COMPANY LAW

PROJECT
TOPIIC:

LEGAL PROVISIONS REGARDING

LISTING AND DE LISTING OF
SECURITIES

MADE BY: PRITHVI YADAV

COURSE: B.A.LLB(H)
ENROLLMENT NUMBER: A11911115068
 ABSTRACT

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 company1. 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 business2.
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.

LISTING
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.
Listing means admission of securities to dealings on a recognized stock exchange. The securities
may be of any public limited company, Central or State Government, quasi-governmental and
other financial institutions/corporations, municipalities, etc.

OBJECTIVES

1) provide liquidity to securities;

2) mobilize savings for economic development;
3) protect interest of investors by ensuring full disclosures.
A company, desirous of listing its securities on the Exchange, shall be required to file an
application, in the prescribed form, with the Exchange before issue of Prospectus by the
company, where the securities are issued by way of a prospectus or before issue of ‘Offer for
Sale’, where the securities are issued by way of an offer for sale.

Delisting of securities means permanent removal of securities of a listed company from the stock
exchange where it was registered. As a result of this, the company would no longer be traded at
that stock exchange.

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 public3.
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

3 Raymond Synthetics Ltd. v. Union of India1992 (1) BomCR 133

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. 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 5which 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 6provides 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 investors point of view. Thus, the ultimate of the regulatory
compliance is to boost the investments in the stock market by making it investor friendly.

DELISTING

4 Stock Exchange Board of India

5 S. 2(j), Securities Contracts (Regulation) Act, 1956.

6 Clause 49, Listing Agreement for Equity Shares

Delisting of securities means removal of the securities of a listed company from the stock
exchange. It may happen either when the company does not comply with the guidelines of the
stock exchange, or that the company has not witnessed trading for years, or that it voluntary
wants to get delisted or in case of merger or acquisition of a company with/by some other
company. So, broadly it can be classified under two head:

1. Compulsory delisting.
2. Voluntary delisting.

Compulsory delisting refers to permanent removal of securities of a listed company from a

stock exchange as a penalizing measure at the behest of the stock exchange for not making
submissions/comply with various requirements set out in the Listing agreement within the time
frames prescribed. In voluntary delisting, a listed company decides on its own to permanently
remove its securities from a stock exchange. This happens mainly due to merger or
amalgamation of one company with the other or due to the non-performance of the shares on the
particular exchange in the market.

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.). In case of delisting the Company is always given a fair
hearing before proceeding with the formalities7. 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 mentioned8. 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 delisting9. 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 Company10. 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.

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
7 CSR Act, Section 21A

8 Rule 10(1), 2009 Guidelines

9 Rule 8, 2009 Guidelines

10 Rule 4[4], 2009 Guidelines

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. 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 value values the fair price of shares in case of compulsory
delisting11. It is therefore seen that ample opportunity is given to the investors to claim against
compulsory delisting. However, the interests of the stock exchange seem to be the primary aim
of compulsory delisting.

CONCLUSION

There is a penalty of maximum Rs. 25 crores and/or a year of imprisonment, for violation of
rules for listing and delisting procedures12. Although some companies can afford such a loss, it

11 Rule 23(1), 2009 Guidelines

12 Section 23(1) SCR Act

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 it selves 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.
There was a time not very long ago when there was no regulating agency like SEBI. Trading was
done then also but then it was a one-way route. Every company that issues shares to the public is
required to have its shares listed on a recognised stock exchange. In 1956, the Government of
India enacted a law called Securities Contracts (Regulations), 1956, which came into force with
effect from February 1957. Among other things, this law regulated operations of stock exchanges
and listing of public issues. The Controller of Capital Issues fixed the price of shares issued by
any company. Normally, the Controller used to permit a small premium that could be charged by
a company while issuing shares to the public.

However, with the changing economic scenario and with the opening up of the Indian economy,
the country witnessed huge influx of foreign capital. This resulted in growth in the number of
listing of companies on the stock exchanges. Alternatively, it also laid to demand from several
India-based MNCs that they should be permitted to delist their shares. The reason remains the
non-performance of the shares on the stock exchange and in case of merger and acquisition of
one company with the other. To consider the prevailing position in respect of delisting, SEBI
appointed a committee to study the whole issue and, as a result, issued guidelines for delisting of
securities in 2003.