By Jalaj Tokas
Published on: December 06, 2021 at 12:20 IST
Introduction
Going public is a source of immense pride for every firm. However, there is a procedure that must be followed in order for a firm to issue an Initial Public Offering (IPO).
The use of stock exchanges to regulate the internal affairs of companies whose stocks they list for trade mostly remains unfathomed. Listing securities provides them a distinct advantage on the stock exchange. Interestingly on the stock exchange, only listed shares are traded. Transparency in listed securities transactions, as well as equality and competitive circumstances, are provided by the stock exchange. Hence, the firm, the investor, and the general public all benefit from the listing.
Following a series of preconceived notion, Initial Public Offerings (IPOs) are seen as massive money-making opportunities. This is supported by instances when high-profile firms go public and as a result their stock prices skyrocket. While they’re unquestionably popular, we all are well-aware that Initial Public Offerings (IPOs) are extremely risky investments with unpredictable long-term returns.
According to experts, domestic confidence was recently hurt by the weak listing of India’s largest initial public offering (IPO) and a lack lustrous global market amid mounting inflation concerns. However, PayTM’s recent dismal performance serves as a useful reminder that investors should be concerned more about the risk of losing money than the risk of missing out.
You must have looked for a good chance to engage in IPOs as an investor. However, are you familiar with the procedure of an initial public offering (IPO)? Knowing about the procedure of listing in India, would undoubtedly broaden your horizons. Don’t worry, we’re here to rescue our readers from the cumbersome journey of researching on the same as this article focuses on the process of listing a company on a Stock Exchange. Therefore, the key processes for a firm considering a public offering are examined under this article.
What is Listing?
Admission of securities to trading on a recognized stock exchange is commonly known as listing. Companies that are listed and traded on a particular stock market are referred to as “listed”. Most exchanges have particular conditions that must be met in order for a company to be listed and remain listed. The Companies Act of 1956 makes listing optional. However, it becomes mandatory once a Public Limited Company wishes to issue debentures or shares publicly. Meanwhile, when securities are listed on a stock exchange, the firm must adhere to the exchange’s rules.
Understanding the Objectives of Listing a Company
Through the process of an Initial Public Offering (IPO), a company can transform from a privately owned to a publicly traded company. IPOs are often used by firms to obtain funds and gain access to liquidity by selling their stocks/shares to the general public.
An IPO’s purpose might be to expand the company’s current activities, launch new initiatives, or any other purpose mentioned by the company in its offer document, or simply to have its existing equity shares listed by diluting existing equity owners’ stakes through an offer for sale.
A company’s listing on the stock exchange is a crucial milestone in its growth and development. More significantly, it guarantees that the issuer’s compliance is effectively monitored and that securities are traded in the best interests of investors, all while enhancing the issuer’s structure and reputation.
Before a company’s shares are publicly traded, it must follow the IPO procedure as laid forth by stock exchanges in India, which can be a tiring operation.
Eligibility Criteria
The Eligibility for listing a company on Security Exchange includes:[i]
| Issuer | Eligibility Criteria for Listing | |
| Public Issue / Private Placement | ||
| Commercial Papers | Structured product / Market Linked Debentures | |
| Businesses (Public Ltd and Private Ltd Enterprises) | Paid-up capital of Rs.10 crores; Rs.25 crores in market capitalisation and more than Rs 25 Crores in case of unlisted companies.Credit rating | Net worth of 100 crores |
| Special Purpose Distinct Entity or Trust as defined under SEBI Regulations, 2008. | Meets the requirements for listing under the Acts, Rules, or Regulations that govern the securities’ issuance. |
The Eligibility Criteria also includes:
- Submission of Letter of Application
- Allotment of Securities
- Trading Permission
- 1% Security Requirement
- Listing Fees
- Compliance with the Listing Agreement
Process of Listing a Company
The IPO Process is when a formerly unlisted firm sells new or existing securities for the very first time and makes them available to the general public.
A firm is deemed private prior to an IPO if it has a small number of investors and/or is confined to accredited investors and/or early investors. The issuing firm becomes a publicly listed company on a recognized stock exchange after an IPO. The process of becoming an IPO is sometimes also known as “becoming/going public.”
If a business wishes to list its securities on the Exchange, it must submit an application in the specified form to the Exchange prior to the company issuing an ‘Offer for Sale’ if the securities are sold by means of an offer for sale.
A corporation can list itself on the markets after completing six phases in this process.
- Hiring an Investment Bank
The business will enlist the support of financial specialists, such as investment banks, to begin the initial public offering process. They provide assurance to the firm regarding the funds obtained and operate as a link between the company and its investors. The professionals will also examine the company’s critical financial metrics and sign an underwriting agreement. The following items are generally included in an underwriting agreement:
- The deal’s specifics
- Amount to be hiked
- Information about the securities that are being issued
- IPO Registration
Every initial public offering (IPO) must register with SEBI, and once approved, the IPO is ready to be listed on the markets.
- SEBI’s Verification
The company’s submission of facts is then verified by SEBI, the market regulator. If the application is granted, the business will be able to announce an IPO date.
- Filing an Application to Stock Exchange
The business must now apply to the stock market to have its initial offering floated.
- Advertising
Before an IPO goes public, the firm uses advertising to generate interest in the market.
