Suggestions on SME Platform of the Stock Exchanges

BSE and NSE started their SME platforms in the year 2012. As on date today, a total of 89 companies are listed on these platforms, with 83 companies being listed on BSE platform (BSE SME) and 6 companies on NSE’s platform (Emerge). The total amount of capital raised is Rs. 785 crores as on 31^st December 2014. The total market capitalization hovers around Rs. 9,000 crores.

SME listing has an important role to play with regards to financing small & medium businesses in the country. As few years have already passed since this platform was made operational, it is probably the right time to suggest some changes based on the experience:

Suggestions

1.      To lower the minimum trading lot size of Rs.1 lakh post listing as we feel that the minimum lot size of Rs.1 lakh could deter many genuine investors.

2.      To review the minimum 25% equity dilution, that is required at the time of listing. At time SMEs do not want to test the waters with a high amount of dilution. A policy reform required is to dilute the norm of minimum public shareholding from 25% to 10% for SMEs.

3.      The authorities should popularize the concept of ‘priority investing’ to improve the financial conditions of SMEs in India. The regulator should mandate Institutional Investors to invest in SMEs. Currently only institutional investors like mutual funds, private equity and venture funds are allowed to invest and trade in companies listed on the SME platforms. Definition of nominated investors should be widened to include wealthy individuals, non-institutional investors, corporate bodies.

4.      SEBI should encourage dual listing of SMEs on both BSE and NSE’s SME platforms.

5.      The existing requirement of market making for a period of 3 years should be reduced to maximum one year.

6.      Lack of consistency in the definition of MSME sector continues here as well. For a company to be eligible to be listed on the SME platform the minimum post issue paid up capital should be 1 cr and the maximum should be 25 cr. This minimum post paid capital be reduced.

7.      Institutional support from Govt. /SEBI like creation of a specialized agency that helps the SMEs list on the platforms is required. Most of the SMEs are not too well acquainted with the way in which stocks are listed and the stock market functions. BSE and NSE have been organizing seminars/road shows to spread awareness about the availability of the platform and the benefits of listing but the cost of listing and complying with continuing obligation can prove to be too heavy for the smaller companies. This specialized agency should provide merchant banking facilities and compliance with continuing obligation for a minimal charge.

8.      A uniform format of information should be developed preferably by the Institute of Chartered Accountants of India or SEBI so that the information becomes comparable. At present no such format is available

9.      A separates index needs to developed for SME exchange.

Integrating the Concepts of One Person Company, Small Company, Limited Liability Partnership and Presumptive Taxation to facilitate ‘Ease of Doing Business’.

The instrumentalities of One Person Company (OPC), Small Company, Limited Liability Partnership (LLP) and Presumptive Taxation are present on various statute books of India. Their application, however, has not been uniform. OPC and Small Company in the Company Act provide the benefit of limited liability, LLPs have very limited statutory compliances under the LLP Act and the provision of presumptive taxation as provided under the Income Tax Act greatly reduce the cost of doing business. As the avowed purpose for their introduction is to facilitate the ease of doing business, it is logical that they be applied in a uniform and consistent manner to realize the said objective.

Our Suggestion is if we combine the benefit of these concepts present in the three Acts- Company Act 2013, Limited Liability Partnership Act and the Income Tax Act, we can radically improve the ease of doing business in India. This is possible with minor modifications in respective laws as given in our suggestions below:

Background of respective Acts

1.      One Person Company (OPC)

The Companies Act, 2013 has introduced a corporate structure for businesses being run by individuals as proprietors, namely ‘One Person Company’ (OPC). Section 2 (62) defines OPC as a company which has only one person as a member. This format allows proprietors not only a limited liability cover but also a perpetual succession.

2.      Section 2(85): Small Company

The Companies Act, 2013 also has introduced another format of companies known as ‘Small Company’. As per section 2(85) ‘‘small company’’ means a company, other than a public company

o   paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or

o   turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

3.      The Limited Liability Partnership Act, 2008 ( the LLP Act)

In January, 2009, the Limited Liability Partnership Act, 2008 ( the LLP Act) was implemented with the objective of permitting partnership firms to operate in limited liability environment on the same lines as to companies formed under the Companies Act. In addition to limited liability cover, partnership firm registered under the LLP Act would be required to file very few information with the Registrar and disclose very limited information. Section 34 to 38 of the LLP Act read with Rules 24, 25 and 27 deal with the disclosure requirements for LLPs. The LLP Act also has provisions for easier winding up and dissolution of LLPs. Section 63 to 65 of the LLP Act read with Limited Liability Partnership (Winding up and Dissolution) Rules, 2012 deal with these issues.

4.      Presumptive taxation scheme under sections 44AD and 44AE

As per the Income-tax Law, a person engaged in business is required to maintain regular books of account and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Law has framed the presumptive taxation scheme under sections 44AD and 44AE. A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited.

The presumptive taxation scheme of section 44 AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing goods carriages referred to in sections 44AE).These provisions cannot be adopted by a person who has made any claim towards deductions under section 10A/ 10AA/10B/ 10BA or under sections 80HH to ​80RRB in the relevant year.

The Company Act, 2013 does not give relaxation to an OPC as well as to a Small Company with regard to filing of documents and disclosure of financial information as much as has been given to a LLP under the LLP Act. The companies Act, 2013 also does not have easier winding up and dissolution provisions for OPC and Small companies as has been provided to LLP under the LLP Act. On the other hand the benefits of provisions of presumptive taxation are available only to individuals and do not extend to either to OPC and Small Company or to LLPs.

Suggestions

1.      In order to encourage businesses to adopt limited liability format either as OPC or small company for their businesses, the statutory compliance for OPC and Small Company should be similar to that for LLPs under the LLP Act.

2.      The Income Tax Act, 1961 may be amended so as to provide applicability of sections 44AD and 44AE to small LLPs and OPCs and Small Companies.

3.      Provisions of the Companies Act and the Income Tax Act should be aligned so as to allow OPCs to not maintain and audit their accounts if they are not required to do so under the Income Tax Act as per presumptive tax schemes.

4.      Sections 253 to 268 of the Companies Act, 2013 are the provisions for revival and rehabilitation of sick companies and section 269 of the Companies Act proposes to set up a Rehabilitation and Insolvency Fund to which a company can apply on voluntary basis.  It is suggested that section 269 of the Act may be amended to have a separate Rehabilitation and Insolvency Fund for MSMEs and LLP, which should be suitably funded by the Government to have a corpus to provide financial help to sick units whether they have opted for the fund or not.