Every year we hear about many companies filing draft papers with SEBI to launch their IPO or Initial Public Offering. IPO is nothing but a way to take an unlisted company public and offer its shares for subscription to the general public. The main objective of a company to launch an IPO is to list on stock exchanges so that people can start buying and selling them.
To know more about how and why companies list on a stock exchange, continue reading!
What is Listing of Shares on the Stock Exchange?
Listing of shares of a company on a stock exchange means making them available to the general public so that they can buy and sell them. A company can list its shares on a stock exchange after meeting conditions set by SEBI and going through a rigorous process of appointing a merchant banker. Moreover, companies have to prepare a DRHP.
A company lists its shares on stock exchanges to raise funds for the growth and expansion of operations. Besides getting financial assistance from loans, these companies raise funds from the general public, making retail investors part company owners.
How Do Companies List Their Shares on Stock Exchanges?
Listing of securities by a company on a stock exchange is a complex process involving many steps. First, companies must meet certain eligibility criteria established by SEBI, India’s capital markets regulator, to start the listing process. Once they meet these criteria, they must appoint a merchant banker who will advise them on all matters related to the launching of the IPO.
The company must release or publish a draft red herring prospectus containing important information about its current situation, future growth trajectory, how it intends to use the raised capital, etc.
After this, the company can open its IPO for prospective investors to subscribe to their shares within the pre-determined price band. The next step involves scrutinizing share applications and determining whether there was an oversubscription or under subscription of the IPO.
If an IPO was undersubscribed, then all valid applicants are allotted shares. Whereas, if there was an oversubscription, then share allotment randomly takes place so that every applicant gets a fair chance at getting these shares. In case of oversubscription, only a part of the total applicant will receive a share allotment.
Even if you do not receive share allotment at the time of IPO, you can still buy shares of companies once they are available for trading on stock exchanges.
Benefits of Listing on Stock Exchanges
Here are some benefits investors can get by listing on stock exchanges:
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Access to financing
A company or an organization needs regular financing to meet its objectives and strive for future expansion. Listing on the stock exchange is an efficient method of raising capital from a wide variety of low-risk investors. It is an alternative method of financing that a company may use to reduce its debt obligations.
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Exit pathway for current investors
Existing company investors can sell their shares to prospective retail and institutional investors and exit the company. This can be done after a company is listed on the stock exchange. They can launch an OFS or Offer for Sale to entirely or partially offload their stakes in the company.
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Transparency in functioning
A company must follow stringent SEBI norms related to disclosures and functioning after list on stock exchanges. It protects the interests of investors and benefits all stakeholders in the long run. Transparent functioning also adds to the credibility of a company.
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Liquidity
One of the most significant things investors look for before putting in their money is the liquidity of the asset. Once a company gets listed on stock exchanges, it increases the liquidity of its shares. Thus, it makes these securities more appealing investment options.
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Higher borrowing ability
As a company gets listed, it becomes easier to access the information about its fundamentals and prospects. The increased transparency allows companies to approach external and internal sources of lending.
Lenders are in a better position to analyze the repayment capability of borrowers. The transparency and wider market recognition boost lenders’ confidence in the company. Therefore, bankers go ahead with borrowing requests of listed companies.
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Increased visibility
There is greater market visibility after companies list on stock exchanges. They gain national and international exposure and play a crucial role in enhancing the goodwill and credibility of the company. It opens up chances for large foreign institutional investors to pump their money into the enterprise.
Final Word
Companies list on stock exchanges to make the most of the associated benefits mentioned in the above section. However, one must be cautious while investing money in an IPO as there are chances of losses. One should consider various important factors such as financials and future goals of the company before subscribing to its IPO.
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Frequently Asked Questions
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How is the price of a company set at the time of an IPO?
When launching an IPO, the price of shares, including premium is set by merchant bankers appointed by companies. After the listing of shares on stock exchanges, their price depends on the demand and supply of the stock in the market.
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What are stock market indices?
A stock market index is a measure of the performance of the group of stocks that resembles the overall functioning of the stock market. A few stocks are chosen depending on the size of the company or type of industry. Any change in the prices of these selected securities will affect the value of these indices. An increase in the price of these stocks will lead to an increase in the value of these indices and vice versa.
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What are some disadvantages or risks of listing shares on stock exchanges?
The biggest drawback of listing shares on exchanges is the huge costs involved in the pre- and post-listing costs. Appointment of merchant bankers and meeting the eligibility conditions of the listing is a huge burden for small companies. Moreover, once the listing of shares takes place, companies have to take regulatory approvals for every decision, which further prolongs the decision-making process.
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