Listing of Securities
We know that the commodities in which transactions in a stock exchange take place are Government Securities, Corporate securities, stocks, bonds, debentures etc. But the stock exchange will not allow all the securities to deal within it. Every stock exchange maintains a list containing the names of selected companies in whose securities the stock exchange will deal. This list is called “Official trade list“.
Only those securities whose name appears on the official trade list can only be traded in the stock exchange. Unlisted securities cannot be dealt with in the stock exchange. The company, which wants its securities to be dealt with in a recognized stock exchange, should apply to the stock exchange and get its name included in the official trade list.
What is Listing?
The inclusion of the name of a company in the official list of securities,which can be dealt with in a stock exchange, is called listing. It implies the securities of a company to the trading privileges on a stock exchange.
By getting its securities listed, a company can create a favorable impression in the mind of the investors about its financial soundness, profitability and the marketability of its shares and other securities. At the same time, it should also be remembered that listing would no way guarantee the earning capacity of the securities of the issuing company.
Moreover, in India, the Central Government is also empowered under Sec. 21 of the Securities Contracts (Regulation) Act to compel a public limited company to get its securities listed on any recognized stock exchange, with a view to protect the broad interests of the investing public.
Any company, which wants to get its shares listed, should apply to regional stock exchange i.e. to the stock exchange nearest to its registered office. It may also get its shares listed on other stock exchanges as well.
Objectives of Listing
According to S. C. Kuchhal, the main objectives of listing are the following:
1. Provision of ready marketability.
2. Imparting liquidity to the securities.
3. Provision of free negotiability.
4. Protection of the interests of the investors and the general public.
Classification of Listed Securities
Listed securities can be classified into two kinds viz.,
- Cleared Securities, and
The stock exchange specifies from time to time, the securities admitted to dealings, which are included in the cleared securities list. All other securities not on the list of cleared securities are deemed to be non-cleared securities. It should also be noted that forward transactions are possible only in case of cleared securities. Hence, cleared securities are known as securities on forward list and non-cleared securities as securities on cash list.
Conditions for inclusion in the Cleared Securities List
There are certain conditions to be fulfilled before securities are included in the cleared securities list. They are as follows:
1. The securities must be fully paid-up equity shares of a company other than a banking company.
2. They must have been admitted for dealings for at least three years on any recognized stock exchange.
3. They must not be included in the cleared securities list of any stock exchange.
4. The company must be of sufficient public importance and its subscribed capital represented by the listed securities must be at least Rs. 25 lakhs and their aggregate ruling market price should be at least Rs. 1 crore.
5. There should be adequate public interest in the company and at least the public must hold 49% of the capital represented by the securities and such holdings are to be evenly distributed amongst a large number of shareholders.
However, partly paid-up shares can also be enlisted but such securities shall be placed only in the cash list. Hence, it is also implied that partly paid-up securities are eligible only for cash contracts and not for future contracts.
Conditions for Listing of Securities
The listing regulations of all the recognized stock exchanges are not uniform. A company, which wants to get its securities listed, should fulfill certain requirements and furnish certain detailed information to the exchange. The general conditions for listing are given below:
1. The Memorandum and Articles of Association of the applying company must contain prescribed provisions, such as prescribing a common form of transfer, transferability of fully paid-up shares without any restrictions etc.
2. The company must offer at least 60% of its issued capital for public subscription through a prospectus. (This provision aims to avoid concentration of economic power in the hands of a few through major shareholding).
3. The prospectus must conform to certain given conditions like the opening of the subscription list and receipt of the share applications.
4. The procedure followed for allotment should be fair and unconditional. If the issue is over subscribed, the basis of allotment should be decided by the company in consultation with the stock exchange in which the company has applied for enlistment.
5. The company must execute a listing agreement. The listing agreement determines the nature of continued relationship between the company and the stock exchange. The company should make certain disclosures, file certain documents periodically and perform certain functions. These matters should be specified in the listing agreements.
6. The company should give an undertaking, specifying that it shall not indulge in certain activities prohibited by law. Besides, the company should also declare that it would abide by the rules and regulations of the stock exchange.
In case the application for listing is rejected by the stock exchange, or the exchange failed to dispose of the application within the specified time, the company can appeal to the Central Government. The Central Government after hearing the company can set aside the decision of the stock exchange and order for enlistment or it can confirm the decision of the exchange. Now listing is made compulsory in case of certain companies.
Advantages of Listing
The advantages of listing can be summarized under two heads namely,
1. Advantages to the company management.
2. Advantages to the investors.
Advantages to the Company Management
1. It gives the management and the company a higher status and facilitates expansion programmes.
2. Such companies can raise finance very easily.
3. Listed companies are eligible for certain fiscal advantages such as concessional rate of income tax, benefits of carry forward and set off of losses of the earlier years etc.
4. Such companies are better placed while approaching the SEBI for its consent under any of the provisions of the SEBI Act.
5. Listed companies are treated favorably by the financial institutions and commercial banks when they approach them for short-term and long-term accommodations.
Advantages to the Investors
1. Listing makes the securities more prestigious and enhances their marketability. Hence, the holders of such securities can convert their holdings without any difficulty in times of need.
2. The security prices are regularly published in the financial newspapers and periodicals. Hence, the investors can sell their holdings at the current market price.
3. Such securities generally fetch higher prices.
4. Holders of listed securities are eligible for certain concessions in matters relating to Income Tax, Wealth Tax etc. in their capacity as assessees.
5. Listed securities enjoy more public confidence. Hence, they have high collateral value. The bankers will readily accept such securities for providing loans and other accommodations.
6. Listed companies should make a fair disclosure of certain information and so the investors are given a reasonable opportunity of judging the merits of the concern.
7. Listed securities ensure safety to the funds of the investors.
Disadvantages of Listing
Listing, however, is not free from defects. The procedure of listing has certain definite limitations and disadvantages. Some of the inherent limitations of listing are given below:
1. Listing makes people depend upon share brokers, jobbers etc. Many of them are weak speculators and frequently put their clients into difficulties. They create violent price fluctuations.
2. Securities, which are unable to have a stable value, shall loose their prestige and fell down in the esteem of the investors and bankers.
3. The management is also induced to show keen interest in the price movements for personal gains. They may take advantage of their inside knowledge and indulge in speculation.
4. The free negotiability of securities enables a few interested persons to buy a substantial portion of the securities and thereby capture the management of the company.
5. The company should furnish certain information in detail. Such a detailed disclosure may even injure the prospects of the company.
These defects, however, are not incurable defects. Proper regulation may solve the problem to a considerable extent. Sachar Committee also made a few solid recommendations to cure the defects associated with listing. But no concrete measures were taken so far and the shareholders still remain unprotected. Thus, there is a strong case for a thorough investigation into the problem and formulation of suitable regulatory measures in this regard.