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Getting registered in the stock market is a matter of pride for a company. It allows a company’s securities to be freely traded to the public, thereby raising a higher capital for the company’s operations. However, this process may seem like a formidable task for new companies who are preparing to get listed, due to the high number of regulations governing the listing procedure.
There are two major stock exchanges in India- NSE or National Stock Exchange and BSE or Bombay Stock exchange. A company has to register itself at a stock exchange, before it can freely trade its securities. This article provides a simple explanation of the registration process and also provides information regarding the provisions pertaining to listing and registration at a stock exchange in India. It further illustrates the advantages and disadvantages of registering at a stock exchange.
Meaning of Basic Terms
- Capital market– It is the financial market where securities are bought and sold. It consists of two components- primary market (related to IPO) and secondary market (related to stock exchange). It generally deals with long-term securities.
- IPO or Initial Public Offering- It is the first public offer that is made to the public and provides a launching station for the company which is getting listed on a stock exchange. It is underwritten by investment banks which provide assistance to such companies in getting listed at a stock exchange.
- Securities– It is a financial asset which can be traded in the capital market and helps in raising the capital for public as well as private companies. There are three types of securities, equity securities which allow investors to hold ownership in a company, debt securities which are in the form of loans and hybrid securities, which have the elements of both debt and equity securities.
- Shares and Stock– Although stocks and shares are used interchangeably in layman terms, however, there is a slight difference. Shares are a unit of ownership in a company that can be individually held and sold. Stocks on the other hand are a cumulative form of shares which are generally held and sold together.
- Stock Exchange– It is a place where various financial instruments are traded, like commodities, stock and bonds. It helps to connect the stock sellers with stock buyers. A stock is traded on the stock exchange after it has gone through the process of Initial Public Offering or IPO.
- Stock Market– It is a broader term which includes all the stock exchanges in a particular area.
- Demat or dematerialised account– It is an electronic account via which the shares which are physically held by the account-holder are converted to an electronic form. This account can be linked to any bank account for the transfer of funds. It is quite similar to a bank account, as it allows the account holder to deposit as well as withdraw money.
- Depository– There are two depositories in India- National Securities Depository Limited or NSDL and Central Securities Depositories Limited or CSDL. They provide a link between the listed companies and the shareholders. It also provides a manner to buy shares online in a paper-less setting.
- Depository Participant- It is an agency, either in the form of financial institutions, banks or broker, which acts as an agent of the depository and streamlines the final issue of shares.
- Dividend– It is the payment made by the company to its shareholders when the company makes a profit. It may or may not be payable, depending upon company policies for the time being.
- Securities Exchange Board of India or SEBI– It regulates the securities or capital market in India. It issues regulations and compliances for listed companies and tracks any malpractices that may be happening in the capital market.
- Stock Brokerage firms and Broker– Stock Brokerage firms are licensed agencies which act as an intermediary between the buyer and seller of securities who are trading on the stock exchange. These Stock Brokerage firms are regulated and financed by SEBI, i.e. Securities Exchange Board of India.
- Listed and unlisted companies– Listed companies are those public companies which has entered into an agreement with the stock exchanges and whose shares are traded on stock exchanges. An unlisted company is a public or private company whose shares are not listed on the stock exchange and therefore it cannot trade its securities on any stock exchanges. A listed company also has to comply with SEBI Regulations, along with the provisions of the Companies Act, 2013.
- Sensex and Nifty– Sensex is the term used for sensitive index which shows the market index for the Bombay Stock Exchange or BSE. It provides the 30 most frequently traded companies on the BSE. Nifty shows the market index for National Stock Exchange. It provides the 50 most frequently traded companies on the NSE.
- Investment banking firms– these companies are intermediaries between the public companies and the investors. They provide an advisory role to the public companies which are getting listed on the stock exchanges.
- Prospectus– It is defined under Section 2(70) of the Companies Act, 2013 as any document issued as a prospectus including red-herring prospectus (Section 32) or shelf prospectus (Section 31) or any notice, advertisement, circular or any other document which is inviting offers from public for purchase of securities of the company.
