This article has been written by Vivek Srivastava pursuing a Training Program to Crack the Independent Directors’ Exam from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

The background

Companies, like humans, have a life cycle. They are born (through incorporation) and they die too (for reasons of insolvency, bankruptcy, etc.). In between, like humans, they traverse through distinct phases such as infancy (ideating, setting up, venturing into the business space); adolescence (rapid growth and expansion); maturity (well-established, stable customer base, consistent revenue, efficient operations); and finally reaching an end of life (may close, get  acquired, go bankrupt). Like humans, companies may transition through a midlife crisis when they face competition and technology obsolescence. There can be some transitory phases, like a midlife crisis, when the company may face stiff competition or obsolescence in its products, services or technology. 

As humans, while navigating through various phases, the company too needs to have resources to move on to the next phase. Resources required by the company include man, method, material, machines and most importantly, money. The promoters of the company, i.e., the persons who incorporated it, will have individual limits to get everything required by the company at all times and hence need to access external resources.

The common denominator for all resources is money.

Stocks and listing

Stocks denote the fractional ‘ownership’ of the company. And ownership, in the most preliminary sense, would mean a claim on the company’s earnings and assets. For a startup with just two founders, both the partners have 50% of the stocks, unless otherwise structured differently and own half the company each. But when they need more resources (money) to fuel future plans and growth, they need to dilute (sell) their ownership with others in exchange for money.  Owners of shares are called shareholders. And companies sell shares to shareholders to fulfil funding needs to grow their business. The share value here is the market value of the share.

There are regulated and monitored marketplaces (also called exchanges) where shares can be sold by the companies and bought by shareholders, collectively called ‘traded’. In India, we have 2 exchanges: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), where the shares are traded, i.e., bought and sold, after they are ‘listed’ or made available for the transactions on the exchange. Thus, listing means the formal admission of securities of a company to the trading platform of the exchange, i.e., the marketplace for shares. There are distinct reasons also why companies resort to listing, such as:

• Access to Capital for Growth – being the most fundamental reason.  
• Enhanced Visibility among buyers, which helps to expand its market and customer base
• Enhanced credibility among the investor public due to compliance with regulatory norms, transparency through disclosures and reporting during operations.
• Liquidity stimulated through buying and selling
• Sharing of risks with multiple owners

Listing is not compulsory under the Companies Act 2013/1956. However, it becomes mandatory when a company wants to offer shares to the public through an IPO (Initial Public Offering). As mentioned earlier, the purpose of an IPO is to raise capital and access to liquidity by offering shares to the public. The process to bring about an IPO is outlined by the stock exchanges of India – the National Stock Exchange and the Bombay Stock Exchange.

The Securities and Exchange Board of India (SEBI) regulates the IPO process. SEBI has a critical role to secure the interest of the investors and reduce the chances of scams leading to defrauding the public. Expert advisors like underwriters, lawyers, auditors, and accountants are generally required to help the companies in the overall compliance and relevant documentation. 

Criteria for listing

There are certain pre-conditions/eligibility norms laid by SEBI, NSE & BSE if a company wants to get listed. These eligibility criteria, prima facie, establish that only those companies that conform to a specific level of fiscal stability, corporate governance, disclosures and transparency can be listed. While the framework for eligibility largely remains the same, there are different benchmarks for large organisations (Mainboard)  and SME (small/medium enterprises) going for listing. In addition, SEBI came up with the Innovators Growth Platform (IGP) in 2019 to support the startup ecosystem in India and provide an alternative to technology startups to list. 

The Mainboard & SME IPO process is briefly explained as follows:

Mainboard IPO for companies with paid-up capital exceeding Rs. 10 crore.
SEBI requirements	Profitability route	The most fundamental requirement is that the tangible assets of the company, which could be in the form of real estate, machinery, inventory, finished goods, etc., must at least be Rs. 3 crore for each of the 3 earlier years of its operations. Out of the above, there should not be more than 50% of the tangible assets in the form of cash or cash equivalent. This could mean cash in hand for bank deposits. Another requirement is that the average PBT, i.e., operating profit (before tax), should be at least Rs 15 crore in any of the three years out of the last five years of operations. In case the company has undergone a name change, at least 50% of the revenue generated in the previous year should be from the business carried out by the company under the new name.

