Amid SEBI banning as many as 239 entities for alleged money laundering, taxation consultancy PwC has called for a three-year locking-in for the entire pre-listing capital held by promoters to curb tax evasion and other illegal activities through market platforms.
The agency has called for imposing a similar lock-in even for preferential allotments, as prescribed under the capital and disclosure requirement (ICDR) norms so that only serious investors access the market. The PwC report is part of a BSE-mandated review of SME listing process.
The premier bourse last week said that 100 entities were trading on its SME platform. The regulator Securities and Exchange Board (SEBI) on June 29 banned four publicly traded SMEs and 235 other related entities for alledgely misusing the exchange’s platform for money laundering and tax evasion.
The SEBI, in an interim order alleged that these entities made Rs 614 crore in illegal gains through suspected money laundering and tax evasion activities. The four companies banned are EcoFriendly Food Processing Park, Esteem Bio Organic Food Processing, Channel Nine Entertainment and HPC Biosciences. These are traded on the BSE SME Platform.
“The institutional trading platform (ITP) could be utilised as a tool for tax planning by staying invested in an SME for a period more than 12 months and exiting at a very high stock price thereby making huge gains with no tax liability,” PwC said in the report.
Accordingly, the report has suggested that the entire pre-listing capital held by promoters should be locked in for three years as “such restrictive conditions would discourage people from accessing the platform only for tax planning”. The BSE had launched ITP for its SME platform to facilitate start-ups and other SMEs to list without the mandatory IPO process which is time-consuming and capital intensive that small companies can hardly afford.
According to PTI, in addition to allowing SMEs and start-up companies to raise capital, the BSE SME platrfom also provides easier entry and exit options for informed investors like angel investors, venture capitalists and private equity players, apart from offering better visibility and wider investor base and tax benefits to long-term investors.
Meanwhile, the report also called for a reduction in trading lot size and shorter interval for review of lot size after many SMEs, merchant bankers and market-makers cited this as a disincentive for entering the market. The report said market participants want the timeframe to review the lot size to be reduced from the current six months and lower the trading lot requirement of Rs 1 lakh to attract retail investors to the segment.
As SEBI continues to make business easier, it is important SMEs do not eye illegal gains through suspected money laundering and tax evasion activities.
The Securities and Exchange Board of India (Sebi) on Thursday eased several rules relating to Initial Public Offers (IPO), rights issues, buybacks and takeovers.
The regulator’s board approved these changes as also those relating tenures of managing directors of market intermediaries. The capital markets watchdog reduced the time for announcing the price band of initial public offers (IPO) from five working days before the opening of the issue to two working days. This will give companies more time to fix the price band.
Companies now need to provide investors with financial disclosures — for public issues and rights issues — for only three years. Currently, information is provided in the offer documents for five years. Also, companies need to provide only consolidated audited financial disclosures in the IPO offer document; audited standalone financials of the issuer and subsidiaries must be disclosed on the company website.
Following a board meeting on Thursday, the capital markets regulator tweaked the buyback norms. The buyback period has been defined as the time between the board resolution or the date of declaration of results for a special resolution authorizing the buyback of shares and the day on which the shares are paid.
Also, Sebi has amended the takeover rules. It has given companies additional time to revise the open offer price upwards till one working day before the start the tendering period.
The Sebi board also approved some recommendations of R Gandhi committee on regulations relating to market infrastructure institutions (MIIs). For rights issues the threshold for submission of the draft letter of offer to Sebi has been increased to Rs.10 crore as against the earlier prescribed Rs 50 lakh. The regular also tweaked the rules relating to the underwriting of all non-SME public issues. If 90% of the fresh issue of share is subscribed, the underwriting will be restricted to that portion only. Accordingly, the requirement to underwrite 100% of the issue without regard to the minimum subscription requirements has been deleted.
Sebi also reduced minimum anchor investor size to Rs 2 crore from the existing Rs 10 crore, for SME issuances. This will allow companies to attract more anchor investors for an issue.