Provisions for Listing Requirements
The regulations governing listed companies are Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 or Listing Regulations, 2015 and certain provisions of the Companies Act, 2013. It is necessary for a company to comply with the aforementioned requirements for maintaining its status as a listed company and ensuring that no legal liabilities are attracted. The primary objective of these regulations is to ensure a proper corporate governance mechanism and transparency in the company. Since the capital invested in listed companies comes directly from the public, it becomes important to protect the interest of the investors.
The Listing Regulations, 2015 provide for a ‘Uniform Listing Agreement’ to act as the format for the mandatory agreement between the company and the stock exchange. There are two kinds of disclosure requirements under Regulation 30 of the Listing Regulation, 2015-
- Events to be disclosed mandatorily- These kinds of disclosures are mandatory in nature. It does not matter whether they pass the materiality test or not, a company is bound to disclose such events. Some of these events are-
- Outcomes of board meetings;
- Change of directors or Key Managerial Personnel;
- Mergers and acquisitions;
- Agreements which deviate from the ordinary course of business;
- Corporate debt restructuring, etc.
- Events to be disclosed on applying the materiality test- Some events are only to be disclosed depending on whether the meet the criteria of the materiality test. As per the materiality test, the criteria for material disclosures provides that any event which is not disclosed would lead to-
- Alteration of information available to public;
- A substantial reaction from the market if disclosed later on; and
- If the board of directors considers such event to be material in nature.
It is mandatory for companies to form a policy for determining materiality as per the Listing Regulations, 2015.
Procedure for Registration in Stock Market in India
Before registering in the Stock Market, a company has to meet a certain minimum criteria.
Minimum Criteria for Listing at NSE or BSE
Any company which has to get registered at NSE has to meet the following criteria-
- Incorporated- The company must be incorporated under the Companies Act, 2013 or 1956.
- The post issue paid up capital of the company in terms of face value should not exceed Rupees 25 Crores.
- Track Record- The company should have a track record of at least three years of-
- Seeking listing; or
- Promoters or promoter company (having at least 20% of post issue equity share capital) incorporated outside or inside India; or
- Proprietorship or Partnership firm which is subsequently converted to a Company which approaches the Stock Exchange for listing.
The net-worth of the company should be positive and it should be earning operating profits in the last 2 out of 3 financial years before the application.
- The applicant or promoting companies should not be undergoing any proceedings under the Insolvency and Bankruptcy Code, 2016.
- The applicant is not undergoing winding up petition in the National Company Law Tribunal.
- There is no material action (regulatory or disciplinary) taken against the applicant by the stock exchange or SEBI in the last 3 years.
The company also has to file the following disclosures in the public offer document-
- Any material action (regulatory or disciplinary) taken against the applicant or promoter company by the stock exchange or SEBI in the last 1 year.
- Any default of payment in relation to interest payment, principal payment to any banks, financial institutions, bonds, debentures, etc. by the applicant or promoter company(s) in the last 3 financial years.
- The litigation record, status and nature that the company or promoter company(s) is undergoing.
- The status, nature and record of the serious offences that the directors of the company have been charged with.
Procedure for registration on BSE and NSE
There might be slight variations in the procedure of registering on BSE and NSE. The following is the general procedure of listing on a stock exchange in India-
- Deciding about listing on the Stock Exchange– A company has to first and foremost decide, whether it wants to list on the stock exchange, by weighing the advantages over the costs. Since the disclosure requirements and the costs involved in listing can be significant, it is pertinent to analyse the same against the profitability of getting listed.
- Selecting contributors (firms, advisors, auditors)- Once the company has decided upon getting itself listed on the stock exchange, it needs to hire certain contributors in order to ensure a smooth transition from being unlisted to getting listed as well as future support.
