All posts by neha

One Director must stay in India: Brief discussion

Section 149 subsection 3 of the Companies Act 2013 state as follows:

Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year”

Let us first analyse the provision-

  1. The provision is applicable to all the companies, irrespective of size, scale and nature of business. 
  2. A raw look of the provision requires one of the director to meet the residency requirement. 
  3. Atleast one director, i.e one or more than one director has stayed in India for the stipulated period
  4. The period of stay in the previous calendar year should be 182 days or more, however the stay may not be a continuous stay of 182 days.
  5. General Circular 25/2014 further clarifies ‘residency requirement’ would be reckoned from the date of commencement of section 149 of the Act i.e. 1st April, 2014. The first previous calendar year for compliance with these provisions would therefore be Calendar year 2014. The period to be taken into account for compliance with these provisions will be the remaining period of calendar year 2014 (i.e. 1st April to 31st December-9 months). Therefore, on a proportionate basis, the number of days for which the director(s) would need to be resident in India during Calendar year 2014, shall exceed 136 days
  6. Further special window of 6 months for companies incorporated between 1st April 2014 to 30th September 2014.

There are lot of private companies in India which are owned by foreign companies, generally such companies have nominee directors on the Board of the Indian company, who are directors or employees of the parent company and reside abroad. Also there are a number of companies privately owned and controlled by NRIs. For the sake of convenience, let us call the foreign parent company or NRI as owners. The pivot of control in such companies remain with owners of the company who are generally residing outside India. The companies appoint a manager or operational incharge in India for management and administrative convenience, though rarely, there are chances of appointment of person residing in India as Director.

Now, the provisions of the Act makes it mandatory for every Indian company to have one director residing in India for min 182 days. Hence such companies have to either :

  • appoint a person residing in India as Director

  • send an employee/close relative to India to act as Director of the Company

  • ensure that one of the existing Directors stay in India for the stipulated period

The latter two options will also have to be reviewed from tax perspective.

The potential tax implications on an employee / director for the income earned while working in India could be an important factor while deciding the options.  For instance, under section 6(1) of Income Tax Act, 1961, an individual could be considered as a resident in India if he is in India in the previous year for a period of at least 182 days and this could lead to tax costs in India. Thus apart from relocation, visa, cost of living and other allied issues the owners will also have to consider the tax implications, before deciding on any of the options.

The first option has its own limitations too, as the owners will have the fear of misuse of power in hands of Indian director. Indeed the Indian director being a part of Board of Directors would have control over both the operations and management of the company, and could possibly take advantage of the same. Thus the owners may spend sleepless nights as they are giving the controlling power of the company to another person, thus increasing manifold the chances of litigations and court cases, which take years to be resolved.

The rationale of new provision is not very clear. However analysts have referred it as a move to create accountability i.e. if the company violates any provisions of law, the Director who is residing in India can be more easily tracked n adjudged. However it is significant to note that if one director is residing in India, the decision making powers including the power for his appointment will remain with the owners of the company residing abroad. The director will only act as per instructions of the owners, and still be accountable for all the lapses and violations, becoming a scapegoat or fall guy in hands of owners and statutory authorities.

The new provision is subject to wide criticism, because in the current scenario of economic despair it is discouraging international business. Investors who are reluctant to dilute their stake or powers will be apprehensive to set up business in India. However it may take some time before there is any change in the statute, so lets live with it till then. We suggest that the companies willing to appoint their foreign or Indian employees as Director should pass necessary resolutions to delegate limited and specific powers to the director residing in India, execute indemnity bond and employment agreement specifying the role, powers, duties, liabilities etc.

