Listing Rules

What are listing rules?

Listing rules are the criteria and policies made by stock exchanges, which must be complied with by a company to become a member of the exchange. Trading on a company’s shares is only possible if it complies with these rules. Listing rules are different for various securities exchanges and may be based on a company's capital or other standards. Listing rules are generally related to minimum equity holding, share price, number of shareholders, etc. Listing rules in this way help ensure that only high-quality securities are traded on the exchange.

Highlights

• Listing rules are the criteria which companies must be complied to become a member of the exchange.
• Listed securities also protect investor interest from the effective control of exchange on trading.
• Investors prefer listed securities over unlisted ones.

Frequently Asked Questions (FAQ)  

How do listing rules help companies?

Listing rules help both the listed company and the investors-

• Securities are often listed to avail marketability and liquidity for capital.
• Listed securities are freely negotiable.
• Listed securities also protect investor interest as there is an effective control from the exchange on trading.
• Thus, listed securities enjoy a certain reputation and visibility amongst investors.
• If companies do not follow the listing rules on an exchange, they may have to delist their securities.

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What is the general listing procedure?

To get securities listed on exchanges, the following procedure is undertaken-

• Promoters need to understand the requirements of various exchanges and decide on which exchange they will list securities of the company.
• Then promoters tend to contact the exchange authorities of the chosen stock exchange/exchanges to propose a list.
• A discussion with the stock exchange authorities happens next and listing rules and eligibility criteria are communicated.
• The company next submits a Memorandum of Association, Articles of Association and a listing prospectus examined by the exchange authorities.
• After examination and approval, the company finalises these deeds.
• Next, securities become open for application on the exchange and are allotted to investors.
• The security issuing company must also enter a listing agreement with the exchange and pay prescribed fees along with necessary documents.
• On completion of share allotment, these are made available for trading on the exchange.

 

Who is involved in the listing process?

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The listing process involves interaction with various other people from inside and outside the organisation. For example, an expert fundraising team includes - a corporate adviser, an underwriter, a lawyer, the share registrar, internal accountants and various other domain experts.

• Corporate adviser- provides objective advice on a broad range of issues like optimal quality and timing of capital needed, offer structure to be used (underwritten or free float), advice on valuation, aftermarket research and trading support. They also co-ordinate for prospectus drafting verification and lodgment and help in liaisoning with regulatory bodies·
• Underwriter- in an IPO, an underwriteris a subscriber who offers to take shares not taken up by the public in consideration for specific fees disclosed in the prospectus. Often underwriting ensures the success of the listing and assumes any market risk on the fundraising. It also acts as an endorsement to the fundraising. 
• Lawyers – are responsible for helping with legalities related to the type of investment vehicle(s) to be used. They are also helpful in conducting legal, due diligence on the company, preparing and reviewing the prospectus and other information statements.
• Share registrar- assists in the listing process by handling the receipt and processing of securities listing applications. They maintain the company's share register during and after the fundraising. They are responsible for allotting and transferring shares and dispatching any investor communication and other information documents to shareholders.
• Other experts- are engaged by a company to advise or produce special reports. Based on the type of company listing its securities, they are needed to consider a foreign company that may need an international law expert or a liaoning expert for cross border issues.

When should a company list itself?

Before deciding on the listing of securities, a company should consider several influencing factors for its success. It must think through factors like-

• The market value of shares,
• Specific valuation of the company,
• The general value of the industry,
• Possible price realisation upon listing,
• Any competition can face, precautions it ought to take,
• How can it attract majority of investment?
• Any seasonal factors and overall capital requirements.

All the above must be balanced with the timing of securities listing. The listing must be done only when the company is ready for-

• Cultural alignment post listing.
• There is a favourable economic and regulatory environment.
• Company has the needed energy and time from its management.
• It has a ready timeline for pre, during and post listing events.
• It is prepared for post-listing disclosure and systems.

The time required for listing completion will depend on the complexity and scale a company’s operations.  It may often vary from three months to a maximum three years.

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What are the pros and cons of listing?

Pros of listing securities-

• Securities become the preferred choice of investors due to liquidity.
• A listed company has become well known and popular due to various media mentions.
• Investment advisors prefer suggesting listed securities to clients over unlisted ones.
• With a listing, there is more visibility and clarity on a company’s whereabouts.
• Once the listing of securities is complete, a follow-on listing or fundraising becomes easier.
• Listing brings in opportunities for growth, collaborations and broadening of a company’s shareholding.
• An institutional investor only looks at listed securities first; very few investors go for the unlisted.
• The listing helps in the easy determination of market value, which is helpful in the case of mergers and acquisitions to derive a purchase consideration.
• Listing is always the most investor-friendly option to raise capital.

Cons of listing Securities-

• The listing gives entry to speculators to drive up or down the share prices, and such affect genuine investors.
• Such market-derived fluctuations result in prices not reflecting on actual fundamentals, making shares over or undervalued.
• Share prices often come under the scrutiny of bankers and creditors, giving them a chance to deny debts.
• Insider tradingfrom top management and others can happen on listed securities.
• The listing requires a lot of disclosure that the management may not favour, sometimes leading to fraudulent manipulation of information.
• Possibilities of substantial holding by unwanted parties rises which ultimately route into unwanted takeovers.