Why Do Companies List On The Stock Exchange?

There have been a lot of Initial Public Offerings (IPOs) in India over the past 5 years. In fact, Indian IPOs of 2021 alone have raised more money than all IPOs of the past 3 years combined. 

The act of listing on a stock exchange creates buzz around the business, which is known to increase brand awareness amongst potential customers and investors. 

Above all, IPOs help companies raise money by giving public investors a share in their business known as stock. They can use the capital generated from the IPO to expand their line of products or operations. 

That said, becoming a publicly listed company is not easy. In this blog, we’ll help you understand how companies list on a stock exchange and why many think of going public as the pinnacle of success. 

How To List On The Stock Market?

The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the most popular stock exchanges in India. Most Indian companies are known to go public on these exchanges. 

The process of listing a company on either stock exchange is fairly similar with a few differences. Let’s look at the process and the criteria so that you can understand the process better. 

For the sake of simplicity, we’ll break down the process of being listed on NSE and BSE into 4 stages. This includes:

• Meet Eligibility Criteria
• Submit AOA
• Get Draft Prospectus Approved
• Submit Listing Application

A. Meet Eligibility Criteria

The NSE and BSE have laid out stringent guidelines for a company to be taken into consideration for being publicly listed on their exchange. The criteria require the company to be:

• Registered as a Public Company under Companies Act 1956 or Companies Act 2013
• Operational for 3 years with 2 years of positive net worth
• Paid-up equity capital must be more than 10 crores
• IPO size can't be less than 10 crores
• Market capitalization post-issue should be equal to or more than 25 crores
  

The company must also publish information about: 

• Itself 
• Operations
• Management team and promoters
  

An attested copy of: 

• Annual report of 3 years 
• Draft Offer Document Memorandum & Articles of Association
• A 5-year plan that encompasses the balance sheet, profit and loss, and cash flow statement. You can consult a Cube wealth coach or download the Cube wealth app.

B. Submit AOA

A company looking to get listed on a stock exchange must submit Articles of Association (AOA), which is a detailed outline of its operations, accounting process, management hiring process and more.  

There are also guidelines that require the company to tweak or remove its existing procedures in case it doesn’t adhere to the existing provisions mentioned in the AOA.

C. Get Draft Prospectus Approved

A Draft Prospectus or a Draft Red Herring Prospectus (DRHP) is an offer document drafted by a merchant banker. It is filed with SEBI and acts as the first step towards registering an IPO.

The DRHP contains details on why the company wants to get listed on a stock exchange, its fundamentals & financials, and the expected issue price of its IPO shares.  

The stock exchange will only check if the DRHP is in line with the guidelines. That’s why any approval from the stock exchange on the DRHP is not to be construed as the final approval of the draft itself. 

D. Submit Listing Application

The DRHP and other required documents must be submitted to the stock exchange along with the application for admission. The company must also pay a security deposit and annual/market cap based fees. You can consult a Cube wealth coach or download the Cube wealth app.

Advantages/Benefits Of Listing On A Stock Exchange

Companies go public for different reasons. However, the main aim of an IPO is to generate money that can be used to boost research, introduce new products, expand operations, or even pay off debt.

If the company plays its cards right and makes wise use of the IPO money,  its stock can potentially grow and with it, shareholders’ investment. 

That’s why public issues are marketed as a win-win for everyone involved. In fact, IPOs are known to be an avenue for early investors like VCs to cash out while acquiring new shareholders. 

Of course, there are risks involved with going public and investing in IPOs that we’ll discuss later. For now, let’s jump onto the advantages of listing on a stock exchange. 

1. IPOs = Publicity

Picture this. You open a well-known website or newspaper and there’s suddenly a company on the front page, one that you’ve never heard of, going public. The creative is flashy and the headline is powerful.  

The news intrigues you and you’re already reading about their brand, products, and services. If the company is good enough (and marketed well enough), you may even be tempted to invest in their IPO. 

This is a company that you didn’t even know existed 15 minutes ago. Now, this may not be true all the time but it may as well be true for IPOs like Paytm, Nykaa, Zomato, and others. That’s the power of IPOs.

IPOs allow companies to gain more publicity, users, and potential investors. There’ll suddenly be more coverage around the brand and even their competitors may take a dig at/promote the IPO.

2. Signals Merit

First things first, not every company will have the chance to be listed on a stock exchange. There are multiple criteria (as mentioned above) and a lot of regulatory compliance requirements. 

Furthermore, every public company is required to disclose their financials periodically. That’s why publicly traded companies are known to be a cut above the rest in terms of value, status, and trustability. 

Being a publicly-traded company thus has its perks, one of them being the ability to secure lucrative loans from lenders because of the added layer of merit (desirability of stock) and trust (regulatory filings).  

3. Increases Trust

Trust is crucial when it comes to money. Companies listed on a stock exchange go the extra mile to maintain trust as the law dictates they have to disclose their earnings and financial statements regularly. 

This gives existing shareholders and potential investors an insight into the company’s business model and ability to turn a profit. It also reaffirms trust as the investors know exactly what they’re into. You can consult a Cube wealth coach or download the Cube wealth app.

FAQs 

1. Why should I invest in Indian stocks?

Ans. Investing in Indian stocks offers several potential benefits, including opportunities for capital appreciation, portfolio diversification, and participation in India's growing economy.

2. What makes India an attractive investment destination?

Ans. India's robust economic growth, a large and youthful population, a thriving services sector, and ongoing reforms make it an appealing destination for investors.

3. Are there specific sectors in India that are promising for investment?

Ans. Promising sectors in India include information technology, pharmaceuticals, consumer goods, finance, and renewable energy, among others.

4. What are the risks associated with investing in Indian stocks?

Ans. Risks include market volatility, currency exchange rate fluctuations, geopolitical factors, and regulatory changes, which can impact investment returns.

Conclusion

Companies get listed on a stock exchange primarily to raise money from public investors. The money can be used to boost their business or pay off debt. IPOs also allow angel investors and VCs to cash out. 

Recent examples of blockbuster IPOs include Nykaa whose stock debuted at more than 75% above its issue price. That said, not all IPOs are made equal. 

Certain companies struggle to meet or maintain the criteria after listing on a stock exchange while others find it difficult to keep up with the quarterly filings. 

In fact, some of the biggest IPOs in India from the 2000s are struggling as of 2021 while relatively unknown stocks like Minda Industries have gained more than 7,800% in value over the same period. 

Thus, it’s important to exercise caution when investing in IPOs regardless of the popularity or reach of the company that’s getting listed on a stock exchange. 

Note: Facts & figures are true as of 15-11-2021. The funds mentioned are suggestions based on funds handpicked by Cube's expert Mutual Fund Advisory partner. Before investing please take Cube's Portfolio Planner feature to ensure the funds you see are right for your goals, life stage, risk level and finances. None of the information shared here is to be construed as investment advice.

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