By Ishita Gupta
Published On: December 28, 2021 at 13:00 IST
Introduction
Listing of shares means a scenario where a company lists its shares for raising capital. The shares are listed on the public platform named Stock Exchange market. The public bids on those shares and invest their money in the share market. For Instance: A company i.e. XYZ Ltd. wants to raise capital for its regular transaction. Hence, the XYZ Company lists its shares on the share market for public investment.
The Companies Act, 2013 has specifically highlighted the concepts of Listed Company and Unlisted Company. However, the Ministry of Corporate Affairs has dealt with and amended the definition of Listed Companies. The MCA has amended the definition of Listed Companies in the year 2014 providing it a better scope. The Companies Act, 2013 has also granted numerous benefits to Listed Companies. These benefits are overlooked by the companies that have not listed their shares. There is a proper procedure to list shares on the stock exchanges. This process is covered under the Companies Act, 2013.
Listing Securities under Stock Exchange
The concept of listing securities is an important aspect of the stock exchange market. The companies primarily make their shares available for public investment. The general public invests their money in the shares of the company. The people who invest their money in the share market are known as shareholders of that company. Primarily a Public Company issues shares to the public at large. To make these shares available to the public, these shares are supposed to be listed on the stock exchange[i]. Additionally, the companies have to fulfil the requirements of the Stock Exchange post listing its shares.
The listing of shares is regulated and governed by various laws in India. The Companies Act, 2013, the Security Exchange Board of India Act, and the Securities Contracts (Regulation) Act, 1956 regulates listing of shares. The Companies Act, 2013 defines Listed and Unlisted Companies. It further establishes the rights enjoyed and obligations imposed on listed companies. Further, the SEBI Act, 1992 and SCRA, 1956 explain the laws, rules, and regulations imposed by SEBI on Listed companies.
This paper will primarily conceptualize the outcomes of the Companies Act, pertaining to Companies that tend to list their shares on the Stock Exchange.
Listed Company Under Companies Act, 2013
The listed company is defined under Section 2(52)[ii] of the Companies Act, 2013. A “Listed Company” means a company that has any of its securities listed on any recognized stock exchange. There are nine recognized stock exchanges in India. These stock exchanges include Bombay Stock Exchange (BSE); Calcutta Stock Exchange; India International Exchange (India INX); Indian Commodity Exchange Limited; Metropolitan Stock Exchange of India; Multi Commodity Exchange of India; National Commodity & Derivative Exchange Ltd.; National Stock Exchange of India; NSE IFSC Ltd.
The different stock exchanges mentioned above have different eligibility criteria for companies that want to list their shares. The Bombay Stock Exchange[iii] has provided the following eligibility criteria for new companies to list their shares. Every new company has to maintain the minimum post-issue paid-up capital of Rs. 10 crores for IPOs & Rs.3 crores for FPOs. The minimum issue size of new companies shall not be less than Rs. 10 crores. Further, the minimum market capitalization shall be Rs. 25 crore. The market capitalization is calculated by multiplying the post-issue paid-up number of equity shares to the issue price.
The minimum criteria to become a member of Calcutta Stock Exchange[iv] are that a company should be registered under the Companies Act. The minimum paid up equity share capital shall be Rs. 30 lakhs. Minimum two directors of the companies should be identified by the CSE. Those directors must have an experience of minimum two years. Finally, the net worth of the company shall be Rs. 32 Lakhs.
Similarly, Indian Commodity Exchange Limited[v] has highlighted that a company having being registered under the Companies Act having minimum paid up share capital of Rs. 30 Lakhs and Minimum two directors is eligible to be member of this Exchange.
The National Commodity & Derivative Exchange Ltd.[vi] has mentioned that a Company incorporated under Companies Act, 2013 are permitted under their Memorandum of Association or applicable constitution document for engaging in production / trading / consumption / broking in commodities / derivatives. The Applicants who are in the process of being incorporated under Companies Act, 2013 may also apply. However, their membership will be effective only upon completion of the aforesaid process to the satisfaction of NCDEX.
