Listing and Delisting of Corporate Stocks

1. Introduction to Corporate Listings

Corporate listing refers to the process by which a company offers its shares to the public and has those shares admitted for trading on a recognized stock exchange. In India, the primary stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Listing is a significant milestone for a company, enhancing its visibility, credibility, and access to capital markets.

2. Listing of Corporate Stocks

A. What is Listing?

Listing is the formal admission of a company's securities to trading on a recognized stock exchange. This allows investors to freely buy and sell the company's shares in the secondary market. To be eligible for listing, companies must meet specific eligibility criteria set by the Securities and Exchange Board of India (SEBI) and the respective stock exchanges.

B. Benefits of Listing

1. Access to Capital:

   • Listing provides companies with access to significant amounts of capital through Initial Public Offerings (IPOs) or Follow-on Public Offerings (FPOs).
   • This capital can be used for business expansion, research and development, debt repayment, and other corporate purposes.

2. Increased Liquidity:

   • Listing provides shareholders with the ability to easily buy and sell shares in the open market, enhancing the liquidity of their investment.
   • Increased liquidity makes the company's stock more attractive to investors.

3. Enhanced Credibility and Brand Value:

   • Listed companies gain higher investor confidence and improve their public perception.
   • Listing demonstrates that the company meets certain standards of financial health, governance, and transparency, enhancing its reputation.

4. Better Valuation and Marketability:

   • Higher visibility attracts both institutional and retail investors, leading to increased trading volumes and a potentially higher stock valuation.
   • A well-traded stock can command a premium valuation due to its liquidity and perceived value.

5. Facilitates Mergers & Acquisitions:

   • Listed companies often find it easier to engage in mergers and acquisitions (M&A) activities due to their transparent valuation and publicly traded shares, which can be used as currency in M&A transactions.

C. Process of Listing in India

1. Appointment of Merchant Bankers:

   • Companies must hire a SEBI-registered merchant banker to manage the IPO process, including due diligence, regulatory compliance, and marketing.
   • The merchant banker acts as the lead manager and guides the company through the listing process.

2. Submission of Draft Red Herring Prospectus (DRHP):

   • The company, through its merchant banker, files a DRHP with SEBI, disclosing comprehensive information about its financials, business model, risk factors, and proposed use of funds.
   • The DRHP serves as the preliminary document for potential investors.

3. SEBI & Stock Exchange Approval:

   • SEBI reviews the DRHP to ensure it contains all necessary disclosures and complies with regulatory requirements.
   • Stock exchanges also assess the company’s compliance with their specific listing norms, including financial criteria and corporate governance standards.

4. Pricing and Book-Building Process:

   • The IPO price is typically determined through a book-building mechanism, where potential investors submit bids indicating the price and quantity of shares they are willing to purchase.
   • The final IPO price is then set based on the demand revealed through the bidding process.

5. Public Subscription:

   • Investors subscribe to the IPO within a specified timeframe, typically a few days, submitting applications to purchase shares at the offer price.

6. Allotment of Shares:

   • Shares are allocated to successful applicants based on the demand and allotment rules.
   • If the IPO is oversubscribed, shares are typically allocated on a proportionate basis or through a lottery system.

7. Trading Begins:

   • The company's shares are listed on the designated stock exchange(s), and trading commences, allowing investors to buy and sell the shares in the secondary market.

D. Listing Requirements in India

The listing requirements in India aim to ensure that only financially sound and well-governed companies are admitted to trading on the stock exchanges. These requirements include:

• Minimum Net Worth:

  • ₹1 crore for Small and Medium Enterprise (SME) IPOs.
  • ₹15 crore for listing on the main board (BSE/NSE).

• Minimum Paid-up Capital:

  • ₹10 crore for listing on NSE/BSE.

• Minimum Public Shareholding (MPS):

  • 25% of the total shares must be held by the public to ensure adequate liquidity and investor participation.
  • Companies must adhere to this threshold on an ongoing basis.

• Profitable Track Record:

  • Companies must demonstrate consistent profitability for at least three years (with some exceptions for startups and SMEs).
  • The profitability requirement is intended to ensure that listed companies have a sustainable business model.

• Other Requirements:

  • Compliance with corporate governance norms.
  • Adequate disclosure of information to investors.
  • Adherence to SEBI regulations and stock exchange listing agreements.

