The capital market in India is an enormous market, catalysing industrial growth in India. It serves as a mechanism for mobilisation of funds, investment of idle funds, and provision of liquidity for financial assets such as shares, bonds, debentures, and other securities.
The securities market in India is mainly bifurcated into two segments:
The primary market is where new securities are issued, and the Secondary market is where trading of existing securities is carried out. These markets are regulated by the Securities and Exchange Board of India (SEBI) with the aim of protecting investors’ interests and maintaining fair trading practices in a transparent manner.
The secondary market is supported by eminent stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), thus providing a well-equipped trading platform in terms of technology and stability.
The Indian securities market has transformed much with the growing popularity of dematerialisation of securities, computerised trading, and much stricter regulation. It plays a greater role in mobilising the savings at the household level into productive investments in the aid of growth. It provides capital to the enterprises; simultaneously, it provides profits to investors, develops accession opportunities for the portfolio, and allows investors to participate in the economic growth of the country.
What is Listing of Securities?
Listing refers to the official authorisation for a company’s shares, debentures, or other financial instruments to be traded on a recognised stock exchange. Once listed, investors are free to purchase and sell these securities in the secondary market.
The listing of company shares enhances visibility, liquidity, and credibility and puts company funds in a position where they can be raised, further enabling investors to enter or exit their holdings.
Listing in India is governed by the Securities and Exchange Board of India (SEBI) and the respective stock exchanges, such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These firms have to meet a bunch of rigorous eligibility criteria such as minimum capital requirements, track record of profits, compliance with corporate governance requirements, etc. The listing process in India involves filing a preliminary prospectus, getting clearance from SEBI, making the issuance of securities to the public through an IPO, and then meeting the listing requirements of that particular exchange.
Listing provides a large degree of advantages. For a corporation, it eases the process of obtaining capital, improving its image before the public, and providing liquidity to its shares. Transparency in operations, regulated trading norms, and valuation of investments residing in its shares are offered to investors. Moreover, listed companies are bound by enforced disclosure and reporting requirements, which further strengthen investor confidence and market discipline.
However, listing is not without its obligations, such as the requirement to meet continuous disclosure requirements, governance provisions, and the performance of frequent audits. Disregard for these requirements can result in penalties or even delisting. Overall, listing is an important milestone for those companies seeking expansion and is essential to the establishment of a strong and transparent securities market.
Process of Listing Securities
The process of listing on the stock market involves various steps and entails adherence to the regulatory norms prescribed by the Securities and Exchange Board of India (SEBI) and the concerned stock exchange (e.g., NSE or BSE). This process encourages transparency, protects investors, and facilitates accurate pricing of the securities of the company, thus generating confidence in the capital market.
1. Going public: The company’s board of directors decides to raise money through public investment by listing its securities (usually shares) in an approved stock exchange.
2. Intermediaries’ appointment: The company appoints necessary intermediaries like a merchant banker (Lead Manager), legal consultants, underwriters, issue registrars, and auditors.
3. Due Diligence and Preparation of Draft Red Hiding Prospectus (DRHP): The merchant banker evaluates the financial position, legal status, and business of the company. The Draft Red Herring Prospectus (DRHP) is prepared and filed with SEBI.
4. Review and approval by SEBI: SEBI scrutinises the DRHP and may seek clarifications. On approval, the company issues an updated Red Herring Prospectus (RHP).
5. Applications for Stock Exchanges
The company obtains in-principle approval from the chosen stock exchanges (e.g., BSE, NSE) by submitting the following documents:
- Memorandum and Articles of Association
- Audited Financial Statements
- Corporate governance disclosures.
- Shareholding patterns.
6. Initial public offering (IPO): The company issues its shares to the public through an initial public offering. Investors can subscribe either by using the book-building route or a fixed price option.
7. Allotment and refund: Successful applicants are allotted shares. Refund of unallotted shares is made as per the procedure.
8. Listing and Commencement of Trading: After allotment, the company completes the last listing requirements of the stock exchange. On the listing date, the shares are listed and begin trading in the secondary market.
9. Post-listing Compliance: Following listing, the company must maintain continuing obligations such as quarterly and annual financial disclosures, corporate governance reports, shareholding pattern updates, and a prohibition against insider trading.
What is the Delisting of Securities?
Delisting of securities is when a company’s shares or other instruments are removed from a recognised stock exchange, thus preventing their sale in the open market. Delisting a security means that it can no longer be bought or sold on that exchange, but it can be sold over-the-counter (OTC).
