SME Connect International Trade

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A successful month of ‘SME Connect’in the Times of India has generated lots of encouraging feedback and plenty of queries for more information on the featured topics. With a focussed approach, SME Connect seeks to empower SMEs and Emerging Corporates with the know-how and skills to compete in global arenas. On July 30th, 2010, ‘International Trade’was featured and the questions that were posed to our expert following it has been answered in detail below. .

  Q: We are in the process of bringing in equity from our associates overseas. It would be helpful if you could guide us on this subject?  
  A: Changes in pricing guidelines:

In April this year, the Reserve Bank of India (RBI) has amended the FDI Regulation with regard to pricing guidelines. The amendments are made effective from April 21st, 2010. The highlights of the amendments are as under:

Pricing norms for issue of shares by an Indian Company to non-resident are as under:

  • In case the shares of a company are listed on a recognised stock exchange in India, the price would need to be worked out in accordance with the SEBI guidelines as applicable.
  • In case the shares of a company are not listed on a recognised stock exchange in India, the fair valuation of shares would be undertaken by a SEBI registered Merchant banker or a Chartered Accountant as per the Discounted Free Cash Flow (DCF) method.
  • Where the issue of shares is on a preferential allotment basis, the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by RBI from time to time.

Pricing norms for rights issue of shares by an Indian Company to non-resident shareholders are as under:

  • In case of the shares of a company listed on a recognised stock exchange in India, at a price determined by the company
  • In case of the shares of a company not listed on a recognised stock exchange in India, at a price which is not less than the price at which offer on right basis is made to resident shareholders.
  Q: Securities and Exchange Board of India (SEBI) has finalised and specified the Model Equity Listing Agreement for execution between the Small and Medium Enterprise (SME) issuer and the Stock Exchange. What will be the benefits for me?  
A: This is a welcome step which enables a Small and Medium Enterprise to raise money from overseas. In recognition of this need, to tap/access capital markets, SEBI had decided to encourage promotion of dedicated exchanges and/or dedicated platforms of the exchanges for listing and trading of securities issued by SMEs. In continuation of the same and to facilitate listing of specified securities in the SME exchange, SEBI has specified the Model Equity Listing Agreement for execution between the issuer and the Stock Exchange, to list/migrate the specified securities on SME exchange, vide its circular dated May 17th, 2010. SMEs, by virtue of being listed in a recognised stock exchange with all its disclosure norms, are likely to attract capital, whether equity or debt.
  Q: What is Base Rate System on the borrowing rates? How would it help me in borrowing money from banks for my business?  
A: The Base Rate System replaces the Benchmark Prime Lending Rate System and is expected to increase credit flow to small borrowers.

The Base Rate system has replaced the Benchmark Prime Lending Rate (BPLR) system with effect from July 1st, 2010. Since the Base Rate is the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. Accordingly, the current stipulation of BPLR as the ceiling rate for loans up to Rs. 2 lakh stands withdrawn. It is expected that the above deregulation of lending rate will increase the credit flow to small borrowers at reasonable rates and bank finance will provide effective competition to other sources of high cost credit.

  Q. What is Corporate Identification Number? Am I supposed to have this id for my company which was established in 1994?  

A: Corporate Identification was started in the year 2000 by the Ministry of Company Affairs.  This was done in order to curb the registration of fictitious companies, and to keep a check on the fly-by-night operators. The Central Government has also prescribed filing of address proof and identity proof for directors and thereafter Director Identification Number is allotted, which aborts formation of fictitious companies.

As a responsible and good corporate citizen, we at ICICI Bank encourage every corporate customer for its registration.

  Q. What is your comment on the Infrastructure Projects, particularly from SME point of view on the Power projects?
A: Without doubt, in the first three years of the Eleventh Plan, there were considerable shortfalls in the completion of infrastructure projects. In the power sector, as against a planned target for creating 78,740 mega watts (MW), it appears we would be lucky to get 62,000 MW by March 2012.

The reality is that failure to create physical infrastructure in time has not only been persistent, but has also been a binding constraint on the expansion of manufacturing output, and this has been a significant contributor to lower competitiveness. On an average, medium and large manufacturing establishments use captive power for one-quarter to one-third of their requirement. In most cases the cost of captive generation is much higher than grid-power, which in conjunction with the capital costs that are involved in setting up such captive power facilities, burdens manufacturing units with sizeable additional cost. This increases their manufacturing cost and erodes their competitiveness vis-à-vis producers in other countries. Small manufacturing enterprises which cannot afford captive generation have been pushed to the wall. Anecdotal evidence suggest that not only has there been a large number of closures of small enterprises on account of acute shortage of grid power, but it has prevented new, small manufacturing units from coming up. It is, therefore, imperative to rapidly improve power availability so that the industrial sector, including small enterprises, can expand in a manner commensurate with their underlying potential and go on to create the millions of industrial sector jobs that are necessary to realise 9% plus growth.