Companies Act 2013: MCA introduces new eforms

On its way to the journey of implementation of Companies Act 2013, MCA introduces the following new eforms

Serial no New form Purpose of the form
1 INC-1 Application for reservation of name
2 INC-2 OPC- Application for Incorporation
3 INC-3 OPC- nominee consent forms
4 INC-4 OPC-change in members/nominees
5 INC-5 OPC-Intimation of cessation
6 INC-6 OPC- application for conversion
7 INC-7 Incorporation for conversions(other than companies)
8 INC-18 Application to regional director for conversion of sec.8 company into any other type of company
9 INC-20 Intimation to registrar for revocation, surrender of license issued under sec 8
10 INC-21 Application for commencement of business
11 INC-22 Notice of situation or change of situation of registered office
12 INC-23 Application to regional director for approval to shift the registered office from one state to another state or from jurisdiction of one registrar to another in the same state
13 INC-24 Application for change of name
14 INC-27 Conversion from private to public and vice versa
15 INC-28 Notice of order of the court or tribunal or any other competent authority
16 PAS-3 Return of allotment
17 SH-7 Notice to registrar for alteration of share capital
18 SH-8 Letter of offer
19 SH-11 Return in respect of buyback of securities
20 CHG-1 Application for registration of modification or creation of charge ( other than debentures)
21 CHG-4 Particulars of satisfaction of charge
22 CHG-6 Notice of appointment or cessation of receiver or manager
23 CHG-9 Application for registration of creation or modification of charge in case of debenture
24 MGT-14 Filling of resolutions and agreements to registrar under sec 117
25 DIR-3 Application for allotment of director identification number
26 DIR-5 Intimation of change in particulars of directors to be given to central government
27 DIR-7 Notice of resignation of director to the registrar
28 DIR-8 Particulars of appointment of directors and the key managerial person and the changes among them
29 MR-1 Return of appointment of managing director, whole time director or manager
30 MR-2 Form of application to the central government for approval of appointment or reappointment and remuneration or increase in remuneration or waiver for excess or over payment to managing director or whole time director or manager and commission and remuneration to directors
31 URC-1 Application by a company for registration of under sec 366
32 FC-1 Information to be filed by foreign company
33 FC-2 Return of alteration in the documents filed for registration by a foreign company
34 FC-3 List of all principle place of business in India established by foreign company
35 FC-4 Annual return
36 ADJ Memorandum of appeal
37 MISC-1 Application to Roc for obtaining the status of Dormant company
38 MISC-3 Return of Dormant company
39 MISC-4 Application for seeking status of active company.

You may also visit demo forms at http://www.mca.gov.in/MinistryV2/Company_Forms_NCA.html