Like other stock exchanges, the National Stock Exchange of India[vii] has also specified its eligibility criteria for its membership. The applicant company must be registered with the Companies Act. That company must be formed with the compliance of Section 12 of the Companies Act, 2013. The company must undertake to comply with the requirements of Section 12 of the Securities and Exchange Board of India Act, 1992. The minimum paid up equity share capital shall be Rs. 30 lakhs. The applicant company must be identified as a dominant group as per the Exchange DPG norms.
Unlisted Company Under Companies Act, 2013
The unlisted companies include those companies which are not eligible/ permitted to list their shares on the recognized stock exchanges. This category of companies primarily includes private companies. A private company is defined under Section 2(68)[viii] of the Companies Act, 2013. Private companies are those companies whose articles of association restrict the transferability of shares. It further prevents the public at large from subscribing to the shares of the private company. However, a private company can raise its capital through private placements. Private placements mean raising capital for private companies by issuing a prospectus to a small and specific class of people.
Other than private companies, there are various public companies which do not opt to list their shares on the stock exchange. These unlisted public company allotments are governed by Unlisted Public Companies (Preferential Allotment) Rules, 2003.[ix] The public unlisted company must make the specified disclosures in accordance with those rules. Under these rules, the unlisted company must comply with SEBI’s requirements and make the initial public offering. The directors of the unlisted public company, who has offered shares in a private placement, incur no additional liability if they have complied with the provisions of the Companies Act during the private placement.
Difference between Listed and Unlisted Company
There are major differences between Listed and Unlisted Companies. These differences are discussed as follows:
On the basis of Ownership:[x] A listed company is owned by many shareholders. The more the number of shareholders, the ownership is more broadly divided in such a company. On the other hand, the private investors are the major source of investors for unlisted companies. Hence, the unlisted company is owned by private investors.
On the basis of decision making:[xi] under listed companies, the decisions are taken by the board of directors appointed by the shareholders. While in unlisted companies, the decisions are taken by private investors only.
On the basis of law (Company Law): Under the Companies Act, 2013, the listed companies have been granted through various rights and enjoyments. While the Unlisted Companies lack such special rights and legal enjoyments. Hence, the Companies Act, 2013 protects the rights of investors in shares of listed companies.
Benefits enjoyed by the Listed Companies
There are multiple benefits which are enjoyed by listed companies under the companies Act. The Listed companies get a benefit of raising funds on recurring basis for company’s growth. The listed companies can also raise funds for a specific new project. The listed companies can choose the price at which they want to list their securities.
The collateral values of securities are also fixed by the listed companies. The company can ensure better corporate practise while listing securities on the stock exchanges. The company can also increase the morale of employees, transparency and efficiency while listing their securities. Hence, all the benefits enjoyed by the listed companies are discussed below.
Raising Funds on Recurring Basis for Companies Growth
A listed company enjoys the primary benefit of raising funds for old as well as new projects. The listed companies can raise capital for new projects, expansion, and diversification.[xii] Most of the companies reach a level where they tend to increase their capital. Hence, a company can increase its capital by inviting the public to invest in the company. The stock exchange is the best public platform to raise capital. Depending upon the requirement, the companies can issue stocks initially as well as at various internals.
Generally, listed companies don’t depend upon the capital provided by venture investments. Listing of Securities allows the companies to hold more control over the regular operations. The people who invest in the shares are granted limited ownership. The provision of complete ownership is not provided to the shareholders. It means that the real owners of the company enjoy their positions.
Fair Price for Securities
The share prices are derived from the principle of demand and supply. Once the security is listed on the stock exchange, the value of the share starts fluctuating. Listing shares helps to generate the independent value of shares. Hence, a company tends to raise more capital than initially expected. The principle of demand and supply can be enjoyed only by the listed companies.