The board has permitted eligible domestic and foreign entities to hold up to 15% shareholding in case of Depository and Clearing Corporation. Moreover, multilateral and bilateral financial institutions, as notified by the government, have also been recommended to hold up to 15% in an MII. Moreover, Sebi has decided to limit the tenure of managing directors of an MII for a for a maximum of two terms of up to 5 years each or up to 65 years of age, whichever is earlier. The requirement would also apply to incumbent MDs of MIIs.
The regulator is also looking into the issues regarding IPO ICICI Securities in ICIC AMC bought the large stake.The regulator had sought details of a significant investment made by ICICI Prudential Mutual Fund in the IPO of ICICI Securities. “Yes we are looking into that, and we have sought some information from them, and we are yet to get their replies,” Tyagi said.
The number of small and medium enterprises listed on BSE and NSE platforms is expected to reach 1,000 in the next two years from nearly 350 at present, leading merchant banker Guiness Corporate Advisory Services said today.
More companies will tap the initial public offer (IPO) route for business expansion plans, to support working capital requirements and other general corporate purposes.
In the entire 2017, 132 SMEs raised a record Rs 1,785 crore through IPOs, much higher than 66 firms that garnered Rs 540 crore in 2016.
Besides, 2017 witnessed more fund-raising than aggregate capital garnered in past five years cumulatively. Overall, the firms mopped up Rs 1,315 crore in the last five years.
“Both the exchanges (BSE and NSE) have already listed nearly 350 SMEs in the last couple of years and this number will definitely reach to 1,000 during the next two years,” Guiness said in a statement.
The firms will be from various sectors such as media and entertainment, manufacturing, textiles, engineering, finance, chemicals, agriculture, food processing and construction.
“SMEs have very well embraced the idea of raising equity through IPO route in the last couple of years. There has been a phenomenal change, as they were perennially dependent on debt for their working capital and expansion plans in the past. This change will be a game changer for the growth of the SMEs in the country,” the merchant banker said.
BSE and NSE launched SME platforms in March 2012, becoming the only two bourses to offer such a segment in the country. Since then, more than 300 companies have got listed on these platforms.
“SMEs have really got benefited from this platform, we are encouraging more SMEs to come out with IPO. This would remain a great source of funds. Many listed SMEs have also moved to main board exchanges because of their growth in the last couple of years. This is also a good gateway for eventually get listed on the main platform of the exchanges,” BSE SME Head Ajay Thakur said.
As many as 117 companies have garnered a staggering Rs 62,736 crore through IPOs in the first eight months of Financial Year 2017-18, much higher than the cumulative amount raised in the last five fiscals, Parliament was informed on Friday.
These 117 initial public offers (IPOs) include 28 main- board public offers and the remaining for small and medium enterprises (SMEs), Minister of State for Finance Pon Radhakrishnan said in a written reply to Lok Sabha.
During April-November of 2017-18 fiscal, a total of 117 companies raised Rs 62,736 crore through IPO route. This was much more than the cumulative amount of Rs 62,147 crore garnered in the last five financial years.
Besides, the ongoing fiscal has witnessed the highest IPO activity since 2007-08, when companies had mopped up Rs 52,219 crore through the route.
The IPO chart in this fiscal is led by General Insurance Corporation of India (GIC) that garnered over Rs 11,176 crore. This was the largest public float by any firm after the October 2010 offer by Coal India which raised Rs 15,000 crore.
GIC is followed by New India Assurance Company that raised Rs 9,467 crore, HDFC Standard Life Insurance Company (Rs 8,695 crore) SBI Life Insurance Company (Rs 8,386 crore) and ICICI Lombard General Insurance (Rs 5,700 crore).
Individually, a total of 106 firms had garnered Rs 29,104 crore in the entire 2016-17, while 74 companies had raised Rs 14,185 crore in 2015-16.
Further, 46 firms had mopped up Rs 3,039 crore in 2014- 15, 40 companies had raised Rs 8,692 crore in 2013-14 and 33 firms had raked in Rs 6,497 crore in 2012-13.