3. Delisting of Corporate Stocks

A. What is Delisting?

Delisting is the removal of a company’s shares from a stock exchange, making them unavailable for trading in the public market. This means investors can no longer easily buy or sell the shares on the exchange.

B. Types of Delisting

1. Voluntary Delisting:

   • Initiated by the company itself, typically when it seeks to become privately held.
   • The company offers to buy back shares from public shareholders, allowing them to exit their investment at a fair price.
   • Reasons for voluntary delisting include:
     • Mergers and acquisitions (M&A), where the company is being acquired by another entity.
     • Restructuring, involving significant changes in the company’s operations or ownership.
     • Cost reduction, as maintaining a listing involves ongoing expenses.

2. Compulsory Delisting:

   • Enforced by the stock exchange or SEBI due to non-compliance with listing regulations.
   • Occurs when a company fails to meet the required standards of financial health, corporate governance, or disclosure.
   • Reasons for compulsory delisting include:
     • Non-filing of financial statements, indicating a lack of transparency and compliance.
     • Fraudulent activities or governance failures, which undermine investor confidence.
     • Prolonged suspension from trading, indicating a lack of market activity or regulatory concerns.

C. Process of Voluntary Delisting in India

1. Board Approval:

   • The company's board of directors must approve the delisting proposal, outlining the reasons for delisting and the proposed buyback price.

2. Shareholder Approval:

   • A special resolution (requiring at least 75% approval) must be passed by shareholders, indicating their consent to the delisting.

3. Reverse Book Building Process:

   • A reverse book building process is initiated to determine the exit price at which public shareholders are willing to sell their shares back to the company.
   • Public shareholders submit bids, indicating the price they are willing to accept for their shares.
   • The company must acquire at least 90% of the total shares outstanding (excluding those held by promoters and related parties) for the delisting to be successful.

4. Stock Exchange and SEBI Approval:

   • Regulatory bodies (stock exchange and SEBI) review the delisting request to ensure that all procedures have been followed correctly and that the interests of public shareholders are protected.

5. Final Payment & Delisting:

   • If the delisting is approved, the company pays shareholders who have tendered their shares at the accepted price.
   • The company's stock is then removed from the stock exchange, and it ceases to be a publicly traded entity.

D. Reasons for Delisting

Companies may choose to delist for various reasons:

• Corporate Restructuring: Delisting is common in cases of mergers, acquisitions, or spin-offs, where the listed entity ceases to exist.
• Low Trading Volume: Companies with consistently low trading volumes may find that the costs of maintaining a listing outweigh the benefits.
• Failure to Meet Listing Requirements: Companies that fail to meet the ongoing listing requirements, such as financial reporting standards or minimum public shareholding, may be forced to delist.
• Privatization of the Company: Companies may choose to delist to gain greater operational flexibility and avoid the scrutiny of public markets.

E. Impact of Delisting on Investors

The impact of delisting on investors depends on whether the delisting is voluntary or compulsory:

• Voluntary Delisting:

  • Investors typically receive a buyback offer at a fair price determined through the reverse book building process.
  • Shareholders have the option to tender their shares and exit their investment.

• Compulsory Delisting:

  • Shares lose their market value, and investors may face significant financial losses.
  • The company may not be obligated to buy back shares, leaving investors with illiquid holdings.

• OTC Market Trading:

  • In some cases, shares of delisted companies may still trade in the over-the-counter (OTC) market, but liquidity may be limited.

4. Key Differences Between Listing and Delisting

Feature	Listing	Delisting
Purpose	Shares are made available for public trading.	Shares are removed from the stock exchange.
Process	SEBI approval, IPO, public offering, and stock exchange listing.	Buyback of shares, regulatory approval, and removal from stock exchange.
Investor Impact	Increased liquidity and marketability.	Shareholders may need to sell shares or hold unlisted stocks, potentially losing value.
Regulation	SEBI (ICDR) Regulations, 2018	SEBI (Delisting of Equity Shares) Regulations, 2021

Conclusion:

Listing and delisting are crucial processes in the life cycle of a public company. Listing provides opportunities for capital raising and enhanced visibility, while delisting may be necessary for restructuring or due to regulatory non-compliance. Both processes are regulated by SEBI to protect investor interests and maintain market integrity. Understanding these processes is essential for both companies and investors navigating the Indian financial markets.