Companies Act 2013-A brief outlook on major changes affecting private companies

Glance on provisions affecting private companies
Section Details Brief Provision
Section 2(41) Definitions Financial Year of any Company can end only on March 31 and only exception is for companies, which are holding / subsidiary of a foreign entity requiring consolidation outside India, can have a different financial year with the approval of Tribunal.
Section 2(68) Definitions Maximum number of members in a Private Company increased from 50 to 200.
Section 2(85) Definitions Concept of small companies with various relaxations in terms of reporting requirement, board meetings and procedure for mergers/ amalgamations have been introduced.  Small Companies have been defined to mean a Company, other than a public Company (a) having paid-up share capital not exceed fifty lakh rupees or such amount, not exceeding rupees five crores, as may be prescribed; (b) Having turnover not exceeding rupees two crores or such amount, not exceeding rupees twenty crores, as may be prescribed, as per its last profit and loss account. 
Section29 Public offer of securities to be in dematerialised form. Any company, other than a public company may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 and the regulations made thereunder.
Section 43 Issue of differential equity shares  Issue of equity shares with differential rights would have to be in accordance with such rules as may be prescribed. This has been made applicable to even private companies now.
Section 62 Preferential issue of shares  Pricing of a Preferential Issue of shares by a company to be determined by a registered valuer. Conditions may be prescribed in rules for preferential issue by companies.
Section 62 Further issue of Capital  – Provisions relating to further issue of capital applicable to all companies. Accordingly, any shares have to be offered to all shareholders on pro-rata basis (except in case of preferential issue through special resolution dealt in next point).
Section 101 Notice of meetings Notices for Board and General Meetings sent by electronic mode are recognised in the statute.
Section 120 Maintenance and inspection of documents in electronic form Any document required to kept by a company or allowed to be inspected or copies given can be maintained in electronic mode
Section 123 Decleration of Dividend Declaration of interim dividend can be out of surplus profits or out of current years profits. However, in case the Company has incurred loss up to preceding quarter during the year, the interim dividend cannot be declared out at a rate higher than the average dividend declared by the Company during immediately preceding 3 financial years.
Section 129 Consolidation of financial statements  Consolidation of financial statements mandatory in case a Company has one or more subsidiaries
Section 129 Financial Statements Cash flow statement and statement showing changes in equity if any of the company also forms part of the financial statements. In case the Company has a subsidiary company, the consolidated financial statements of all subsidiaries and the company shall be prepared and laid before the AGM
Section 131 Voluntary revision of financial statements or Board’s report. Voluntary revision of financial statements or Board’s report.
Section 135 Concept of Corporate Social Responsibility CSR introduced  ;Board shall ensure to spend 2% of average profits of last 3 years on CSR. Applicable to Companies having net-worth of Rs. 500 cr or more or Turnover of Rs. 1,000 cr or more or net profit of Rs. 5 cr or more. Company also required to constitute CSR committee.
Section 139 Appointment of auditors The Auditor will be appointed for a period of 5 years, with a requirement to ratify such appointment at each annual general meeting
Section 149(1) Company to have Board of Directors. A maximum limit of 15 directors is imposed for the Board unless approved by a special resolution in AGM.
Section 149(3) Company to have Board of Directors. Every company shall have at least 1 director who has stayed in India for a total period of not less than 182 days in the previous calendar year.
Section 174 Quorum for meetings of Board Participation of directors through video conferencing or by other audio visual means is recognized for the purpose of quorum.
Section 185 Loan to directors  No Company shall directly or indirectly make any loan including book debt or give any guarantee or provide any security to its directors or to any persons in whom the director is interested. However, this provision shall not be applicable to managing director / whole time director subject to conditions, etc.
Sec 186 Inter-Corporate loans / investment  Rate of interest on inter corporate loans will be the prevailing rate of interest on dated Government Securities. Further, exemption to Private companies from restrictions /conditions contained under section 372A of the exiting Companies Act, 1956 is now done away with. Hence, private companies shall be required to be bound by the above restrictions (i.e., private companies may not be able to grant interest free loans).
Section 232 Merger of listed Company with unlisted Company  Under existing provisions of the Act merger of listed company with listed company entails listing of the unlisted company. However under the new provisions the unlisted company has the option to continue as an unlisted company subject to payment of cash to existing shareholders of listed transferor company in accordance with determined valuation.
Section 233 Merger and amalgamation of certain companies Concept of fast track merger without the requirement of a Court Process introduced to facilitate merger between 2 or more Small Companies or between holding Company and its wholly owned subsidiary.
Section 234 Merger of Indian Company with Foreign Company  –  Indian Company can be merged with Foreign Company or vice versa with prior approval of RBI
Chapter XI Directors  (a)  One of the directors of the company shall be a person who has stayed in  India  for 182 days or more; (b) Maximum no. of directors in a company increased from 12 to 15 which can be increased further by special resolution; (c) Maximum no. of directorship increased from 15 to 20 (with maximum 10 public companies)
Chapter XXVII National Company Law Tribunal and National Company Law Appellate Tribunal – Constitution of a National Company Law Tribunal and National Company Law Appellate Tribunal consisiting of combination of technical and judicial members
** Limitations of the above
This is only a summarized version of provisions

KYC procedure for opening of Bank Accounts for Foreign students studying in India

Foreign students arriving in India are facing difficulties in complying with the Know Your Customer (KYC) norms while opening a bank account due to non-availability of any proof of local address therefore it has been decided to lay down a procedure for opening accounts of foreign students who are not able to provide an immediate address proof while approaching a bank for opening bank account.

http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=8359

The Companies Act, 2013 has acquired assent by President of India on August 29, 2013.

The new Companies Bill has received President’s assent, that will make it into a law replacing the nearly six-decade old regulations that govern corporates in the country.

The Companies Bill 2013 received assent from the President Pranab Mukherjee on August 29 2013.

The new Bill, providing for sweeping changes in the way companies operate and are regulated in the country.

The draft rules, expected to be ready in two weeks, would be put out on the Ministry’s website. After this, stakeholders and general public, among others, would have up to 60 days to provide their comments.

