What is the process for listing securities?

Introduction 

Listing of securities refers to the process of registering financial instruments, such as shares, bonds, or debentures, on a recognized stock exchange, allowing them to be traded publicly. This process involves meeting specific regulatory requirements and obtaining approval from the stock exchange, which ensures transparency, investor protection, and adherence to market standards. Once listed, the securities can be bought and sold by investors in the open market, providing liquidity and facilitating capital formation for companies. The listing also enhances a company's visibility, credibility, and access to a broader base of investors.

Under Section 40 of the Companies Act, every company must apply to one or more recognized stock exchanges to obtain permission for dealing in securities on those exchanges. This approval is mandatory for listing securities. The funds received from the public for the subscription of securities must be held in a separate account by the company and can be used only for specific purposes:

• Adjustment Against Allotment: If securities are allotted and permitted to be dealt with on the stock exchanges where the application was made, the funds can be adjusted against the allotment of these securities. The stock exchanges where the securities are listed must be named in the company’s prospectus.
• Refunds: If the company is unable to allot securities for any reason, the funds must be refunded within the timeframe specified by the Securities and Exchange Board of India (SEBI).

Non-compliance with these requirements is punishable by a fine ranging from 5 lakhs to 55 lakhs rupees. 

Meaning of Recognised Stock Exchange

Section 2(j) of Securities Contracts (Regulations) Act, 1956[1], defines the term “stock exchange” as referring to either a group of people, whether formally organized or not, that was set up before certain legal changes called corporatisation and demutualisation, outlined in Sections 4A and 4B of this Act, or a company formed under the Companies Act of 2013, regardless of how it was created. The main role of a Stock Exchange is to help manage and oversee the buying, selling, or trading of stocks and other securities. According to Section 2(f) of this Act, recognised exchange means a stock exchange which is for the time being recognised by the Central Government. In India the primary stock exchange are Bombay Stock Exchange (BSE), and National Stock Exchange (NSE) both are regulated by the SEBI.

Listing Agreements

• A listing agreement is a formal contract between a company and a stock exchange (SE) at the time of listing its securities.
• This process is governed under regulation 19 of the Securities Contracts (Regulation) Act, 1956 (SCRA), which was enacted to address issues related to speculative and undesirable transactions in securities.
• Section 21 of the SCRA, 1956 stipulates the conditions for listing securities. It mandates that any person or entity applying for the listing of securities on a recognized stock exchange (RSE) must comply with the conditions outlined in the listing agreement with that RSE as per SEBI (Listing of Obligations and Disclosure Requirements) Regulations, 2015[2].
• This ensures that the listing process adheres to regulatory standards and promotes fair trading practices. 

Requirement of listing of securities with Recognised Stock Exchange

• Rule 19 of the Securities Contracts (Regulation) Rules, 1957[3], outlines the requirements for public companies seeking to list their securities on recognized stock exchanges.
• Rule 19(1) mandates the submission of an application with essential documents, including the company’s memorandum and articles of association, audited financial statements for the past five years, and agreements with vendors and promoters.
• Rule 19(2) emphasizes compliance with specific provisions in the articles of association, such as share transfer procedures and dividend rights, and allows provisional admission if the company commits to amending its articles.
• Rule 19(2)(b) specifies minimum public offering requirements based on post-issue capital, with varying percentages depending on the capital size.
• Rule 19(3) details essential commitments, including the simultaneous issuance of allotment letters, efficient handling of securities, and timely communication of significant changes to the stock exchange.
• Overall, these rules promote transparency, governance, and effective communication between companies and their stakeholders.

Application for Listing of New Securities

Rule 19(4) specifies that an application for listing is required for all new issues of any class or kind of securities of a company being offered to the public, as well as for any further issues of such securities if they are already listed on a recognized stock exchange. This ensures that any new or additional securities are subject to the necessary regulatory scrutiny and compliance before being made available to investors. 

Suspension to Dealing in Securities on Stock Exchange

• Rule 19(5) allows a recognized stock exchange to suspend or withdraw admission to dealings in a company's securities for breaches of admission conditions or other justified reasons, which must be recorded in writing.
• Before taking such action, the exchange must provide the company with a reasonable opportunity to respond to the notice outlining the reasons for the proposed action.
• If the suspension lasts over three months or if admission is withdrawn, the company can appeal to the Securities Appellate Tribunal under the SEBI Act, 1992.
• The Tribunal may review the stock exchange's decision and issue orders that must be followed.
• Additionally, Rule 19(6) permits the stock exchange to restore or re-admit securities either at its discretion or following Tribunal orders.
• Public sector companies must also comply with these listing requirements Rule 19(6A).
• Moreover, SEBI can waive or relax these listing requirements at its discretion or upon a stock exchange's recommendation Rule 19(7).
• Finally, the minimum offer and allotment requirements do not apply to equity shares with superior voting rights issued to promoters if the company is seeking to list ordinary shares for public offering Rule 19(8).

Minimum Shareholding Requirements

• Rule 19A (1) mandates that listed companies maintain a public shareholding of at least 25%. Public sector companies with public shareholding below this threshold upon the commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018, must increase it to at least 25% within three years from the date of such commencement in a manner specified by the SEBI.
• If a company's public shareholding falls below 25% at any time, it has twelve months to restore it, while public sector companies have two years.
• Specific provisions are made for instances where the decline results from certain regulatory schemes or insolvency plans, detailing different timelines for restoring public shareholding.
• Additionally, if public shareholding drops below 10%, it must be raised to at least 10% within twelve months, and companies must maintain a minimum of 5% as per the insolvency regulations.
• The Central Government has the authority to exempt any listed entity from any or all provisions of this rule if it serves the public interest. This applies to entities where the Central Government, State Government, or public sector companies hold a majority of shares, voting rights, or control, either individually or in combination with others. 

Listing in International Financial Services Centres Authority (IFSCA)

The IFSCA (Issuance and Listing of Securities) Regulations, 2021[4], outline various types of listings permissible under the regulations. These include initial public offerings of specified securities by unlisted issuers, follow-on public offer of a specified securities by listed issuers, listings by start-up companies or SMEs, secondary listings, initial public offerings by Special Purpose Acquisition Companies (SPACs), listings of depository receipts, listings of debt securities (including SMART City bonds), and listings of ESG-focused debt securities. 

Conclusion

Thus, listing securities on recognized stock exchanges is essential to guarantee transparency, safeguard investors, and facilitate companies in raising capital. The process of listing securities on recognized stock exchanges is crucial for ensuring transparency, investor protection, and capital formation for companies. The regulatory framework established by the Companies Act, Securities Contracts (Regulation) Act, and associated rules mandates specific requirements for companies, including submission of comprehensive documentation and adherence to governance standards. Minimum shareholding requirements further enhance market stability, while provisions for public sector companies ensure compliance with broader regulatory goals. The IFSCA regulations expand the scope of listings, accommodating diverse financial instruments and catering to innovative entities such as start-ups and SPACs. Overall, this structured approach fosters a robust and accessible financial market conducive to growth and investment.

[1]  Securities Contracts (Regulation) Act, 1956 (Act 42 of 1956), s 2.

[2]  SEBI (LODR) Regulations, 2015, India available at: https://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-january-10-2020-_37269.html ( Last visited on January 10, 2020).

[3]  ICSI Capital Market & Securities Laws 91.

[4]  ICSI Capital Market & Securities Laws 218.