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Why do Companies List on the Stock Exchange?

  • Marisha Bhatt
  • Dec 21 2021
  • 7 minutes
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Investment in the share market essentially means investing in the shares of various companies. Investors have an ocean of opportunities for investment as these companies can be new companies or industry stalwarts. It is necessary to have a thorough fundamental and technical analysis of the stocks before investing in them. However, the prerequisite for investing in any company is for such a company to be listed on a stock exchange. There are many advantages for a company when they get listed on a recognized stock exchange. This makes it a milestone for any company to be listed and gives a boost to its growth trajectory.

Let us discuss the need for any company to be listed on a recognized stock exchange and related details for the same.  

What is the meaning of listing on a stock exchange?

Listing of a company is when a company issues shares for subscription by the general public. Such shares can be bought and sold and traded from the recognized stock exchange. A company can raise capital by listing on the stock exchange by means of an Initial Public Offer (IPO). This is the invitation for the general public to invest in the company and become owners of such a company in their own individual capacity. 

What is the process of listing a company on a stock exchange?

The process of listing a company on a recognized exchange is quite stringent as it involves the investment by shareholders all across the country or even abroad. Therefore, to safeguard the interest of millions of investors, the listing requirements and the process for the same are quite strict and require absolute adherence by the companies. 

The broad steps of listing a company on a recognized stock exchange are,

  1. Appointing an Investment Bank
  2. File the necessary registration forms with SEBI
  3. Issue the Red Herring Prospectus
  4. Increase public awareness about the IPO by means of adequate advertising.
  5. Bid for the lots of the shares within the price band set by the Investment Bank 
  6. Determining if the IPO is over or under-subscribed and listing of the shares based on the highest bid.

What are the reasons or benefits of listing a company on a stock exchange?

As mentioned above, there are many advantages for a company to be listed on a recognized stock exchange. Some of the common reasons and benefits for a company to be listed are mentioned below.

1. Wider access to finance

The very purpose of starting a business is to get adequate finance to meet its goals and ultimately make a higher profit for its owners. By listing the company on a recognized stock exchange, the company gets a chance to raise a huge amount of capital as it has access to a wider base of potential investors, whether retail or institutional.

2. Ability to raise further capital as and when needed

Capital requirement is a constant need for any business. By listing on the stock exchange, a company can raise funds as and when needed by issuing further shares whether of a new class or rights issue of the existing class of shares at the discretion of the company. 

3. Better regulation of the company

Listing of shares on the stock exchange is regulated by SEBI through strict rules and regulations that aim at safeguarding the shareholders’ and investors’ interests. It requires the company to provide higher transparency with respect to its financial statements and decisions that can potentially have a huge impact on the interest of all the stakeholders.

4. Higher investor confidence

The stringent regulations to be followed by a company at the time of listing and further till the very end, even in case of winding up of the company acts as a dual benefit for the company and its stakeholders. The increased transparency generates higher confidence among the investors regarding the viability and profitability of their investment. At the same time, it allows the company to follow a structured process to build and maintain its high credibility. 

5. Increased ability to borrow

A listed company can also borrow funds more easily from an external source whenever they need them. The increased transparency and verification of the financial statements from external as well as internal auditors increase the confidence of the lenders in the viability of the company to repay the funds. 

6. Increased liquidity

Listing of the shares on the recognized stock markets makes it easier for the investors to buy and sell them at any point. The shares can be easily traded and also have the potential to take part in the upward trend of the market or a boom or bullish market sentiment.   

7. Higher visibility in the market

When a company is listed on any recognized stock exchange, it gets exposure not only to retail investors but mainly to institutional investors. The company also has a chance to attract investments from international investors by showcasing its business and growth model as well as strong financials. This increased visibility in the national and international market is a huge advantage for the company to generate the required funds from time to time. 

Conclusion

Listing a company on a recognized stock exchange is the primary goal of any business. The benefits of listing are vast as it opens a wide door of opportunities for any company. However, the process of listing and the basic requirements that have to be met by any company to be eligible for listing are also quite stringent and vast. A company has to ensure that they meet all such requirements to reap the benefits of listing on any recognized stock exchange. 

FAQs

How are the stock prices of a listed company determined?

The stock prices of a listed company are determined based on the basic demand-supply functions of the shares of such a company.

What are the broad points considered by companies in choosing a stock exchange for their shares to be listed?

The broad points considered by companies in choosing a stock exchange for their shares to be listed are,
-Listing requirements of the stock exchange
-Listing fees charged by the exchange
-The ability of the exchange to generate adequate awareness and publicity for the company.
-The ticker symbol offered by the exchange

What are the prime disadvantages of listing a company on an exchange?

The prime disadvantages of listing a company on any exchange is the increased scrutiny from various stakeholders, delay in the decision-making process due to the need for various approvals, increased cost of listing, possibility of a significant drop in share prices due to market volatility, etc.

Can a small business be eligible for listing on a stock exchange?

Listing a company on a stock exchange requires the business to meet various qualifications, one of them being the minimum capital requirements. Small businesses may not be able to meet such criteria thereby disqualifying them from the chance to be listed.

Is every public company listed?

It is not necessary that every public company be listed on a stock exchange. Many companies may not meet be large enough to qualify the listing parameters but can still have a huge number of shareholders that help in raising capital.

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