as graduate from venture capital/ startups phase to a scale of operations that would make them internationally competitive. A vibrant equity market would prove to be an added incentive for greater venture capital participation by providing an exit option, leading to a reduction in their lock-in period.

4. Liquidity for shareholders

Becoming a public company establishes a market for the company’s shares, providing its investors with an efficient and regulated vehicle in which to trade their own shares. Greater liquidity in the public market can lead to better valuation for shares than would be seen through private transactions.

5. Create employee incentive mechanisms

The employees of the SME enterprises can participate in the ownership of their own company and benefit from being a shareholder. This can serve to ensure stronger employee commitment to the company’s performance and success.

6. Facilitate growth through Mergers and Acquisitions

As a public company, company’s shares can be utilized as an acquisition currency to acquire target companies, instead of a direct cash offering. Using shares for an acquisition can be a tax efficient and cost effective vehicle to finance such a transaction.

7. Encourages Innovation & Entrepreneurial Spirit

The ability of companies in their early stages of development to raise funds in the capital markets allows these companies to grow very quickly. This growth helps speed up the dissemination of new technologies throughout the economy. In addition, by raising the returns available from pursuing new ideas, technologies, etc. the capital markets facilitate entrepreneurial activities.

8. Efficient Risk Distribution

The capital markets have given an opportunity to the SMEs to distribute their risk more efficiently by transferring it to the group or investors who are willing to bear it. Thus the capital markets ensure that capital flows to its best uses.

9. Migration to Main Board

All Companies listed on SME Exchange can migrate to the Main Board of BSE at any point of time, provided that the shareholders approval is accorded. Is any time limit

10. Tax Benefits
11. ZERO Long-term Capital Gains Tax and less Short-term Capital Gains Tax.

* depending upon assesse’s income slab
In case of listed share securities transaction tax (STT) must have been paid

If the company is listed on SME Exchange above benefits would be available and is good tax planning point.

1. No tax on fresh equity infusion in the company
   As per the Finance Act, 2012 there is a tax liability on fresh issuance of equity shares by an unlisted company to investors other than “Registered Venture Fund”, if the issuance is made at a value more than the fair value. This tax liability however, is not attracted if the shares of the company are listed on recognized Stock Exchanges, including SME Exchange.
2. No tax on distressed business purchase
   Income-tax Act levies a tax inter aliaon the buyer of shares of an unlisted company, if the transaction is conducted at a value less than its book value. Hence, acquisition of distressed assets could attract heavy tax. Such a tax liability however, is not attracted if the shares of the company are listed on recognized Stock Exchanges, including SME Exchange.
3. Efficient Risk Distribution for Investors
   It is expected that the development of capital markets would help distribute risk efficiently by transferring the risk to those best able to bear it. Capital is a precious resource; when one can afford, he can invest it; when one needs it back, he can exit. This in-built mechanism of risk-transfer, in turn, lends 0 sustainability to market forces. Thus, capital markets for SMEs are also expected to ensure that capital flows to its best uses and even the riskier activities with higher payoffs could be funded.
4. Entry & Exit Platforms for PE/ Other Investors
   The presence of a market-driven transparent trading platform provides  a ready and easy entry and exit strategy for strategic investors. Listing not only offers the investors flexibility for entry and exit, but also the confidence required for any such transaction.

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