Listing And Delisting Of Securities In India: An Analysis

1.       Introduction

Companies require huge investments for start ups. Among the many choices that they have, they often resort to calling for investments in their organization from the public. This is done by issuing securities to the investor. The investor thus has a stake in the capital of the company. A share is merely a share in the share capital of the company.[1] The securities market (share market) therefore has a two-fold role in the economy: one, to bring together the buyers and sellers on the same platform. And second, to reduce information asymmetry, that is, the company doesn™t indulge in giving wrong information (or concealing information) from the public that would affect the demand of its securities in the market. This is the reason the securities law in India is a tightly vigilant process: it affects the buyers and sellers, as well as economy as a whole. The shares have no intrinsic value attached; their price in the market is governed by two factors. One, the liquidity of the share (the interface price the seller is ready to sell it for and the buyer is ready to pay for). The second factor is the profit/loss the company is making while doing business.[2]  Thus the primary aim of the law of listing is to govern the transactions and call for investments in the stock market. This paper analyses the listing and delisting provisions in India, with regard to the role of the stock market and traces the economic logic of the same.

2.      Rules For Listing And Economic Implication

Listing essentially means getting the securities of a company listed in the stock market to raise investment and for further trading. The principal objectives of listing are to provide ready marketability and impart liquidity and free negotiability to stocks and shares; ensure proper supervision and control of dealings therein; and protect the interests of shareholders and of the general investing public.[3] There are broadly three legislative provisions govern the listing process in India- S. 73 of the Companies Act, 1956, S. 21 of the Securities Contracts (Regulation) Act, 1956 [hereinafter SCR Act] and Rule 19 of the Securities Contracts (Regulation) Rules, 1957 [hereinafter SCR Rules]. The Guidelines issued by the SEBI[4] would also be of importance. S. 73 of the Companies Act makes it mandatory for every company intending to offer shares or debentures to the public for subscription, through the issue of a prospectus, to apply to one recognized stock exchange for these shares or debentures to be listed on it.[5] S. 9(1)(m) of the SCR Act, confers powers on stock exchanges to make bye-laws to provide for the listing of securities, which include listing agreements[6] which they can choose to enter into, with companies intending to get enlisted. More importantly, S. 21 of the SCR Act  lays down the condition for the listing: the compliance with the listing agreement between the stock exchange and the company. Thus it makes the listing agreement as the chief tool for the regulation and governance of securities trading. There are other conditions for disclosure of material information, enumerated in Rule 19 of the SCR Rules.

From these laws it is very clear that instead of correcting market discrepancies, the securities law tries to enhance investor confidence in the market. With regulations like disclosure of material information, the stock market tries to attract more investors. This in turn results in increase of transaction in the market, which leads to savings being converted into investments. For example, Clause 49 of the Listing Agreement[7] provides for enhancing corporate governance, through such means as regulating the composition and conduct of the Board of Directors of listed companies. Such a provision cannot possibly remove any imperfection underlying in the market rather it focuses on transparency from the investor™s point of view. Thus the ultimate of the regulatory compliance is to boost the investments in the stock market by making it investor friendly.[8]

3.      Delisting

Delisting refers to removing the listed securities of a company from the stock market. As per the SEBI Delisting Guidelines of Equity Shares, 2009, delisting can be of two types: voluntary delisting: or involuntary delisting. Delisting results in loss to the investor confidence, as it goes against what he was ensured in the prospectus of the company

4.      Voluntary Delisting And Economic Implications

Voluntary delisting refers to the company delisting its shares from the stock market on its own accord. It is typically done in case of economic losses incurred by the company. If the cost of enlisting exceeds the incurring losses, or where its securities are infrequently traded, the company would choose to delist its securities. Conversely, if the company is making huge profits then it could choose to remove its listing to consolidate its funds, rather than disperse it over the investors. Although it might seem unfair to the investors that they are losing out of profitable securities, it would be problematic to put barriers to the exit of firms (which might even lead to few firms listing in the stock exchange.)[9]. In case of delisting the Company is always given a fair hearing before proceeding with the formalities.[10] There are certain guidelines for voluntary delisting. Firstly, the Company promoter is required to make the announcement for such an exit in a public hearing. The time frame and method of exit must be mentioned.[11]  Second, such delisting can proceed only if the decision has been approved by the investors. A postal ballot system has been formulated whereby the votes for such delisting must be more than twice the number of votes against delisting.[12] Third, a mandatory exit price has to be given to the investors. This exit price strangely has to be paid by the promoter, not the Company.[13] Thus, the 2009 Guidelines have strictly looked after the interests of the investors. It is clear that the consensus of the public is of essence. Moreover, the law penalizes the promoter for the delisting. Thus, while the company gets the profits, the loss of delisting has to be suffered by the promoter. This seems harsh and unfair.

