SME are the back bone of India’s industrial sector but despite the benefits associated with public listing, the SMEs were not able to access the capital markets through Stock Exchanges due to several factors such as stringent regulatory, disclosure and financial requirements and the like. The creation of a separate stock exchange for SMEs has been on the policy makers’ agenda for some time and finally in March, 2012, SME Exchange was launched. A dedicated stock exchange for SMEs would allow them accessing capital markets easily, quickly and at lesser costs.
The dedicated SME exchange provides SMEs with equity financing opportunities to grow their business – from expansion to acquisitions and reduce the debt burden through equity financing etc. Here is how an SME can get benefited through listing.
- Access to Capital and Financing Opportunities
Going public provides SMEs with equity financing opportunities to grow their business from operations to expansion. Equity financing lowers the debt burden leading to lower financing costs and healthier balance sheets.
- M&A Currency
Listed shares act as a currency especially for inorganic business acquisitions. Using shares as a currency is tax efficient and cost effective vehicle to finance such transactions.
- Premium Valuation
Valuation of a listed company in a nationwide exchange platform gets fair valuation than an unlisted company with same credentials as the value discounting by investors of an unlisted entity can be avoided.
- Entry & Exit Platforms for Investors
The presence of a market-driven transparent trading platform provides easy entry and exit for strategic investors. Listing offers the investors flexibility to invest or exit and as well as confidence to take up such transaction.
Income- tax Act offers immense benefits to listed companies.Tax benefits, often, turns out to be prime reason for listing:
- No Long-term Capital Gains Tax
Transfer of unlisted shares attracts long term capital gains tax of 20% and short term capital gains of up to 30% (depending upon an assessee’s income slab and applicable tax rate). Whereas in case of listed shares, tax on long term capital gains is nil and short term capital gains is 15%, provided the transaction has been subjected to securities transaction tax (STT).
- No tax on fresh equity infusion in the company
Finance Act, 2012 imposed 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 could make SMEs subject to heavy tax outgo, since they often go for fund raising through equity issuance to investors. Such a tax liability, however, does not attract if the shares of the company are listed on stock exchanges.
- No tax on distressed business purchase
Income-tax Act levies a tax inter alia on 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, does not attract if the shares of the company are listed on recognize stock exchanges.
- Efficient Risk Distribution for Investors
The capital markets help distribute risk efficiently by transfer of risk to those best able to bear it.
- Visibility – Profile Building
Going for a public issue is most likely to enhance the company’s visibility. Greater public awareness gained through media coverage, and research coverage by sector investment analysts provide the SMEs with greater visibility and help brand building.
- Unlocking / Benchmarking Value
The fair value of an unlisted company may not be benchmarked appropriately, in absence of a market-driven mechanism. The companies listed on a stock exchange are traded and the market forces are expected to establish their fair value or near-fair value.
- Incentive Mechanism for Employees
The employees of an SME can participate in the ownership and benefit from being a shareholder. This can serve to ensure stronger employee commitment to the company’s performance and success. ESOPs and any other share-based compensation plan of listed company have an immediate and tangible value to employees and talent pool of an enterprise.
- Governance and Business Sustainability
Though the requirements for a company listed on Stock Exchange are stringent that ensures that the company has drawn up the internal control systems and set up minimum required framework of corporate governance. This, in turn, lends sustainability to the business.
Note: The article is prepared with the help of Sarthi Capital Advisors Private Limited