Sangeeta Lakhi | Sulakshna Sinha
Listing on a stock exchange is a big step for a private company when it comes to expansion of business or raising capital. There are several reasons for a company to go public. However, the most important of them all is to obtain financing outside the periphery of the banking sector.
Getting listed on a stock exchange not only brings a wider recognition to the company, it also gives the company an opportunity to raise funds from one of the most traditional investor class, the public.
By listing, the risk of ownership is spread among a wider group of shareholders thereby allowing the original shareholders to make profits while retaining a stake in the company.
Why should one consider listing?
One would ask why a company should consider getting listed and going public rather than staying private with fewer regulations and restrictions.
The answer to that is quite simple. It affords the company an opportunity to offer the public a chance to invest in the company. Investment by public can bring in an influx of capital, which is otherwise difficult for a company to raise on its own.
Listed securities enjoy exclusive privileges as compared to unlisted ones. A striking example would be the ability to reduce debt as it gives the company more power to negotiate interest rates thereby extending more leverage with banks and financial institutions.
Besides the above, there are several other advantages that listing offers, such as market exposure, valuation, transparency and governance, indirect advertising, brand equity etc.
Listed securities draw attention from a wider investor class, which covers categories beyond the private equity player and encourages interest from institutional investors.
The general consensus is that a company with a broad-based share ownership is considered better suited for stability and growth than a company with shares concentrated only in a few hands.
Investor categories in Capital Market transactions
Any company intending to get listed should be mindful of the investors that it will have to appeal to for receiving full subscription. Broadly, the current regulations recognize the following investor classes:
i. Retail Individual Investors (RIIs): This category includes individual investors who apply for securities for a value of not more than Rs 200,000. This category comprises of individual investors, HUFs, NRIs etc. who generally trade in smaller amounts for their personal gains;
ii. Non-Institutional Investors (NIIs): NIIs include that category of investors who apply for securities for a value of more than Rs.200,000. This category comprises investors other than RIIs and QIBs and includes companies, corporate bodies, trusts, etc.;
iii. Qualified Institutional Buyers (QIB): A QIB is an institution, either domestic or foreign and comprises entities whose expertise lie in evaluating and investing in the capital markets. The current regulations clearly provides a set of entities which are categorized as QIBs and are entitled to invest in public issues.
Typically, in a book built issue based on the profitability of a company, the offer is made in the following manner:
a) not less than 35% to the RIIs;
b) not less than 15% to the NIIs; and
c) not more than 50% to the QIBs.
In case of an issue made through a compulsory book building process, the allocation is made in the following manner:
a) Not more than 10% to the RIIs;
b) Not more than 15% to the NIIs; and
c) Not less than 75% to the QIBs, failing which the subscription money must be refunded.
Exchange listing requirements
An important aspect of listing is transparency and governance. Once a company is listed on a stock exchange, it is subject to a number of on-going conditions and disclosure requirements. It must comply with them in order to maintain its status as a listed company. Listing regulations are governed by the Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations").
The LODR Regulations were introduced with the intention of codifying the requirements laid out in the listing agreement, which is a mandated contract between the company and the stock exchange on which the company proposes to get listed. SEBI has now prescribed the format for a "Uniform Listing Agreement", which is available on the SEBI website.
The LODR Regulations deal with the listing obligations and disclosure requirements to be complied by a company within prescribed time frames. The LODR Regulations lay out guidelines regarding composition of the board and corporate governance, grievance redressal mechanism, obligations with respect to employees, reporting of financial results and various other matters. Regulation 30 of the LODR Regulations particularly deals with disclosures which have been divided into two categories, which are:
i. events that must be disclosed without applying any test of materiality;
ii. events that should be disclosed, if considered material.
In the first category, events such as acquisitions, outcomes of board meetings, agreements outside the ordinary course of business, fraud, change in directors and key managerial personnel, corporate debt restructuring etc. must to be disclosed.
For the second category, a listed company must determine materiality based on certain criteria. An event, if omitted from being disclosed, could result in (a) altering publicly available information; (b) significant market reaction if the said event were to surface later; and (c) if the board considered the event material. The LODR Regulations require a company to mandatorily frame and adopt a policy for determination of materiality for this purpose.
The listing obligations and disclosures aside, there are certain requirements a new company must meet, in order to get listed on a stock exchange. Few of these requirements to be met by a company to get listed on NSE / BSE, inter alia, are as follows:
i. The paid-up equity capital of the company shall not be less than `10 crores and the capitalisation of the company's equity shall not be less than `25 crores;
ii. The company shall have adhered to conditions precedent to listing as emerging from, inter-alia, the Securities Contracts (Regulations) Act 1956 and the rules made thereunder, Companies Act, 2013, Securities and Exchange Board of India Act, 1992, any rules and/or regulations framed under foregoing statutes, as also any circular, clarifications, guidelines issued by the appropriate authority under foregoing statutes.
NSE further requires a track record of three years of either the company or the promoters of the company or the partnership firm subsequently converted into the company. Needless to say, that the above eligibility criteria are in addition to the conditions prescribed under SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018 which the companies must follow in order to go public and consequent listing.
Key obligations post-listing
An IPO is a company's biggest leap at expansion and the journey just does not end at listing. A lot depends on the level of transparency and accountability that the company exudes in its manner of functioning to its shareholders. Its rebirth as a listed entity must be marked by the first and foremost responsibility of strictly adhering to the listing agreement and the LODR Regulations.
Other than the LODR Regulations, a host of other legislation become applicable to the company once listed, such as the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI (Prohibition of Insider Trading) Regulations, 2015, Companies Act, 2013 compliances with respect to a listed company, etc. All these regulations come with their own set of compliances and disclosure norms that must be met by the company on a regular basis. The true test of a listed company lies in the proper evaluation of each of these legislations to ensure their proper compliances and minimize any chances of penalties or disputes with authorities. This automatically calls for a robust internal control system employed by the company in the form of a strong compliance team. As they say, with great power comes great responsibility.Sangeeta Lakhi, is Partner, Rajani Associates. Sulakshna Sinha is HOD Domestic Capital Markets, Rajani Associates.