Collateral Value of Securities
The listed companies can use their securities as collateral. Hence, it can raise capital from financial institutions by keeping their securities as collateral.[xiii] The degree of assurance also increases while listing securities. Hence, the general public sees the share market as a safer way of investment.
Also, when the shares are listed, the company tends to be more visible to consumers. This adds to the overall value of the company nationally as well as internationally. Hence, it is mentioned that the listed companies can get finance easily as compared to listed companies. The Companies Act, 2013 assures that the company must be listed as the relevant provisions of the legislations.
Better Corporate Practice
When the company lists its securities on the stock exchange, it has to follow a certain code of conduct. This set of codes of conduct is enumerated by the Securities Exchange Board of India. If a listed company fails to comply with the code of conduct, it gets delisted from the stock exchange.[xiv] Hence, the listed companies are expected to follow fair corporate practices. In other words, the listed companies cannot follow any unfair trade practices.
Also, the accountability of listed companies is not ignorable. The listed company has to be transparent in its regular transactions. Better accountability leads to more growth of the listed company as compared to the unlisted company.
Compliance under Companies Act, 2013
The Companies Act, 2013 is the primary legislation which deals with the concept of Listed Companies. Beginning from the definition to the procedure; rights; obligations; the Companies Act deals with all the related aspects of the listed companies. Under the Companies Act, 2013, a listed company has to follow various compliances. These compliances are broadly mentioned as per the requirements of the company.
A listed company has to maintain compliances relating to list of members; annual returns; appointment of directors; voting rights; maintenance of records; annual general meeting; financial statements; auditing etc.
- Register of Members
The listed company has to maintain a register of list of shareholder/ debenture holders, bond holders. The list of members is maintained under Section 91[xv] of the Companies Act, 2013. This register has to be closed within forty five days of preparing list. The purpose[xvi] of closing register is to provide with the holders with interest, dividend and conducting annual general meeting.
- Annual Return
Section 92[xvii] of the Companies Act, 2013 deals with preparing the Annual Return. Every Listed company having paid up share capital of Rs. 10 crore or more and turnover of Rs. 25 crore or more is supposed to prepare and file annual returns. The company has to provide all the financial disclosures in such annual return.
- Appointment of Directors
Section 149(1) of the Companies Act, 2013 deals with appointment of women director. Every Listed Company with a paid capital of Rs. 100 Crore has to appoint a women director. Section 149 of the Companies Act, 2013 deals with appointment of independent director. Section 151 of the Companies Act, 2013 deals with appointment of small share holder director.
- Voting Rights
Section 108[xviii] of the Companies Act, 2013 deals with E-voting rights of the shareholders. Every listed company or a company having not less than one thousand shareholders, shall provide to its members facility to exercise their right to vote at general meetings by electronic means.
- Maintenance of Record
Section 120[xix] of the Companies Act, 2013 deals with maintenance of records in electronic form. Every listed company or a company having not less than one thousand shareholders, debenture holders and other security holders, shall maintain its records in electronic form which shall be in a readable format but cannot be tampered after affixing digital signature.
- Annual General Meeting Reports
Section 121[xx] and 134[xxi] of the Companies Act, 2013 deals with preparing AGM Reports by the company as well as directors. These reports are prepared for requirements and easement of the shareholders. Through these reports, the agenda of company is forwarded to the all the shareholders.
- Financial Statements
Section 136[xxii] of the Companies Act, 2013 deals with modes of sharing financial statements with the shareholders. According to this provision, the financial statement can be shared either through electronic mode or by dispatch of physical copies.
- Auditing
Section 138, 139, 177, 204 of the Companies Act, 2013 deals with the principles of auditing that a listed company needs to follow. The brief details of all the provisions is listed as follows:
Section 138 of the Companies Act, 2013 deals with Internal audit. Section 139 deals with Appointment of auditors. Section 177 deals with Audit Committee. According to this provision, every listed company has to constitute an audit committee[xxiii]. Section 204 deals with Secretarial audit for bigger companies. All these provisions deal with the auditing concept of the listed companies. They provide a specified set of rules that these companies have to adhere to while following auditing standards. All these standards are going to be dealt further under various heads.