Corporate Affairs Minister Sachin Pilot had earlier said the government plans to adopt a transparent and interactive process to finalise a detailed set of rules to be adopted under the new Companies Bill.

The new Bill requires companies to spend on social welfare activities, empowers investors against any frauds committed by promoters, encourages companies to have women directors, and seeks to bring in greater transparency in corporate governance matters.

It also provides about three dozen new definitions, including for terms such as frauds, promoters, turnover, small companies, associate companies and employee stock options.

Gift received by assessee on occasion of his daughter’s marriage won’t be exempt as the word individual appearing in proviso to sub-clause (vi) of sec. 56(2) relates to marriage of assessee and not of his daughter.

The High Court held as under:

1) Proviso to sec. 56(2)(vi) provides that gift received on the occasion of the marriage of an individual would be exempt from tax. There is no ambiguity in such proviso;

2) The expression “individual” appearing in proviso (b) to section 56(2)(vi) of the Act, is preceded by the word “marriage” and, therefore, relates to the marriage of the individual concerned, i.e., the assessee and not to the marriage of any other person related to him in whatsoever degree, whether as his daughter or son;

3) The expression “marriage of the individual” is unambiguous in its intent and does not admit of an interpretation, that it would include an amount received on the marriage of a daughter;

4) If the Legislature had intended that gifts received on the occasion of marriage of the assessee’s children would be exempted, nothing would prevent the Legislature from adding the words “or his children”, after the words “marriage of the individual”;

5) Thus, in view of unambiguous legislative intent appearing in the proviso, the addition made to the appellant’s income on account of gifts received on the occasion of his daughter’s marriage was to be affirmed – RAJINDER MOHAN LAL V. DY.CIT (2013) 36 taxmann.com 250 (Punjab & Haryana)

MCA amends DIN 1, 4 and eForm 18

MCA amends eForms Din 1 & 4 and 18
Ministry of Corporate Affairs vide Notification G.S.R (E) dated December 24, 2012 has amended e-forms DIN 1, DIN 4 and Form 18. The new eforms shall come into effect from 25th December 2012 . The details regarding the amendment is summarized below
1. Form DIN 1:

  • A new column for “Current Occupation” and “Educational Qualification” of the Applicant has been inserted in the Form.
  • Changes in Affidavit prescribed in Annexure 1 to DIN 1:Certain additions have been prescribed in the existing format which are as follows:
    1. Affidavit to be on a non-judicial stamp paper of Rs. 10/- which should be duly notarized.
    2. Following additional declarations have been inserted in the Annexure which shall confirm as follows:
      • The particulars of address provided in DIN 1 of the applicant and documents attached as address proof are correct beyond all reasonable doubts.
      • Neither has any false information has been furnished nor the applicant has suppressed any material information with view to obtain DIN. In case information provided is found to be false or suppressed or willful omission, the applicant shall have no objection to de-activation and cancellation of the DIN allotted by the Central Government and the applicant shall be liable for penal action u/s 628 of the Companies Act.
      • In case of DIN allotted by the Central Government has not been activated within 365 days from the date of allotment, the applicant shall have no objection for cancelling/Deactivating for cancelling/ deactivating the allotted DIN.
2. Form DIN 4:

  • The existing certification column (after serial no.17) has been substituted by following:
    1. I hereby verify that I have satisfied myself about the identity of the director/ designated partner based on the perusal of the original of the attached documents. Note: In case where the applicant is residing outside India, the particulars have to be verified from the documents duly attested by the attesting authority as mentioned in the instruction kit.
    2. I also verify having attested the photograph of the said person:
      • Who is personally known to me; or
      • Who met me in person along with the original of the attached documents
    3. It is further certified that all required attachments have been completely attached to this application
3. Form 18