- Investment Bank- the Company may hire an investment firm, which will assist in the process of preparing to issue securities to the public as well as offer or sell the securities to the public. For this purpose, a company may hire an advising investment bank. The applicant company should do a thorough research before choosing such firms or banks as they play a vital role in advising the company through the issuing process.
- Auditor- the auditor’s role in case of a public company getting listed is much wider than for an unlisted company. He provides a long form report which is a detailed financial report and also provides an assessment of the earing forecasts of the management.
- Legal advisors- a legal advisor is required for the drafting of all the contracts, examination of the legal status of the company, and drafting of shareholder rights. He or she also prepares a final report for the company and ensures that the company complies with the legal requirements of listing.
- Public Relations and Marketing Advisors- They help in marketing the securities to the public by organizing road shows and by providing the logistic services.
- Preparation for listing and maintenance– A company which is preparing to get listed on a stock exchange also has to prepare for maintenance of listing on the stock exchange, by ensuring a proper investor relations and internal governance of the company. The company also has to ensure that it meets the minimum eligibility criteria and makes the required disclosures as stated above. Furthermore, a company has to provide the certified copies of the Memorandum of association and Articles of Association to the Stock Exchange.
- Registration forms– A company has to register the IPO with SEBI, and only after the approval from SEBI, is a company liable to be listed on a stock exchange in India.
- Preparing a prospectus– A company has to prepare a prospectus, which contains the information about the IPO and includes the financial statements, the company history and future plans of the company. This prospectus has to be filed with the Registrar and SEBI under Section 32 of the Companies Act, 2013.
- Submission of Application– an application to the stock exchange also has to be filed along with the prescribed fees and forms, if there are any.
- Advertising– It is important to advertise the company in order to gain popularity and more demand from the investors upon listing. More demand of the company’s shares results in getting a higher listing price on the Stock Exchange.
- Setting of price band by investment bank– The investment bank sets a price band which determines the price in which the bidding will take place. Bidding process invites various investors, institutional investors, insurance companies, mutual funds, etc. The price band is based on the demand and supply of the company’s securities.
- Book bidding process- On the completion of the bidding process, it is the duty of the investment bank to determine whether the issue is under-subscribed or over-subscribed. In case of over-subscribing of issues, the bank releases the securities at the highest band price and the listing of share is completed.
- Shares can be freely traded on the stock exchange– one the process of the IPO is complete, a share can be freely traded to the public via the stock exchange through stock brokerage firms.
Advantages of Registering in the Stock Market
There are considerable advantages for a company getting itself listed in a stock exchange. They are-
- Getting listed allows a company to trade its security in the public arena which helps in bringing greater funds or higher capital into the company.
- A listed company is entitled to privileges, which are not available to unlisted companies. For example, a company can reduce its debt due to the higher negotiating power in case of interest rates.
- The brand image of the company also improves as it is considered reputable to be listed on the stock exchange.
- It is considered that a wide range of investors provide better stability and growth options to a company, than where the shares are only held by a few people.
- Various investors are attracted towards a listed company, including institutions which generally do not participate in private- equity transactions.
Disadvantages of Registering in the Stock Market
Although there are many advantages to registering in a stock exchange. It is pertinent to note that registering also has some disadvantages. The following disadvantages are there for a company who registers in the stock exchange-
- The regulations as well as the restrictions on a listed company are significantly more than an unlisted company.
- Compliance with regulations leads to greater utilization of funds.
- The liability of a listed company is much higher than an unlisted company.
- The shares of the already existing shareholders may be diluted, depending upon the share capital scheme of the company.
For a public company to get listed, it has to follow the aforementioned procedure. However, it should keep in mind all the pros and cons before making the decision of listing. A company needs to choose the stock exchange it wants to get registered at and follow the specific procedure laid down by the stock exchange. The company should also keep in mind the SEBI guidelines and other regulations pertaining to listing, while keeping an eye at the capital market. A good marketing strategy should also be in place so that there is more demand for the company’s stocks and it eventually becomes a highly traded company on Nifty or Sensex.