Increasing the fear of an unravelling of the exercise of invoices-matching, which is crucial to realising the presumed merits of the goods and services tax (GST), like reduction of tax evasion and cascades, three-fourths of the 60 lakh eligible taxpayers haven’t completed the formalities of filing both the inward and outward supplies-based returns for July till a day before the October 31 deadline. This has forced the government to give another window till November-end “to facilitate about 30.81 lakh taxpayers” to file details of inward supplies (GSTR-2). The triplicate comprehensive returns for July, the first month since GST’s launch, were originally required to be filed in the subsequent month itself, but due to the GST Network’s technical glitches and low levels of compliance, the deadlines have been extended multiple times. The schedule for filing these returns for August onwards has not even been announced yet, as this was to follow from the July-cycle learning. While invoice-matching is getting unduly delayed, piling up a huge job for the taxmen, the consequent blockage of input tax credits is bound to hit the working capital for large sections of the industry.
Since the launch of GST, small and medium enterprises have faced cash crunch, while exporters have got the refunds of July and August taxes only recently. Of course, the government has allowed industries with turnover up to Rs 1.5 crore to file the detailed returns on a quarterly basis while assuring them of prompt release of input tax credits claimed via monthly interim returns, but the deferment of invoices-matching would mean large-scale adjustments of the tax and ITC figures later. The government has faced much criticism for the imperfections of the GST it launched (multiple rates, high peak rates, exclusion of real estate and five petro- leum products etc). Also, since the GST was introduced, it has had to make more compromises that besmirched the new tax further. While dozens of items saw rate changes post-July, the GST Council, on October 6, accorded virtual tax waiver for exporters till March 31, 2018, despite exemptions running contrary to the GST’s basic tenet.
Besides, units with up to Rs 1.5 crore turnover were allowed to file quarterly instead of monthly returns, a move that would allow 90% of the non-composition GST registrants to shift to the easier system of filing returns every quarter, but could make prompt invoices-matching difficult. As reported by FE on Monday, the council may allow all taxpayers to move to quarterly mode of filing returns as it meets at Guwahati on November 10. The composition scheme — that allows businesses to pay taxes as a small percentage of turnover annually — is set to be made available to units with turnover up to Rs 1.5 crore, in what could effectively exclude 90% of the taxpayers from being part of the multi-point destination-based tax chain.
GST Network, which is the IT backbone of GST, estimates that about 80 crore invoices would be uploaded on to the system every month. A tax official said that even if 2-3 crore of the invoices don’t match, it will lead to numerous disputes, which would be arduous to resolve. “Besides, tax evasion takes place when transactions are off-book which will never be captured through invoices. The government needs precise and visible enforcement to minimise tax evasion,” the official said. To begin with, GST Council should have implemented matching at the GST level where sale and purchase are matched on the basis of the unique GST registration number of each taxpayer. Invoice matching should ideally have been brought in a few months later after the system stabilised. Now that some taxpayers are allowed to file returns only quarterly, the matching should also be harmonised with it and not be carried out every month.
These steps alone will make the process smoother,” Rahul Renavikar, managing director of Acuris Advisors said. Aditya Singhania, of Taxmann, said: “The matching concept is a much appreciated step for allowing input tax credit which is regulated by the GSTR 1, 2 and 3 mechanism. But with the brilliant concept, the IT platform of GST i.e. www.gst.gov.in should equally work in same wavelength for achieving the objective. Due to certain bugs and frictions, coupled with totally new forms of returns, taxpayers were unable to file the (returns) on time.” While industrialised states like Maharashtra, Gujarat and Karnataka among others had invoice-matching systems prior to GST, although these were not granular-level matching. A Maharashtra tax official, who requested anonymity, said that matching at the level of VAT number –much simpler than invoice-level matching – had enabled identification of 80% mismatches, which enabled the tax department to take action against hawala operations.
However, some tax officials have doubted the efficacy of invoice-matching, saying this wasn’t much of a success in any country with GST-type tax. “The first two month would pose immense challenges on how to deal with invoice mismatches and the provision may eventually have to be done away with,” a revenue department officials told FE on the condition of anonymity. The tax department is also worried that about 40% of taxpayers who filed the returns for July have claimed nil-tax liability. “It is indeed a large number. If enforcement is required, we will carry it out, though not in the nature of search and seizure. We may opt for discreet inquiries and meetings with such groups of taxpayers, to find out the reasons for the trend,” revenue secretary Hasmukh Adhia had told FE earlier.
