How is a Company Listed on NSE or BSE? - The Complete Process

Everything is business. Well, it is true, just look around you and you will see multiple examples of a corporation selling something. We are all covered with businesses and it is efficient.

Having businesses is efficient because it provides us with things that we want. In other words, they provide us with something of value. Otherwise, we would have to make everything on our own which would be inefficient and time-consuming and practically impossible. So businesses make markets efficient and society a better-managed entity.

When a business turns big, I mean really big, then it needs to scale accordingly. Scaling in India is a very hard process because of different types of people everywhere. Most companies are primarily limited in nature and at their inception. This means that they operate mostly on private capital but at some point in time they need more funds than their private capacity. Thus, when a company successfully pulls off the magic of scaling then happens the true magic. It goes on and lists itself as a public limited company that now can make money from people to scale and fuel other activities.

Not to mention, the listing process may seem easy and simple, the fact is that it isn’t. This is an article about how a company lists itself in India. There are majorly two important exchanges in India, namely NSE and BSE. Read on to find out how a company is listed on NSE and BSE.

What is Listing?
Why do Companies Go Public?
What is a Stock Exchange?
The Process of Listing (Initial Public Offering)
Prerequisites for Listing on National Stock Exchange
Prerequisites for Listing on Bombay Stock Exchange
FAQ

What is Listing?

Every company which operates in a market of high demand has a good scope of growing and scaling. From the inception of a company, most companies are privately limited. Private limited means that these companies are funded privately, or the source of the capital is just normal private people or organisations behind the promoting chair. Hence, they operate on a limited capital that they can privately afford to fuel the operations at that company.

Some companies, however, go ahead and become big national companies that need huge cash flows to fund their activities. At the point when companies become big and quite popular in a nation, the promoters or the chair people will be needing more capital.

There can be many sources of funds to be considered, as a loan, or issuing debentures or selling stakes etcetera. One of the most famous ways to raise capital is to list the company on a stock exchange.

In corporate finance, a listing refers to the company's shares being on the list of stocks that are officially traded on a stock exchange. Thus, listing means that anyone from the public or a retail investor can now take part in a company by buying its shares. The general public will be buying a company’s shares to earn capital appreciation or dividends.

Why do Companies Go Public?

A very valid question that may arise in your head is, why do companies go public? There can be many reasons why a company chooses to go public. It depends on the entrepreneur running it on how he/she is willing to go about raising funds. The most common and eligible reasons for a company to go public and the list itself is given here -

1. Fund Capex from internal accruals
2. Raise a Series of funding from another PE (Private Equity) fund
3. Raise debt from bankers
4. Float a bond (this is another form of raising debt)
5. File for an Initial Public Offer (IPO) by allotting shares from authorised capital
6. A combination of all the above

Let us go into some detail about how these reasons arose in the first place.

Capex requirements

Let us first understand the term Capex first. Capex is made up of two individual words, that are capital (Cap) and expenditure (ex). Capital expenditure is that form of expenditure that is required to fund the management and acquiring of fixed assets. Fixed assets are those assets that are fixed in nature that will pay benefits after a year or so. Thus, capital expenditure is spending money on fixed assets that are not to be converted into cash quickly.

They include land, building and machinery. So we can conclude, Capex expenditure is the expenditure that a company incurs for growth in business. This long term growth expenditure has to be fuelled from somewhere, that is why companies go public.

Provide an exit for the company’s early investors

After the process of listing is done, the shares of the listed company go around in the market and are traded freely. When this situation arises, any existing shareholder can exit the company by selling his/her shares. That existing shareholder could be one of the promoter, anger investor Private equity funds or venture capitalists.

They can use this opportunity to sell their shares in the stock market. Thus, by selling the shares or stake that they own, they can exit the venture and thus exit the initial investment they made in the company. However, they can also choose to sell shares in multiple parts and slots. There have been many successful and famous exits in India like that of Kunal Shah from Freecharge.

Avoid paying interest and other finance charges

When a company chooses to go public, it avoids taking any sort of loan. The reason is that taking loans is hefty work, it also comes with much financial burden and high-interest rates.

So many entrepreneurs refer to selling stakes or ownerships in the form of shares. The best way to do that is to be listed. The listing makes a company’s shares trade freely in the market and makes space for funds that the company needs to grow. That too happens without paying any form of interest and any other sort of financial charges.