5.      Compulsory Delisting And Economic Implications

Compulsory delisting happens usually in two types of scenarios:

a.)      The first scenario relates to the relationship of the stock exchange with listed companies. When certain rules are not adhered, the company is mandatorily delisted. For example, Schedule III of the Listing Agreement of the National Stock Exchange (NSE) codifies rules regarding the payment of listing fees to the exchange. If payment is not made to the stock exchange, it has no financial consideration to list the company. The listing fees is a major source of income of the Stock Exchanges.[14] It would be costly for them to continue to list securities of such companies. Also, there is a requirement for a minimum trading level in the Schedule III of the SEBI Guidelines. It is submitted that delisting for the breach of such rules is economically justified for the stock exchange: the operation of the securities market must not result in a loss to the stock exchange.

b.)     The second kind of scenario relates to information disclosure by listed companies. Companies can get delisted when the rules regarding information disclosure is not adhered to. This is important as the aim of the secondary market is to ensure that material information is disclosed to the securities-holder, to enhance efficiency of the market.

The limitation period given to an aggrieved party for filing a suit in case of compulsory delisting is 15 days. This may be extended to a month, anyone can file a suit- the Company itself or even its investors. Also, an independent valuer values the fair price of shares in case of compulsory delisting.[15] It is therefore seen that ample opportunity is given to the investors to claim against compulsory delisiting. However, the interests of the stock exchange seem to be the primary aim of compulsory delisting.

6.      Conclusion

There is a penalty of maximum Rs. 25 crores and/or a year of imprisonment, for violation  of rules for listing and delisting procedures.[16] Although some companies can afford such a loss, it seems like a deterrent factor to the players of the market. The process of listing securities is intended towards boosting trade volume in the securities market than removing its imperfections. This is particularly true in the case of voluntary delisting wherein the loss making companies can delist itselves to plug in further losses. However investor protection in this area must be ensures to prevent companies from taking undue advantage and indulging in unfair practices. The practice of compulsory delisting also seems viable which protects the interests of the exchange itself and the investors in question. As a result, it is concluded that the SEBI Guidelines seem to strike a balance between investor sentiments and company regulation.

By

Harshita Jalan

IVth Year B.A. LLB. (Hons.)
WB National University of Juridical Sciences

[1] Section 2(46), Company™s Act, 1956

[2] Akhilesh R. Bhargava, Delisting Regulation- A Start, Vol. 45, Sebi & Corp. Laws 37 (2003) The profit causes the price of the share to go increase, while loss decreases the value of the share.

[3] Raymond Synthetics Ltd. v. Union of India 1992 (1) BomCR 133

[4] Stock Exchange Board of India

[5] K. Balasumbramanian, Delisting of Securities under SEBI™s New Guidelines- An Overview, Vol. 45, Sebi & Corp. Laws 77 (2003)

[6] S. 2(j), Securities Contracts (Regulation) Act, 1956.

[7] Clause 49, Listing Agreement for Equity Shares

[8] SEBI Circular No. SEBI/CFD/DIL/CG/1/2004/12/10, on Corporate Governance in Listed Companies.

[9]Para 4.9, Pratip Kar Committee Report.

[10] CSR Act, Section 21A

[11] Rule 10(1), 2009 Guidelines

[12] Rule 8, 2009 Guidelines

[13] Rule 4[4], 2009 Guidelines

[14]Para 5.1, Chandratre Committee Report.

[15] Rule 23(1), 2009 Guidelines

[16] Section 23(1) SCR Act