  • Mandatory clause 4 (b) regarding ownership of registered office has been inserted in the Form which is as follows:
    1. “(b) * Registered Office is
      • Owned by company
      • Owned by Director (not taken on lease by company)
      • Taken on Lease by Company
      • Owned by any other entity/Person (Not taken on lease by company)”
  • Following attachments have been additionally inserted:
    1. Proof of Registered Office address – which is mandatory attachment
    2. No-objection certificate from director if registered office is owned by director (not taken on lease by company)
    3. A proof that the company is permitted to use the address as the registered office of the company if the same is owned by any other entity/Person (not taken on lease by company)
  • One mandatory verification has been additionally inserted which is as follow: “The company undertakes to file the form 18 for change of registered office address with the ROC within prescribed period.
  • One additional certificate, certifying the personal visit by CA/ CS/ CWA (whosever certifying the form) to new address is inserted which is as follows: “I further certify that I have personally visited the new address, verify it and I am of the opinion that the premises are intended at the disposal of the applicant company.” This ia very important amendment as it will increase the liability of the certfying professional and the scope of work.

Highlights of Company Bill 2012- passed in Lok Sabha

After a long wait –  

Companies Bill, 2008 became Companies Bill, 2009 and then Companies Bill, 2011. Based on Parliamentary Standing Committee’s recommendations, it was again amended and finally now we have Companies Bill, 2012 – Passed in Lok Sabha on 18th Dec 2012 at 10:46 PM

The Companies Bill, 2012 has been passed by the Lok Sabha on 18 December 2012 and introduced in Rajya Sabha. After receiving Rajya Sabha’s and President of India’s assent it will get enacted and will replace the existing statute for regulation of companies in the country, viz. the Companies Act, 1956.

The final version of the Companies Bill 2012 that was passed by Lok Sabha is yet to be public. However, based on the existing Companies Bill which was placed before the Lok Sabha and yesterday’s PIB Press release, following are the Salient features of the Bill and the press release:

  1. Maximum number of members in a Private company – Maximum number of members in a Private Company increased from 50 to 200. Further, the concept of One Person Company has also been introduced.
  2. Small Companies – Concept of small companies with various relaxations in terms of reporting requirement, board meetings and procedure for mergers/ amalgamations have been introduced. Small Companies have been defined to mean a Company, other than a public Company – (a) having paid-up share capital not exceed fifty lakh rupees or such amount, not exceeding rupees five crores, as may be prescribed; (b) Having turnover not exceeding rupees two crores or such amount, not exceeding rupees twenty crores, as may be prescribed, as per its last profit and loss account. 
  3. Annual Return – Substantial additional information is required to be given in the Annual Return of a company. Further, in case of a listed company, even if the Annual Return is signed by the Company Secretary in employment of the Company, it is further required to be signed by the Company Secretary in Whole time 
  4. Auditor (Clause 139) – Auditor appointed shall continue to hold office up till the conclusion of 6th meeting. Also, in case of listed companies and certain other class of companies as may be prescribed, compulsory rotation of individual auditors in every five years and of audit firm every 10 years has been provided.Limited Liability Partnership is allowed to be appointed as auditor.
  5. Financial Year – Financial Year of any Company can end only on March 31 and only exception is for companies, which are holding / subsidiary of a foreign entity requiring consolidation outside India, can have a different financial year with the approval of Tribunal.
  6. National Company Law Tribunal and National Company Law Appellate Tribunal – The bill provides for constitution of a National Company Law Tribunal and National Company Law Appellate Tribunal consisting of combination of technical and judicial members
  7. Dividends (Clause 123) – Mandatory transfer of profits to reserves for dividend declaration out of profits seems to have been done away with. Further, declaration of interim dividend can be out of surplus profits or out of current year’s profits. However, in case the Company has incurred loss up to preceding quarter during the year, the interim dividend cannot be declared out at a rate higher than the average dividend declared by the Company during immediately preceding 3 financial years.
  8. Inter-Corporate loans / investment (Clause 186) – Rate of interest on inter corporate loans will be the prevailing rate of interest on dated Government Securities. Further, exemption to Private companies from restrictions /conditions contained under section 372A of the exiting Companies Act, 1956 is now done away with. Hence, private companies shall be required to be bound by the above restrictions (i.e., private companies may not be able to grant interest free loans).
  9. Buyback (Clause 68) – Time gap between 2 buy-backs of an unlisted company shall be minimum of 1 year whether approved by board of directors or shareholders.
  10. Concept of Fast Track Merger introduced (Clause 233) – Concept of fast track merger without the requirement of a Court Process introduced to facilitate merger between 2 or more “Small Companies” or between holding Company and its wholly owned subsidiary.
  11. Merger of Indian Company with Foreign Company (Clause 234) – Indian company can be merged with foreign Company or vice-versa with prior approval of RBI.
  12. Merger of listed Company with unlisted Company (Clause 232) – Under existing provisions of the Act, merger of listed company with unlisted company entails listing of the unlisted company. However, under the Bill, the unlisted company has an option to continue as unlisted company subject to payment of cash to existing shareholders of listed transferor company in accordance with determined valuation.
  13. Further issue of Capital (Clause 62) – Provisions relating to further issue of capital applicable to all companies. Accordingly, any shares have to be offered to all shareholders on pro-rata basis (except in case of preferential issue through special resolution dealt in next point).
  14. Issue of differential equity shares (Clause 43) – Issue of equity shares with differential rights would have to be in accordance with such rules as may be prescribed. This has been made applicable to even private companies now.
  15. Preferential issue of shares (Clause 62) – Pricing of a Preferential Issue of shares by a company to be determined by a registered valuer. Conditions may be prescribed in rules for preferential issue by companies.
  16. Concept of Corporate Social Responsibility (‘CSR’) introduced (Clause 135) – Board shall ensure to spend 2% of average profits of last 3 years on CSR. Applicable to Companies having net-worth of Rs. 500 cr or more or Turnover of Rs. 1,000 cr or more or net profit of Rs. 5 cr or more. Company also required to constitute CSR committee.
  17. Consolidation of financial statements (Clause 129) – Consolidation of financial statements mandatory in case a Company has one or more subsidiaries
  18. Directors (Chapter XI) – (a) One of the directors of the company shall be a person who has stayed in India for 182 days or more; (b) Maximum no. of directors in a company increased from 12 to 15 which can be increased further by special resolution; (c) Maximum no. of directorship increased from 15 to 20 (with maximum 10 public companies)
  19. Issue of Preference shares beyond 20 years (Clause 55) – For infrastructural projects, preference shares can be issued for a period exceeding 20 years.
  20. Loan to directors (Clause 185) – No Company shall directly or indirectly make any loan including book debt or give any guarantee or provide any security to its directors or to any persons in whom the director is interested. However, this provision shall not be applicable to managing director / whole time director subject to conditions, etc.
  21. Independent director (Clause 149) – Concept of independent director introduced. Applicable to listed companies and CSR committee.