Procedure followed for Listing Companies Under Companies Act 2013
Under the Companies Act, 2013, a company has to fulfil a proper procedure to list its shares on the stock exchange market. The company is expected to fill and submit various forms (either in physical form or electronically)[xxiv]. Hence, the procedure to list securities include documentations, listing of shares, raising capital and utilising that capital for prescribed purpose. These forms are highlighted by the company law legislations and are discussed below:
- Form MBP- 1- Disclosure of Interest by Board Members
The director has to disclose his interest in the company in the very first board meeting. This interest directly affects the regular operation of a listed company. Sec. 184(1) of the Companies Act, 2013 deals with the procedural aspect of this form. This form has to be filled by the director to comply with rules of incorporation of a listed company.
- Annual Returns Form MGT7
Under Section 92 of the Act, every listed company has to file its annual return. MGT 7 is an electronic form that is allocated to all the companies by the Ministry of Corporate Affairs for filing details of their annual return. It is highlighted the MCA that “The Registrar of Companies uses to maintain this e-form via electronic mode and on the basis of the statement of correctness given by the company.[xxv] It is a popular form among the companies which are required to file the form as per the norms and regulations of the ministry of corporate affairs.” In lieu of the Annual Report submission, the listed companies receives an annual report certificate through Form MGT-8.
- Financial Statement in Form AOC-4
Every listed company has to maintain financial statement[xxvi] under Section 136 and 137 of the Act. This financial statement has to be submitted via form AOC-4 to the MCA. The relevance of filing AOC-4 is to maintain consistency, transparency and efficiency in the regular company transaction.
- Report On AGM In Form MGT-15
As provided under Section 121(1) of the Companies Act, 2013 read with Rule 31(2) of the Companies (Management and Administration) Rules 2014[xxvii]; every listed public company shall prepare a report on the annual general meeting. This Annual Report has to be filed in less than 30 days from the completion of the Annual General Meeting. Every listed public company shall prepare a report on each annual general meeting including the confirmation to the effect that the meeting was convened, held and conducted and file the same in e- Form MGT-15 with ROC.
- Auditing MGT-14, CRA- 2, ADT-1
Sec 138 of the Act deals with the provision of Internal Auditor. Every listed company must have an internal auditor in its place who shall be a qualified Chartered Accountant, Cost Accountant, or Company Secretary. Audit committee fixes their remuneration, scope of work, roles & responsibilities, and periodic and timelines for conducting an internal audit.
Sec 139 deals with Rotation of Auditors.[xxviii] It states that every listed company shall have an individual auditor for only one term of 5 successive years and audit firm as its auditor for two terms of five consecutive years.
Under Sec 177, the Audit Committee comprises for the following classes of companies has to constitute an audit committee:
- Every listed company
- Every public company having paid-up share capital exceeding INR 10 Crore.
- Every public company having a turnover exceeding INR 100 Crore.
- Every public company having aggregate outstanding loans, debentures & deposit exceeding INR 50 Crore.
Sec 204 includes Secretarial Audit. It is states that every listed company shall get it done secretarial audit by a whole-time company secretary in practice. PCS gives it report in form MR-3, which has to be annexed with board report. Following classes of companies shall have to comply with this audit provision:
- Every listed company
- Every public company having paid-up share capital of INR 50 Crore
- Every public company having a turnover of INR 250 Crore.
Rights of Shareholders of Listed Companies
When the public becomes the shareholders of the company, then the public becomes duty bound to the company. Hence, when the people become the shareholders of the company, then they enjoy various rights under the companies act. People are also obligated to fulfil certain duties/obligations as per this Act. Hence, the Rights and Duties of shareholders are discussed as follows:
- Appointment of Directors
The most important role of shareholders is to appoint directors. The shareholders have to appoint additional director, alternative director, small shareholders director and nominee director.[xxix] These directors are appointed either by board resolution or some special resolution. The shareholders are also provided with a statutory right to take legal action against the directors. This right has been embodied under the Companies Act, 2013.
