What is Primary Listing?
Imagine a world without any stock exchanges, and how difficult it would have been for companies to raise money from the public at large or investors to grow their wealth. Before the existence of the Bombay Stock Exchange (BSE) in 1875 India, people used to loan out to others in close circles, now popularly known as the Over-the-counter (OTC) trades. Exchanges made it easier for people to reach the masses. stock exchanges make the life of both the fund-raiser and the investors easier.
But, how are the companies listed? How do we purchase the shares of a company on a stock exchange? When does a company first trade on a stock exchange? This article answers these questions along with what primary listing is.
Primary Listing
The first time a company’s share appears on a stock exchanges is called the primary listing. This is where a company offers part of its share to the public via equity. It is provided essentially through the Initial Public Offering or the IPO in the primary market.
A company must meet strict financial and regulatory criteria for a primary listing. A primary listing with a reputed exchange means that the company has high-quality security and the issuer is reputable too. Additionally, the company lists itself on different stock exchanges to improve its liquidity and reach through a secondary listing.
Primary listing is a widely-accepted phenomenon in the US. However, companies going public in India mostly opt for dual listing or cross-listing due to the availability of more capital and higher liquidity. In India, the majority of companies opting for an IPO appear on both NSE and BSE together on a listing day. These are the two of the most popular exchanges in India. Apple, on the other hand, trades only on NASDAQ and not on NYSE. NASDAQ and NYSE are the two most important exchanges in the US.
Companies need to fulfil specific requirements to acquire a public listing. The requirements to list security on the National Stock Exchange (NSE) include but are not limited to:
- Paid-up Capital: The minimum paid-up equity capital of the applicant company should be INR 10 crores. The minimum capitalization of the company should be INR 25 crores.
- Prerequisites for listing: The applicant must have adhered to the requirements stated under the Securities Contract (Regulations) Act 1956, Companies Act 1956 and 2013, Securities and Exchange Board of India Act 1992, and any other guidelines, circulars, clarifications issued by the concerned authorities.
- Record: The issuer company/promoter company/partnership firm should maintain a profit-making track record of at least three years.
- Net Worth: Net worth of the applicant should be positive. However, this criteria does not apply to companies with a proposed issue size of more than INR 500 crores.
How does Primary Listing work?
The companies that are willing to raise money from the public list their equity on a popular medium known as the stock exchange. This process of listing part of the issuer company is known as the Initial Public Offering (IPO). After the IPO, the shares of the company can be traded on a listed exchange.
A company lists its share on various stock exchanges to increase investor reach and liquidity. An investment bank assists the company in listing its shares at a high value with a decent price on the most prominent exchange first. According to the definition of primary listing, it is the first stock exchange where a publically-traded company’s shares are listed. Listings on other exchanges afterwards are known as the secondary exchange.
Advantages of Listing on an Exchange
Listing the shares of a company on exchange is considered a huge milestone. Apart from that, the advantages of turning a private company into a public company include:
- Potential to raise funds from retail investors by allowing them to buy equity
- Saving on the cost of debt which is higher than raising capital via equity distribution
- A medium to take advantage of equity and not just cash to buy other companies
- Provides a channel for the existing investors to exit
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Frequently Asked Questions
Ans: Primary listing is the first appearance of a publically-traded stock on an exchange.
Ans: Primary listing is the first time a stock trades on an exchange. Secondary listing is the consequent listing of the security in another stock exchange.
Ans: No, it is not mandatory to have a division between the primary listing and the secondary listing. Companies can choose to go public simultaneously on more than one exchange, given they meet the exchange criteria.
Ans: Primary listing refers to the listing of a company on an exchange for the first time; the primary market is where the new stocks are sold to the public for the first time.
Ans: Listing a company on an exchange may be a gateway for the existing investors to exit. It also helps to raise capital and increases the visibility and scalability of the company.
Ans: A company needs to fulfil certain criteria to get listed on an exchange. If a company does not meet the criteria for exchange listing, it can trade on the over-the-counter (OTC) market which is not subject to the same regulations as the exchanges.