More than 90 days after the roll-out of the goods and services tax (GST), lenders are gravitating to sanctioning working capital loans, especially to micro and small units, against documents used in the new tax regime.
They are no longer looking at just sales of the units concerned to decide on loan sanctions.
Banks are looking at input credit in deciding how much working capital loans they should advance.
The country’s largest lender, State Bank of India, and Union Bank of India, also a public sector bank, have started giving loans, especially to micro, small and medium enterprises (MSMEs) after assessing their input tax credit claims.
A public sector bank executive said the large number of small and medium enterprises (SMEs) had been included under the ambit of formal trade with the introduction of the GST.
SMEs are facing a working capital crunch because in the absence of proper financial returns, they are unable to access bank credit.
In the traditional route, banks make working capital assessments based on sales, as indicated in the balance sheet.
Besides this, entrepreneurs are facing a credit crunch because in the GST regime SMEs are entitled to input tax credit, and it is stretching their operating cycle.
A Punjab National Bank (PNB) official said the banking system is shifting to looking at the history of transactions such as GST credit-based decisions about credit, especially for SMEs.
SBI Chief General Manager (SME) V Ramling said using GST claims by banks would give SMEs the time to manage their working capital requirements till the time they got input tax credit. It will also help stabilise SMEs to run their operations without any hurdles.
SBI said the loan would be sanctioned outside Assessed Bank Finance (ABF) at 20 per cent of the existing fund-based working capital limit or 80 per cent of input tax claim due on purchases, whichever is lower.
Units and companies seeking a loan under the product need to give a certificate from their chartered accountant, confirming the input credit claims.
The government on Tuesday expanded the scope of the new insolvency rules to bring individual businesses under its purview.
On Tuesday, the Insolvency and Bankruptcy Board of India (IBBI) published the draft rules dealing with insolvency resolution process of individuals and firms on its website (www.ibbi.gov.in) ; public comments can be submitted till 31 October.
Once notified, even individual businesses such as proprietorships will come under the bankruptcy regime. This will enable an orderly bankruptcy resolution within the purview of a transparent rules-based regime. The existing insolvency and bankruptcy code, at present, applies only to corporate defaulters.
“These rules shall apply to matters relating to the insolvency resolution process for individuals and firms under Part III of the code,” said the draft rules issued by IBBI.
Part III of the Insolvency and Bankruptcy Code, 2016, deals with insolvency and bankruptcy of individuals and partnership firms.
According to a statement issued by IBBI on Tuesday, the draft rules and regulations have been submitted by a working group which was formed to recommend the strategy and approach for implementation of the provisions of the Insolvency and Bankruptcy Code, 2016, dealing with insolvency and bankruptcy in respect of guarantors to corporate debtors, i.e., personal guarantors, and individuals having businesses.
“So far, the rules were only in respect of the Corporate Insolvency Resolution Process (CIRP) and the rules concerning individuals and partnership firms were yet to come,” said Satwinder Singh, partner at Vaish Associates, a law firm. “The jurisdiction for corporate, companies, limited liability partnership (LLP) lies before the National Company Law Tribunal (NCLT) and with the Debt Recovery Tribunal (DRT) for individuals and firms. The provisions relating to insolvency and bankruptcy of individuals and firms had not been notified earlier, so now the IBBI has come out with the draft rules.”
Harsh Pais, partner at law firm Trilegal, said, “It is a positive step towards consolidating the bankruptcy regime for individuals, for whom there was no systematic approach previously. For companies, at least there was recourse to the Companies Act, whereas for individuals there were only some archaic laws from the early 1900s, which were hardly relied upon in practice.”
Most of the small and medium enterprises (SMEs) take the legal form of either partnership or proprietorship firms. Though the loans are smaller in value, SME borrowers far outnumber companies, resulting in their borrowings exerting a significant influence in the financial sector’s stability.
Bankruptcy resolution is high on the agenda of the central government, which is keen to improve the ease of doing business in India and attract more private investments from domestic and overseas sources. An efficient exit route from failed projects is an essential factor that lenders consider before participating in projects.