 

Let’s hope that the Bill receives assent from the Rajya Sabha and the President of India and get’s enacted. Once the Bill becomes an Act, the Central Government will notify a date/s for coming into force of the Act, and only from such date / dates the provisions of the Act will come into force.

SME Listing- win win all!

Introduction

Among all the uncertainties impacting the economy, as regulators are bringing about policy changes, as foreign investors are apprehensive about investing in India– its a sigh of relief for the small and medium sized enterprises(SME), which has a new and easier platform to raise money and advance its growth. SMEs are correctly named as backbone of Indian economy. SMEs contribute 45% of the industrial output, 40% of exports, 42 million in employment, create one million jobs every year and produces more than 8000 quality products for the Indian and international markets.

SMEs till now have been looking at debt options only to raise funds, but they cannot leverage debt beyond a point as they exhaust collaterals. Despite of the priority lending window, raising funds in the capital market has been difficult for most SMEs, given the high costs involved in meeting various compliance requirements.The Prime Minister’s Task Force has recommended to set-up a dedicated Stock Exchange for SMEs. Listing of SME and a dedicated platform for its exchange will facilitate the promotion and development of SME sector and enhance their competitiveness. Listing of securities will help SME sector to raise equity capital as well as create visibility and transparency, thus, corporate governance of a company improves manifold. SEBI has laid down the regulation for the governance of SME Exchange. Both BSE & NSE has announced eligibility norms for listing of companies on its SME exchange launched in the month of March 2012

The relaxed share listing norms issued by SEBI for SMEs will lower some of the barriers for SMEs to enter the stock markets.The norms issued will reduce complaince cost for continuous listing of shares of SMEs,and thus would encourage many more SMEs to borrow the funds from public. As these companies grow bigger, they would migrate to main trading platform and be subject to as much market discipline as any listed company.