		The financial size of the issue must not exceed five times the pre-issue net worth.
	QIB Route(alternate route genuine, capable and legitimate companies failing tomeet profitability parameters)	Qualified Institutional Buyer Route Under the QIB route, at least 75% of the net offering must be made to qualified institutional buyers. This is the minimum allotment requirement. If the above minimum allotment requirement cannot be met, then the IPO subscription money must be refunded.
Listing requirements at NSE	The most initial requirement at NSE is that the market capitalisation of the company must be > Rs. 25 crore. For the reasons of credibility, at least one promoter must have at least  3 years of relevant industry experience. The companies which are going for an issue size of less than Rs 500 crore must have a Positive net worth   After the issue is raised, the paid-up equity of the company must exceed Rs 10 crore.
Listingrequirements atBSE	The requirements pertaining to the equity and market capitalisation for listing at BSE are the same as applicable for NSE.   As for NSE, the minimum paid-up capital must exceed Rs 10 crore after the issue. Also, the size of the issue must exceed Rs 10 crore.
Other/Misc.	Other administrative and miscellaneous requirements are primarily to ensure that there is no illegitimate involvement from either the company or its promoters. The sum of such requirements are–  There must neither be any pending proceeding nor a pending winding-up petition at NCLT against the issuer/company under the Insolvency and Bankruptcy Law (IBC 2016). There must not be any pending disciplinary action at any statutory body or legal forum against the company founders, promoters, directors, or selling shareholders.
	The promoters/directors/founders/investors/issuing company must not be barred from accessing the capital markets as of the date of application.   The promoters/managers/founders/investors must not be affiliated with another company that is excluded from access to capital markets. The promoters, directors, founders, or investors should not be defaulters of any bank or government organisation for timely discharge of its obligations. The promoters/directors/founders/investors must not be pronounced as fugitive offenders as defined in the Fugitive Economic Offenders Act 2018. The promoters should individually or collectively own at least 20% of the equity after the IPO.
In addition to the above, there are requirements for proper documentation and disclosures, including some self-certifications.

SME IPO  The paid-up capital of the company issuing the SME IPO must be limited to Rs 25 crore after the post-issue.  Unlike Mainboard IPOs, SMEs can get listed on only one of the platforms: NSE or BSE.
SEBI requirements	The requirement from SEBI is that there should at least be 50 prospective allottees for the IPO.   Mandatory market making for at least 3 years from the date of listing. To be available for trading. The issue must be 100% underwritten. The merchant bankers must underwrite 15% on their own account. The minimum application and trading lot size must not be less than Rs. 1,00,000.
Listing requirements at NSE	The first and foremost requirement at NSE is that it’s only Indian companies who can participate in the IPO, which means that the company must be incorporated under the Indian Companies Act 1956/2013.
	The companies must have been under continuous operations for at least 3 years preceding the IPO. The promoters should individually or jointly hold at least 20% of the share capital after the issue. At least one of the promoters of the company must have relevant industry experience prior to the IPO. The operating profit and net worth of the company must be positive for at least 2 out of 3 fiscal years.
Listing requirements at BSE	The companies that are appraised and funded by NABARD, SIDBI, banks (other than cooperative banks), and financial institutions can have a relaxation on the 3-year prior existence requirement. The company must have a positive Operating profit (i.e. Earnings before Interest, depreciation and tax) for at least2 out of 3 last financial years, including the recent year The debt/equity ratio of the company should not be more than 3:1, i.e., the company must not be excessively leveraged or under debt.
Other / misc.	Other administrative and miscellaneous requirements are primarily to ensure that there is no illegitimate involvement from either the company or its promoters.  Largely the same as for Mainboard IPO, primarily ensuring no material regulatory or disciplinary action has been taken against the applicant company or its directors/founders/promoters by any stock exchange or regulatory agency in the last three years.
In addition to the above, there are requirements for proper documentation and disclosures, including some self-certifications.

Conclusion

In summary, listing on an stock exchange is an important milestone in the journey of an organisation. Regulatory authorities like SEBI and trading platforms like NSE and BSE have laid down some minimum criteria in the areas of financials, transparency, governance, etc. that qualify the companies wanting to go for listing.

Another stakeholder likely to be discussed in future assignments are the ‘Investment Bankers’. They act as an intermediary between the company and the stock exchange and carry out the listing process on behalf of the organisation. They provide valuable guidance and advice to the organisation while ensuring compliance and documentation support for the organisation.