During last few years, a lot has been written and said about Small and Medium Enterprises (SMEs), their size and contribution to the economy and the ways of providing fund-raising options to them. Various Government bodies are on the job for the same.
What’s an SME: There is no precise definition for an SME. The term has been defined differently in different legislations and rule books. SMEs are categorised on the basis of turnover, loan size, investment in capital assets, capital base and number of employees.
The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), bifurcates micro, small and medium depending on being in the manufacturing or service sector.
However, looking at it from the Indian capital markets context, an enterprise can be classified as an SME on the basis of its capital base, investment in tangible assets, turnover, networth, distributable profits, to name a few.
SEBI definintion: According to SEBI (Issue of Capital and Disclosure Requirement) Regulations, issuers have been categorised on the basis of the post-issue face value capital, as under:
- An issuer with post issue face value capital up to Rs 10 crore shall be covered under the SME Platform;
- Issuer with post issue face value capital between Rs 10-25 crores may get listed at SME Platform;
- Issuer with post issue face value capital above Rs 25 crores has to necessarily list at main exchanges
World over, governments have recognised the role and importance of the SMEs in their economy which have become silent drivers of economic development. The biggest challenge being faced by these enterprises is access to capital.
To overcome this, almost all major capital markets have realised the need for a separate exchange for SME segment. More than 20 countries operate separate SME bourses. These markets have tried to create a SME-friendly market architecture supported by effective institutions and forging links to policies that foster a new class of investable equities.
BENEFITS OF SME LISTINGS:
- Ease of access to capital & financing opportunities: SMEs, by virtue of the nature of their industry and working patterns were unable to tap markets to raise equity and debt to fund their projects. Some of these with viable greenfield projects are not able to implement or execute them for limited funds availability. With the easing of IPO norms for SMEs, these SMEs found a solution to raising funds. SME Listing provides an avenue to raise capital through equity infusion for growth oriented SME’s.
- Less regulatory controls: As against an IPO on the main exchanges, for a SME IPO, there are multiple benefits in terms of regulatory supervision and controls – both at the time of the IPO and on routine compliance under the listing agreement and regulations.
- Enhanced visibility and credibility: Listing provides these SMEs with the benefit of greater credibility and enhanced financial status leading to higher valuation of the company on one hand and improved customer-client credibility on the other. Even banks and financial institutions prefer to fund listed SMEs as against an unlisted one.
- Unlocking hidden value: As there is no market available for trading of shares of an unlisted company, the fair market value of such companies is difficult to arrive at. Accordingly, listing helps to unravel real value through market-driven mechanism.
- Eased Tax Planning: Any share transaction through stock exchanges is exempt from the provisions of Long Term Capital Gains (LTCG). Rather, these transactions happen on payment of Securities Transaction Tax (STT), which acts as a major booster for share transactions.
- Encourages SME growth: Equity financing provides growth opportunities like expansion, mergers and acquisitions thus being a cost effective and tax efficient mode.
- Migration provisions: One of the major attractions for SME IPO remains the provision of migration to the main exchanges. Any company listed at the SME platform, after crossing the threshold of Rs 10 Cr Capital may migrate to the main exchange and upon crossing the threshold of Rs 25 Cr has to mandatorily migrate to the main exchange.
- Easier liquidity and exit: Listing would provide liquidity to shareholders and at the same time would offer exit options to venture capital and private equity investors.
- No long-term capital gain tax: No long term capital gains tax will be applicable on transfer of shares through exchange, on payment of Securities Transaction Tax (STT).
- Well-organised risk distribution system: Capital markets strengthen in-built mechanism of risk transfer from one person to another through well-organised market forces.
The author is Partner & Head, Capital Market and Stock Exchange Services, Corporate Professionals