There are various conditions under which the legal action can be taken against the directors. These conditions[xxx] are discussed as follows: A director can work prejudice to the rules laid by the Act. A director can also conduct a fraud or work against the law. A director is involved in diversion of funds of the company. A director can also work in a malafide manner.
- Appointment of Auditors
The shareholders have the rights to appoint the Auditors of the company. The auditor is appointed at every annual general meeting by the shareholders. The company should intimate the auditor about the appointment within 7 days of such appointment. The auditor can accept or refuse the proposal of appointment anytime with 30 days of its appointment.[xxxi] The intimation to the Registrar about the acceptance / refusal of appointment is necessary only if the auditor / auditors are appointed in an annual general body meeting.
- Voting rights
Shareholders also have the right to attend and vote at the annual general body meeting. The Companies Act, 2013 has recognised various mode through which voting can be conducted by the listed company. These modes[xxxii] include voting by Show of hand; voting on poll; voting By Postal ballot; Voting through Electronic Means.
In Earnest Vs Loma Gold Mines Ltd.[xxxiii] it was held that “In the case of voting by Show of hands, every member has right to cast only one vote, irrespective of the number of shares he holds.” Hence, it is stated that all the modes are legally recognised. The company is obligated to conduct voting by any of these methods.
- Right to call for general meeting
Shareholders have the right to call a general meeting. They have a right to direct the director of a company to can all extraordinary general meeting.[xxxiv] They also can approach the Company Law Board for the conduction of general body meeting, if it is not done according to the statutory requirements.
- Receive Dividend on shares
A company can pay dividends for any financial year out of the profits of the company for that year arrived at after providing for depreciation or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed, or out of both.[xxxv] The declaration of dividends is subject to shareholder’s approval at an annual general meeting. Dividends are payable within 30 days from the date of the announcement.
Obligations of Shareholders Of Listed Companies
- Participate in general meeting of company.
Once a person becomes the shareholder of the company, the primary duty is to attend the AGM of the company. The regular operations of the company have to be taken care by the shareholders. In case the shareholder fails to attend the meeting, he shall send his proxy. But not attending the meeting is considered as negligence of the shareholder.
- Advice on matters related to corporate affairs
When the shareholders prescribe to the shares of the company, they become co-owners of the company. Being the co-owners of the company, it becomes a huge responsibility of the shareholders to advice and comment upon the regular corporate affairs.[xxxvi] The large shareholders can also initiate to corporate decision making.
- Consult matters related to finance
The shareholders are open to consult the management of company with regard to its financial decisions and regulations.[xxxvii] It is agreed that the shareholders cannot interrupt in all small matters of the company. But the shareholders play a major role to determine the big decision making of the company.
Recent Developments for Listing Securities Under Companies Act, 2013
The recent trends relating to listed companies have been embodied by the Companies (Amendment) Act, 2019[xxxviii]. It primarily includes enhanced punishments on non-compliances with the provisions of the Act. Also the Amendment Act has understood the demands of the present economy. The Act has allowed the companies to fulfil all its obligations through online mode. Hence, the recent developments are discussed as follows:
Under Section 92 of the Companies Act, 2013, the change has been incorporated w.r.t. Penal charges. It has been stated that “If any company fails to file its annual return, before the expiry of the period specified therein, such company and its every officer who is in default shall be liable to a penalty of fifty thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lakh rupees.”.
Under Section 121 of the Companies Act, 2013, the change has been incorporated w.r.t. Penal charges. It has been stated that “If the company fails to file the report under sub-Section (2) before the expiry of the period specified therein, such company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lakh rupees and every officer of the company who is in default shall be liable to a penalty which shall not be less than twenty-five thousand rupees and in case of continuing failure.”