Reward employees

There is a thing called “Employee stock option plan” or ESOPs. They are awarded to employees who are early in the venture and/or are outstanding with their work. They work as an incentive for employees who work really hard to make a successful venture.

Once the company is listed and shares start trading freely, it makes space for more ESOPs. They are awarded to employees to keep the work motivation high and construct a better work environment. A few examples where the employee benefited from ESOP would be Google, Infosys, Twitter, Facebook etc.

Improves clarity

As a company goes public and gets out of its private cocoon, it raises its status. Being a listed entity in a stock exchange is definitely not a small thing, it makes the company stand in the limelight of investors. Which interests people more in getting to know about that company. This will eventually create a positive impact on the company in its future prospects.

What is a Stock Exchange?

When we discuss ‘listing’ and all the technicalities of listing, it is extremely crucial to talk about stock exchanges. Whether you are a person trying to list your company or a person willing to invest his/her money with the company, one entity that you both have to work together with is the stock exchange. So, what is a stock exchange?

Let us take one example to know clearly what a stock exchange is. Imagine the Kirana store near your house, or a supermarket or a shop of essentials that has a lot of items in its store. Just like a Kirana store is a store for items, a stock exchange is a marketplace for equities. It is a place where buyers and sellers come together to complete trade and settle transactions.

The stock market is where everyone who wants to transact in shares goes. Transact in simple terms means buying and selling. It is impossible for a stock to be traded without being listed on the stock exchange. Thus, the main purpose of a stock market is to facilitate equities trading.

Trading is buying and selling of securities. In India, there are two main stock exchanges. The names of these stock exchanges are National stock exchanges and Bombay stock exchange. Let us read a little about them.

National Stock exchange

NSE was incorporated in 1992. It was recognised as a stock exchange by SEBI in April 1993 and commenced operations in 1994 with the launch of the wholesale debt market, followed shortly after by the launch of the cash market segment. IT is the leading stock exchange in India. Located in Mumbai, Maharashtra and is owned by some leading financial institutions, banks, and insurance companies

Bombay stock exchange

BSE was established in 1875. It was Asia's first and the fastest stock exchange in the world. It is called the fastest stock exchange as it operates at a speed of 6 microseconds. It was established over 143 years ago, and BSE has helped the country to grow its capital market by ensuring a smooth flow of equities. Though it is now known as the Bombay stock exchange, it was established as “The Native Share and stockbrokers association” in the inception year of 1875. In 2017 BSE became the first listed stock exchange of India.

The Process of Listing (Initial Public Offering)

Now we will discuss the cherry of the cake, the process of listing. It is also known by the name of initial public offering because it is the first time (Initial) when the shares will be offered to the public. This is a very strict process and both the National and the Bombay stock exchange take it very heartedly. It goes without saying at this point that the company which is trying to list itself has to follow dedicated guidelines of the desired exchange. However, the most common checkpoints to be ticked are listed here -

Appointing a merchant banker

Merchant bankers are also called Book Running Lead Managers (BRLM)/Lead Managers (LM). The work of a merchant banker has diverse actions. It includes conducting some efforts to check all the legal compliances at the company filing for the IPO and issuing a due diligence certificate.

The Lead Manager has to work closely with the company to prepare the DRHP. DRHP stands for draft red herring prospectus. He also has to underwrite shares, which is agreeing to buy all the unsold shares. He then has to help the company to reach a decision on a reasonable price band of the offering. Thus, these are all the major functions that a merchant banker does.

For example, The merchant banks (book running lead managers) for the issue are Morgan Stanley India, Goldman Sachs (India), ICICI Securities, Axis Capital, JP Morgan, Citigroup Global Markets India and HDFC Bank.

Applying to SEBI with a registration document

Not to mention that everything at a listing is done through the rules of the securities exchange board of India. After getting the work done by a merchant banker, you have to pitch a registration document to SEBI. That document should contain what the company does and what is the motive of the listing along with all other mandated information. After all the process, the company should look for an affirmative response from the regulating body to go ahead and issue a DRHP.