BSE on Monday launched its SME bourse fully, with the listing of BCB Finance, a Mumbai-based broking house and NBFC. BCB Finance raised 8.85 crore through an issue of 35.4 lakh shares, which was oversubscribed 1.5 times. The stock listed at 27, or 8% above its post-IPO offer price of 25. BCB is promoted by Uttam Bagri, a member of BSE board. So far, about 50 firms from all accross the country has shown interest to be listed on the BSE SME. Though suspended firms are not allowed to list on the SME exchange, an option is provided to the such firms, which have a paid up capital of less than Rs.25 crore, to migrate to the SME exchange after taking necessary approvals. For suspended companies, these have to first comply with main board norms, get their suspension revoked, get two-third of the shareholders to back the move and then apply to the exchange.

NSE, which has named its SME bourse ‘Emerge’, also announced the filing of the first SME draft red herring prospectus by the Chennai-based Thejo Engineering.

Eligibility Conditions

The eligibility norms announcecd for listing on SME are as follows-
(a)Net tangible assets of at least Rs 1 crore as per the latest audited financial results.
(b)Net worth (excluding revaluation reserves) of at least Rs 1 crore as per the latest audited financial results.
(c)Track record of distributable profits in terms of sec. 205 of Companies Act, 1956 for at least two years out of immediately preceding three financial years and each financial year has to be a period of at least 12 months. Extraordinary income will not be considered for the purpose of calculating distributable profits. Other wise, the networth shall be at least Rs 3 crore.
(d)The post-issue paid up capital of the company shall be at least Rs 1 crore
(e)The company shall mandatorily facilitate trading in demat securities and enter into an agreement with both the depositories.
(f)Companies shall mandatorily have a website

Benefits of Listing of SMEs

Access to capital market for current and future funding requirements
SME sometimes get over-leveraged by borrowing huge funds, through high interest bearing securities leading to high costs. Many a times good ventures fail due to inability to pay off the debts and interest there on. Now, SMEs would be able to access capital markets and raise money at cheaper costs. Further a listed SME can raise finance a number of times, as and when it has requirement of capital, thus capitalise on the opportunity cost of funds.

Liquidity to investors
An investor is generally reluctant to invest in a project where gestation periods are long, in such cases the investor has a high risk and charges high premium on funds. On the other hand the SME finds it difficult to arrange funds for its project at reasonable cost. Listing of SME securities will provide a uniform platform to investors to trade in shares, and enhance the liquidity of such securities. Now, the investor may not be required to hold the securities, until the securities are listed on recognised Stock Exchange.

Regulatory Perspective
So far SMEs have been funded through financial institutions, venture capitalists or PE funds or so. However often there has been concerns by Regulators, for the SMEs where the investors have created undue pressure on the management, and on the other hand where investors are stuck with high investments in a SME project. If SMEs raises money from public, it can mitigate such concerns and still meet their funding requirements. The dedicated exchange for SME securities and easy process of listing will enhance the opportunities available for SME sector. The trading of SME securities will be standardised and governed by regulatory bodies, helping to build up the faith of investors, assume a clean and transparent corporate image.

Conclusion

Entrepreurship and Innovation are the key to succees! The saying though old is still very relevant. SMEs play important role to sustain entrepreurs and promote innovation, allowing small promoters to bring alive there ideas. SMEs become more important as it has helped considerably to control unemployment issues of our country. SME Listing will promote the growth of such entrepreneurs and help us to radicate unemployment and other social issues associated with it. However the promotion of the new concept is still to reach masses, in this context Lakshman Gugulothu, CEO, BSE SME Exchange in an interview says-”We have a bigger challenge of educating promoters of SMEs. The number runs into millions; in every nook and corner of the country. Reaching out to these people and making them aware of the capital market issues is a big challenge. It will take some time and here I think professionals such as CAs and CSs have a big role to play.

Author: Neha Singhi Baid

Contact: +91-22-67477400
neha@nehasinghi.com
Date: May 25, 2012