A Budget proposal that could help Sebi address SME IPO concerns

While presenting the Union Budget on Tuesday, Finance Minister Nirmala Sitharaman said that LTCG tax on unlisted shares will be reduced to 12.5 percent. Earlier, it was taxed at 20 percent with indexation benefit

The government’s decision to lower the long-term capital gains tax rate for transfer of unlisted shares is likely to help address a growing concern in the SME IPO space, which is already high on the regulatory radar due to frequent instances of unusually high level of subscription and listing gains.

While presenting the Union Budget on July 23, Union finance minister Nirmala Sitharaman said that LTCG tax on unlisted shares will be reduced to 12.5 percent. Earlier, it was taxed at 20 percent with indexation benefit.

“… the amount of income-tax calculated on such long-term capital gains (for unlisted securities)… at the rate of twenty percent for any transfer which takes place before the 23rd day of July, 2024; and at the rate of twelve and one-half percent for any transfer which takes place on or after the 23rd day of July, 2024,” stated the Finance Bill 2024.

This assumes significance as this has done away with the spread that existed earlier in terms of the LTCG tax rates for listed and unlisted securities. For listed shares, it was 10 percent prior to the budget, which was hiked to 12.5 percent.

Simply put, the LTCG tax rate now for listed and unlisted shares is same at 12.5 percent.

Market participants say this would lead to many promoters of SMEs raising funds by diluting stakes in the private market as there would be no real tax incentive of doing that on the exchange platform.

Also Read: SME IPOs continue to pour amidst regulatory concerns

Doing a stake sale through an IPO also entails compliance and regulatory costs and those can be avoided as well when doing a private sale, they add.

“This will give fillip to stake sales in the private space especially in the SME segment as the tax benefit spread is no more there plus such stake sales will be much easier and quicker to execute,” says Bhavin Shah, Partner, Private Equity Leader, PWC.

This would be welcome news to the Securities and Exchange Board of India (Sebi), which has been highlighting its concerns around the SME IPO segment, which was launched way back in 2012.

“We do see signs of manipulation in the SME (small and medium enterprises) segment… We are able to see certain patterns. However, as per our regulation, the way that we need to construct the entire case, we do need to take some time to do that in a robust manner,” SEBI chairperson Madhabi Puri Buch had said in March.

Also Read: 'We see signs of manipulation in the SME segment,' says SEBI chairperson

Recently, the National Stock Exchange (NSE) also tightened the norms for the segment, while putting a 90 percent cap on the stock price movement on the day of listing. There have been nearly 22 SME IPOs this year that saw their respective share prices more than double on the day of listing itself.

Market participants further believe that such a move was warranted as the current calendar year has also seen many SME IPOs that were subscribed in multiple of hundred times.

The IPO of HOAC Foods India and Magenta Lifecare was subscribed 1963 times and 1003 times, respectively. Further, there were another 35 SME IPOs that were subscribed between 200 and 800 times each.

Meanwhile, the current calendar year has already seen as nearly 120 SME IPOs till June with a cumulative fund raising of Rs 3,644 crore. This assumes significance as 2023 saw a record number of 182 SME IPOs getting launched with the total fund raising pegged at an all-time high of Rs 4,686.11 crore.

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