Paid-up capital & turnover new yardsticks to ring in sops for SMEs

NEW DELHI: Small and medium enterprises (SME) may soon get classified differently for availing exemption from certain Company Law requirements. This is in addition to the existing classifications for other purposes such as excise exemption and priority lending from banks.

The corporate affairs ministry is planning to define them on the basis of paid-up capital and turnover. This classification would be reflected in the proposed new Company Law that the government hopes to introduce in Parliament during the winter session.

This twin criteria — based on paid-up capital and turnover — would reduce the compliance cost of small companies while denying the benefit to large unlisted companies that have a small paid-up capital but a significantly high turnover, it is understood. Indian subsidiaries of some foreign companies have a low paid-up capital but a large turnover, according to a corporate affairs ministry official. The exemptions proposed for small scale companies would cover accounting, auditing and corporate governance requirements.

For excise exemption, the threshold now is Rs 4 crore turnover a year.The micro, small and medium enterprises development Act, 2006, however, covers entities with an investment of up to Rs 10 crore in the manufacturing sector and of up to Rs 5 crore in the services sector, in the SME definition. This law aims to promote the competitiveness of this class of companies.

Banks now have a wider definition for SMEs within which they can work, ranging form tiny units to mid-corporates. A large number of banks have specialised teams on SME lending. As per RBI definition of small enterprises, investment in plant and machinery should be only up to Rs 5 crore. However, for the purpose of convenience, banks classify SMEs as per turnover.

Another example of a classification relates to the accounting standard 18 –– recently notified by the corporate affairs ministry, which applies only to small and medium entities incorporated as companies, while the standard prepared by the ICAI covers partnerships, proprietorships, associations and Hindu undivided families. The standard makes it mandatory for small scale companies to disclose the nature of their relationship and the transactions with all related parties. An SMC is an unlisted entity with less than Rs 50 crore turnover a year. It should also not be a holding or a subsidiary company of a non-SMC.