DRHP

DRHP stands for Draft red herring prospectus. It is a disclosure document that describes information about the IPO to the general public. It contains a lot of information about the company and the issue price and that is often too deep in finance terminologies. The most important and imperative information that is present in a DRHP is as follows -

1. Estimated IPO size
2. Everything about the shares that are to be issued
3. The risk involved in the business
4. Why the company wants to go public and how does it plan to utilise the funds
5. Revenue model and all sorts of expenditure
6. Complete financial statements
7. Management relevant information

Marketing the IPO

After DRHP is issued and is made public, it is important to float some marketing about the IPO. The company would want to reach the maximum audience of investors for the purpose of its public offering. So they take support of print media and other sorts of media to market the IPO more.

Fixing the price band

Fixing the price band is super imperative when preparing for an IPO. The price is the only number which the people would see first. So, it is important to set the number not too high and not too low to attract the right amount of people on the board of directors. This is helmed by the existing shareholders and is helped by experts like merchant bankers. Once the price band is fixed, that becomes the base on which the company is listed on the stock exchange.

Book building

Book building is the process of capturing and recording investor demand for shares. For example, if the price band is between Rs.100 and Rs.150 then the public can choose. They can choose what is the right amount per share that the company deserves. The process of book building is to collect these price points along with respective qualities of shares and demand. Book building is perceived as an effective price discovery method.

Closing date

After the book building process is done and completed, it is said as the closing date. Generally, it is open for two to three days and maybe more in some exceptions. Thus, then the price point is selected which has the most bids from investors. That price becomes the listing share price of the company.

Listing day

Then comes the day when the company actually gets listed on the stock exchange. That becomes the day when the shares start to be traded freely in the market.

When the shares are being bid, they lay a foundation for future selling values. This happens when investors choose the desired price from the given price band. This whole arrangement around the date of issue is known as the “Primary Markets”. After the initial bidding has stopped and the stock gets listed on the stock exchange, the share starts to trade normally like any other listed company. This situation in this share is known as the “Secondary Markets”.

Once the stock transitions from primary markets to secondary markets, it gets traded daily on the stock exchange. People start buying and selling the stocks regularly and normally like any other company.

Bootstrapping vs Funding: Which is the Right Strategy to Fund your Startup

Many entrepreneurs get confused about receiving funding or growing by bootstrapping. Here are the major differences between bootstrapping and funding.

StartupTalkyDamini Bhandary

Prerequisites for Listing on National Stock Exchange

There are many checkpoints that one has to fulfil before getting listed. Some of the most needed and crucial prerequisites are -

• The paid-up equity capital of the applicant shall not be less than 10 crores and the capitalization of the applicant's equity shall not be less than 25 crores.
• The Issuer shall have adhered to conditions precedent to listing as emerging from inter-alia from Securities Contracts (Regulations) Act 1956, Companies Act 1956/2013, 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.

Prerequisites for Listing on Bombay Stock Exchange

There are many checkpoints that one has to fulfil before getting listed. Some of the most needed and crucial prerequisites at the Bombay stock exchange are -

• The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 10 crores for IPOs & Rs.3 crore for FPOs.
• The minimum issue size shall be Rs. 10 crores.
• The minimum market capitalisation of the Company shall be Rs. 25 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price).

Conclusion

In this article, we got to know why a company goes public, the needs that make a company think about listing itself. We read about the stock exchanges in India. The two most important exchanges are the NSE and BSE, the national stock exchange and the Bombay stock exchange. They lay the foundation of stock markets in India. Then we read about the process of how a company is listed in a stock exchange.

After all these discussions, we can say that companies get listed, mainly to fund their Capex (Capital expenditure) requirements. This helps a company grow and get out in the market of more people. If you want to invest in a fresh new IPO then you must read the DRHP that is the draft red herring prospectus. It is super important for an investor to know where he is investing. In this modern world, one thing to make sure of is that your money should grow faster than inflation.

FAQ

What happens when a company gets listed?

When a company gets listed it can raise additional funds by issuing its shares on the stock market.

Can a private company be listed?

No, a private company cannot go public. It will first have to convert itself to a Public Limited company, then only it can be listed on the stock exchange for trading its share.

How long does it take to IPO?

The IPO process depends on many factors but it typically takes six to nine months for the company to complete its public debut.