In India, delisting is governed by the SEBI (Delisting of Equity Shares) Regulations 2021. The two principal forms of delisting are:
- Voluntary delisting involves a company wanting to become private, restructure its business, or go through a merger or acquisition. In such instances, the promoters must offer to buy back public shareholders’ shares at a reasonable price, generally through a method called reverse book building.
- Mandatory delisting is imposed by the stock market or SEBI on account of serious violations of listing rules, non-compliance with disclosure norms, or cases of financial malfeasance. In certain cases, the company can be penalised, and investors may find it difficult to dispose of shares.
The delisting process is a multi-step process, such as board and shareholders’ approval, hiring a merchant banker, finding an exit price, and repurchase of shares from public investors. SEBI makes sure that shareholders’ interests are protected during this process.
Delisting is very serious. Although companies might face lower compliance expenses, their ability to raise public funds is curtailed. For investors, this results in lower liquidity and might impact share valuation. The Securities and Exchange Board of India has therefore set tough regulations to facilitate transparency, fairness, and investor protection throughout delisting.
Process of Delisting Securities
The SEBI (Delisting of Equity Shares) Regulations, 2021, regulate the delisting of securities from stock exchanges in India. Delisting is a regulated and investor-sensitive process that ensures transparency, fairness, and protection of shareholders. The voluntary and compulsory delisting procedures are different. Here is a step-by-step elaboration of the voluntary delisting process, which is more formalised and widely used by companies:
Voluntary Delisting Process
- Board Approval: The operation begins with the company’s board of directors approving a resolution to delist its shares. The decision should be in the best interests of the shareholders and supported by strong reasons (for example, restructuring or going private).
- Shareholder Approval: The proposal is given to the shareholders through a special resolution. At least 75% of the public shareholders have to vote in favor for the resolution to be passed.
- In Principle Approval of the Stock Exchange: The company obtains in principle approval from the stock exchange (like NSE/BSE) for delisting its shares. The exchange ensures compliance with the listing and delisting rules.
- Appointment of Merchant Banker: A SEBI-registered merchant banker administers the delisting offer and determines a reasonable exit price.
- The Reverse Book Building (RBB) Process: Public shareholders use an electronic platform to bid for the exit price. The floor price follows SEBI guidelines, e.g., the average market price. The price established is based on the highest number of shares tendered.
- Acceptance of Discovered Price: Acceptance by the promoters is necessary for the process of delisting to proceed. Successful delisting is accomplished when promoters acquire 90% of the total number of shares, including their own.
- Payment to Public Shareholders: On a successful delisting, the corporation is required to pay the exit price to shareholders within 5 working days.
- Final Approval and Delisting: Final approval is given by the stock exchange, which results in the official delisting of the securities of the company.
Compulsory Delisting Process
- The exchange initiates the procedure because of non-compliance, misdealings, or prolonged suspension.
- A fair price is decided by an independent valuer.
- Promoters are expected to purchase shares from public shareholders at this determined price.
Significance of Listing and Delisting Securities
Listing facilitates expansion and openness, and delisting provides strategic maneuverability; both are extremely important to a company’s survival and the overall capital market structure.
Importance of Listing:
- Access to Capital: Facilitates companies to raise funds from the public via the stock exchange.
- Liquidity: The public obtains benefits from trading listed assets freely.
- Increased Visibility: Enhances the company’s public image and brand name recognition.
- Valuation Benchmark: Market price helps determine a company’s present value.
- Confidence of Investors: Regulated listing creates transparency and attracts a greater number of investors.
- Corporate Governance: Improves disclosure and compliance standards.
- Exit Strategy: Offers an avenue for existing investors and promoters to sell their stakes.
Importance of Delisting:
- Delisting offers operational flexibility by freeing companies from stock exchange regulation and disclosure requirements.
- Reduces costs associated with listing charges, compliance, and disclosures.
- Restructuring Strategy: Suitable for mergers and acquisitions and business reorganisation.
- Going Private: Allows promoters to take full control by buying out public shareholders.
- Market Exit: Provides companies with the opportunity to exit the stock market if it does not meet listing requirements or no longer require public funding.
- Investor Risk: Restricted trading opportunities and reduced liquidity for shareholders upon delisting.
Conclusion
Listing and delisting of securities are rudimentary parts of the life cycle of a company in capital markets. Listing enables companies to raise funds, enhances their reputation, and provides investors with liquidity and transparency. Conversely, delisting either voluntary or involuntary constitutes the removal of a company from the public market and may be for strategic, financial, or regulatory reasons. The Securities and Exchange Board of India (SEBI) regulates the two processes to ensure fairness and safeguard the interests of investors. Investors, firms, and regulators need to have a thorough knowledge of these processes as they significantly impact market participation, corporate governance, and the overall efficiency of the financial system.
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