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Learn why companies choose listing of securities on stock exchanges. Explore the concept, benefits, regulatory framework, and listing process in an easy-to-understand way.
Understanding why companies choose listing of securities on the stock market is essential. It provides insight into how businesses grow and raise capital.
When a company lists its shares on a stock exchange, the public can trade its shares on stock exchanges. This means investors like you can buy and sell ownership of the company through shares.
This process, known as the listing of securities, plays a vital role in the financial ecosystem. It gives companies access to capital while providing you with an opportunity to invest and take part in their growth.
Listing of securities means a process by which a company makes its shares available for trading on a stock exchange. It marks the transition of a company from being privately held to becoming publicly traded.
The company offers its shares to a broader set of investors, where the main aim is fundraising. It must follow specific regulatory and exchange requirements, ensuring transparency, liquidity, and protection.
When a company lists shares, it divides its ownership into tradable units called securities.
If you are wondering what is a listed company, it is a business that lists its shares on a stock exchange. When a company lists itself on stock exchanges, it must adhere to the exchange's rules and regulatory standards.
It includes regular disclosure of financial statements and other material information. This status allows you, as an investor, to freely buy and sell the company's shares on the exchange.
The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) operate as stock exchanges to enable companies to list. Both stock exchanges present a controlled environment that enables you to conduct secure and transparent security transactions.
The registration process guarantees that organisations which comply with specific requirements can make their shares available to investors.
Company listingon the stock market happens for several strategic reasons. Understanding these reasons provides insight into how businesses plan their growth strategies.
One of the primary reasons companies list on the stock market is to raise capital. By issuing shares to the public through an Initial Public Offering (IPO), companies can generate significant funds.
They can do so without taking on debt. They can use the funds for expanding, funding research and development, or reducing liabilities.
A business achieves improved market perception and trustworthiness through its listing on an established stock exchange. Businesses that become listed entities achieve a broader connection with their customers along with their suppliers and partners.
Public trading through stock exchange listings demonstrates a transparent governance framework that fosters trust and generates business development prospects.
Listing provides liquidity to shareholders by creating a market for buying and selling shares. It allows founders, early investors, and employees holding stocks to liquidate their equity into cash. It also helps attract and retain talent through stock-based compensation plans.
The public listing enables companies to implement employee stock option plans (ESOPs) effectively. These plans allow employees to acquire shares, aligning their interests with the company’s success. Such incentives can boost employee motivation and talent retention.
Companies must follow strict regulatory requirements regarding financial disclosures and corporate governance. While this increases the company’s administrative responsibilities, it also builds investor confidence. By following guidelines issued by SEBI, companies ensure greater transparency and accountability.
In some cases, companies list to position themselves strategically in the market. Listing on stock exchanges can aid companies in mergers and acquisitions by providing a ‘currency’ in the form of shares. It also enhances a company’s ability to compete globally as the share prices reflect market perception.
The procedure of listing securitieson the stock market involves several stages and compliance steps. Companies transition by listing shares through IPOs (Initial Public Offerings). Companies design it to protect your interests and ensure market integrity.
Before listing, companies undertake extensive financial audits and due diligence. This preparation ensures that the company meets financial reporting and regulatory requirements. It involves the underwriting process, involving deal details, the amount to be raised, and security details issued.
A key document in the listing process is the Red Herring Prospectus (RHP) or offer document. It provides detailed information about the company’s business, financials, risks, and the terms of the share offering. It must be accurate and transparent to enable you to make informed decisions.
In India, the Securities and Exchange Board of India (SEBI) regulates the listing process. Companies must obtain SEBI’s approval for their prospectus and comply with all requirements. It ensures that only companies meeting strict standards can list.
Once regulatory approvals are in place, companies can list their shares on the BSE or NSE. The listing process involves documentation, paying fees, and meeting the listing criteria.
The company can price its IPO through the Fixed Price method or the book-building method. In the fixed price method, the company announces the price in advance. In the book-building method, a 20% price range is provided, and you can bid within that bracket.
After the bidding window, which lasts 3-5 working days, the company determines the Cut-Off price, which is the final price of the share issue.
Once the company finalises the IPO price, it decides the number of shares to allot. In case of oversubscription of the issue, the company may make partial allotments to distribute shares fairly. The company then credits the allotted IPO shares to your Demat accounts, typically within 10 days from the bidding date.
Listing brings advantages but also introduces new risks that companies must evaluate carefully. Here are the considerations companies need to make before listing:
The process involves costs, including fees paid to regulatory bodies, exchanges, and intermediaries. Companies should consider these expenses relative to the capital they expect to raise.
Companies face public scrutiny, as they must regularly disclose financial and operational details. This transparency can improve corporate governance but requires resources and preparedness.
Once listed, market forces beyond a company's control influenceits share price. Share prices can fluctuate due to economic conditions, investor sentiment, or industry trends. Due to prices going up or down, it can affect perceived company value.
Understanding what listing means can help you clarify why stock markets are important. Here are some benefits you can get by investing in listed companies.
Listing creates a marketplace where you can easily buy and sell shares. This liquidity supports active trading and enables you to adjust your portfolios as needed.
Regulators require listed companies to disclose financial statements and other material information regularly. This transparency helps you make informed decisions based on reliable data.
Dividends are regular payments made by companies to shareholders from their profits. While not guaranteed, they offer a way to earn passive income without selling your stock. However, not all stocks provide dividends.
Investing through index funds, mutual funds, or ETFs is an easy option for beginners. It offers diversification and lower risk. These funds simplify investing without the need for deep market analysis.
You can choose from a wide range of companies listed on exchanges from the NSE or BSE. You are not limited to one firm and can purchase through any licensed broker in the primary or secondary market.
Listing on the stock market is a milestone for companies seeking capital, visibility, and growth. The process involves rigorous compliance and ongoing responsibilities. It offers benefits such as access to funds, enhanced credibility, and liquidity for shareholders. For you, listed companies provide a transparent and regulated environment to take part in the equity markets.
Understanding it can help demystify the concept of listing and build confidence in navigating the stock market.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sources
Securities and Exchange Board of India (SEBI): https://www.sebi.gov.in/
Bombay Stock Exchange (BSE): https://www.bseindia.com/
National Stock Exchange of India (NSE): https://www.nseindia.com/
Ministry of Corporate Affairs, India: https://www.mca.gov.in/
Investopedia: https://www.investopedia.com/
An Initial Public Offering (IPO) is the process by which a company offers its shares to the public for the first time. Listing refers to the admission and trading of a company’s shares on a stock exchange. IPO is often the initial step after listing.
No, not all companies meet the eligibility criteria for listing. Exchanges have eligibility criteria for financial health, company size, governance standards, and disclosure.
The time for listing varies but generally takes 6-10 business days. It includes preparing documents, obtaining regulatory approvals, marketing, and completing formalities.
Yes, listed companies must disclose periodic financial statements. These include quarterly and annual reports to maintain transparency and follow regulations.
Delisting means the removal of a company’s shares from the stock exchange. This can occur voluntarily or involuntarily, and consequently, investors trade shares over the counter. It may reduce liquidity and investor access.