Under Section 137 of the Companies Act, 2013, the change has been incorporated w.r.t. punishment. It has been stated that “the words “punishable with imprisonment”, and ending with the words “five lakh rupees or with both”, the words “shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lakh rupees”
Analysis And Suggestions
The concept of listing securities is an important aspect of the stock exchange market. The companies primarily make their shares available for public investment. The general public invests their money in the shares of the company. The people who invest their money in the share market are known as shareholders of that company. The listed companies have to fulfil various compliances before approaching the share market. These compliances are to be fulfilled through online documentation form.
It is analysed that the company law has ensured complete protection to the shareholders of the company. On the other hand, the company law made sure that the listed company also enjoys certain aspects before entering the share market. For instance: the listed company does not worry about the fund raising issue. The listed company can easily access loans for any financial institution etc.
ABOUT THE AUTHOR
Ishita Gupta is a practicing Advocate dealing in corporate matters. Her interest in corporate law inspires her to conduct intrinsic research and execute research writings in this field. She believes that her enthusiasm towards corporate law would allow her to understand this field in a better manner. She would like to contribute in the legal profession with the help of numerous publications. She would further like to get involved in the corporate industry while conducting the research in the same way in the coming years.
Edited by: Aashima Kakkar, Associate Editor, Law Insider
[i] Meaning of listing securities under stock exchange (Last Visited on September 21, 2021)
[ii] Section 2(52) of Companies Act 2013
[iii] Eligibility to list under BSE (Last Visited on September 21, 2021)
[iv] Eligibility to list under CSE (Last Visited on September 21, 2021)
[v] Eligibility to list under ICEX (Last Visited on September 21, 2021)
[vi] Eligibility to list under NCDEX (Last Visited on September 21, 2021)
[vii] Eligibility to list under NSE (Last Visited on September 21, 2021)
[viii] Difference between Listed and Unlisted company (Last Visited on September 21, 2021)
[ix] Difference between Listed and Unlisted company (Last Visited on September 21, 2021)
[x] Difference between Listed and Unlisted company (Last Visited on September 21, 2021)
[xi] Difference between listed and unlisted (Last Visited on September 21, 2021)
[xii] Benefits of listing company under stock exchange (Last Visited on September 21, 2021)
[xiii] Benefits of listing (Last Visited on September 22, 2021)
[xiv] Benefits of listing (Last Visited on September 22, 2021)
[xv]Section 91 of the Companies Act, 2013
[xvi] Purpose of creating list of members (Last Visited on September 22, 2021)
[xvii] Section 92 of the Companies Act, 2013
[xviii] Section 108 of the Companies Act, 2013
[xix] Section 120 of the Companies Act, 2013
[xx] Section 121 of the Companies Act, 2013
[xxi] Section 134 of the Companies Act, 2013
[xxii] Section 136 of the Companies Act, 2013
[xxiii] Compliances of Listed Companies (Last Visited on September 22, 2021)
[xxiv] Compliances of Listed Companies (Last Visited on September 22, 2021)
[xxv] Annual returns form (Last Visited on September 23, 2021)
[xxvi] Details of form AOC 4 (Last Visited on September 23, 2021)
[xxvii] Details of form MGT (Last Visited on September 23, 2021)
[xxviii] Rotation of auditors (Last Visited on September 23, 2021)
[xxix] Appointment of directors (Last Visited on September 23, 2021)
[xxx] Rights and duties of shareholders (Last Visited on September 23, 2021)
[xxxi] Appointment of Auditors (Last Visited on September 23, 2021)
[xxxii] Modes of voting rights (Last Visited on September 23, 2021)
[xxxiii] Earnest Vs Loma Gold Mines Ltd (1897) 1CH 1 (CA)
[xxxiv] Rights and duties of shareholders (Last Visited on September 25, 2021)
[xxxv] Shareholders rights (Last Visited on September 25, 2021)
[xxxvi] Supra 34 (Last Visited on September 25, 2021)
[xxxvii] Duties of shareholders (Last Visited on September 25, 2021)
[xxxviii] The Companies (Amendment) Act, 2019