Winds of change are blowing

A new regulatory environment will aid healthy SME growth

Winds of change are blowing through India’s micro, small and medium enterprise (MSME) sector. First, capital market regulator Sebi has notified guidelines for trading on the SME platform, which will enable easier listing by SMEs; second, the Federation of Indian Micro and Small & Medium Enterprises (Fisme) has begun work on a bankruptcy law that will supersede the current archaic and dysfunctional insolvency mechanism for MSMEs; and third, Fisme is also working on a competition framework for MSMEs, which is intended to help these enterprises leverage the new Competition Commission of India dispensation to their advantage.

Most SMEs find it impossible to raise funds in the capital market, because of the high costs of meeting various compliance requirements. Nor would angel investors, venture capital or private equity funds invest in SMEs if easy exit at a time of their choosing was not possible.

Therefore, Sebi’s relaxed share listing norms announced in May 2010, coupled with the earlier decision to create a separate platform for SMEs, will lower the barriers that prevent SMEs from entering the stock markets. The new norms will encourage listing by substantially reducing the compliance costs of doing so.

Unlike companies listed on the main trading platforms of the BSE and NSE, listed SMEs need not submit their financial results on a quarterly basis or publish them. Nor do they need to send annual reports to investors. They only need to file their financial results on a half-yearly basis, publish their results on their websites and send out salient features to shareholders.

However, they will be subject to all other conditions applicable to listed entities, such as a minimum 25 per cent public holding at all times. For a company that intends to list in the SME segment, a post-issue upper limit of Rs 25 crore has been set on face value of capital. Companies listed in the SME segment will be compulsorily shifted to the main board of the exchange on exceeding the limit of Rs 25 crore on post-issue paid-up capital and be subject to the same market discipline.

Creation of a platform where SMEs can list has proven successful in bringing smaller companies to the market in other countries, one of the most notable examples being the Alternative Investment Market of the London Stock Exchange.

The study titled ‘Competition Commission Framework in India and MSMEs’ is to be completed by mid-August, Fisme Secretary General Anil Bhardwaj said. The aim is to give MSMEs an idea of how to leverage the new Competition Commission of India (CCI) dispensation to their advantage.

Bhardwaj said MSMEs are largely ignorant of their rights and responsibilities in the new competition policy regime. The study will aim to list anti-competitive practices as examples, help MSMEs identify practices of this kind that affect them, and let them know the remedial measures available under the law to mitigate their hardships, as well as the processes to be followed for initiating action.

At the request of the MSME ministry, Fisme has also kick-started the process of developing a draft law on insolvency and bankruptcy for such enterprises.

A meeting of ministry officials with economic and legal experts on insolvency, organized in June, and attended by Anil Bhardwaj, secretary-general of Fisme, agreed that since 97 per cent of Indian MSMEs were partnerships or proprietorships, issues arising out of business failure could only be addressed through a modern personal insolvency law and an affordable litigation process and administrative mechanism.

It agreed that the law could draw from the US bankruptcy code for its effectiveness and simplicity.