Basically, the more your firm is discussed and recognized, the more interest it will generate among investors, resulting in a higher listing price on the markets.
- Pricing of IPO
The issuing firm decides on the offer price and the exact number of shares to be sold a day before the effective date. The offer price is crucial since it is the price at which the issuing enterprise raises capital for its own needs.
- Market Competition Transition
Once the “silent time” imposed by the SEC expires, the final phase of the IPO process, the transition to market competition, begins 25 days following the initial public offering.
Important Judgements
- Intention of Company is gathered from its Conduct – Sahara India Real Estate Corpn. Ltd. Vs SEBI[ii]
The Supreme Court, while deciding on the ambit of Section 73 of the Companies Act, held that the legal responsibility to apply to a stock exchange for listing arises immediately after an unlisted company conveys its intention to offer its securities to the public, specifically to more than 49 people, by issuing a prospectus.
- Understanding the Meaning of ‘Forthwith’- Desh Bandhu Gupta & Co. Vs Delhi Stock Exchange Association Ltd.[iii]
The Supreme Court highlighted that despite amending Section 73 of The Companies Act, it still was not entirely free from ambiguities. Therefore, the term ‘forthwith’ in Section 73(2-A) must be interpreted as an instant responsibility determinable by reference to the date of allocation, although subject to an 8-day grace period. Making it much more clear, the Court added that the term does not usually and always imply instantaneous, and it must be interpreted in the context of the legislation. Where the legislation requires the payment of money and the accumulation of interest at certain times, the phrase forthwith’ must be interpreted as immediate or instantaneous in order to eliminate any ambiguity or doubt. Hence, the responsibility or obligation arises exactly in the manner specified by the legislation.
- No agreement can Defeat a mandatory pre-requisite of the Statute – Keshav Nilkanth Joglekar Vs Commissioner of Police[iv]
It was held that the Stock Exchange’s extension of time will not relieve the firm of its need to pay interest. The Supreme Court reiterated that any provision in the prospectus that is contradictory is unenforceable and useless to the corporation. Hence in light of Section 9 of the Companies Act, the Court held that no agreement can override or evade a statute’s mandatory requirements.
- Applications made for Permission for Shares in more than one Stock Exchange – Rishyashringa Jewellery Ltd. Vs Stock Exchange[v]
The Supreme Court held that unless authorization is given by everyone of all the stock exchanges specified in the prospectus for listing of shares for which the firm has applied, the entire allocation will be worthless. In other words, if any of the numerous stock exchanges specified in the prospectus has not received permission for the listing of shares, the effect of Section 73(1-A) is to deem the whole allocation unlawful, and the grant of authorization by one of them becomes insignificant.
Consideration
No one can predict whether a firm that fulfils the exchange’s conditions for original listing will continue to do so in a competitive environment. If the exchange wants to maintain a high-quality market, it can’t keep a security on the list only because it satisfied the standards when it was first listed. Many aspects must be considered, including the firm’s national interest, its relative status in the sector, the nature of its market, if the company follows solid business procedures, and whether the company is expanding. Clearly, the interests of individuals who purchased a security before it was listed must be balanced against those who may purchase because it is listed.
Since the procedures and expenditures involved in taking a private company public are considerable, the choice to do so must be properly thought out. Furthermore, once a firm is listed, it will be subject to a slew of continuous regulatory regulations. As a result, there must be compelling arguments to justify the choice to go public.
Conclusion
Investor protection and market quality are the two major regulatory goals in markets. Investor protection is realized when material information is supplied to investors and they are safeguarded by constant monitoring and enforcement. Further, disclosure of information about publicly traded firms and trust that the company’s insiders would not defraud investors by engaging in “self-dealing activities” are the two most important aspects of investor protection.
Strong capital markets can emerge if these critical preconditions are met. Strong markets can lower the cost of capital for publicly listed companies, encouraging investment. As a result of this investment, economic development gets aided.
Certain standards can be implemented by making it a requirement for firms to comply with them in order for their securities to be traded on an exchange. As a consequence, investors would be less likely to base an investment choice on a misunderstanding of their future rights as owners, and would be able to judge the value of corporate equity instruments more correctly than they do now.
ABOUT THE AUTHOR
Jalaj Tokas is a second Year Law student pursuing B.A.LLB from University School of Law and Legal Studies, GGSIPU, New Delhi. He is a life-long learner is self driven towards his ambitions. He strongly believes that expectations are premeditated disappointments and strives not just to be successful but more importantly to be of value.
Edited by: Aashima Kakkar, Associate Editor, Law Insider
References
[i] National Stock Exchange of India Ltd.
[ii] Sahara India Real Estate Corpn. Ltd. Vs SEBI, (2013) 1 SCC 1.
[iii] Desh Bandhu Gupta & Co. Vs Delhi Stock Exchange Association Ltd., (1979) 4 SCC 565: AIR 1979 SC 1049: (1980) 50 Comp Cas 84.
[iv] Keshav Nilkanth Joglekar Vs Commissioner of Police, AIR 1957 SC 28: 1956 SCR 653: 1957 Cri LJ 10.
[v] Rishyashringa Jewellery Ltd. Vs Stock Exchange, (1995) 6 SCC 714.