Listed and Unlisted Companies

Introduction:

A public company, in simple terms, refers to any company which has given the opportunity to the general public for a claim to ownership via open distribution of shares and stocks. Various investors start to purchase those shares, and the moment the process of buying and selling commences, those shares adorn the higher personality of securities.

In simple terms, securities are any financial instruments, be it stocks or bonds, that is tradable. It is best described as a certificate, which represents a contract between two or more people, with a promise of a cash flow type consideration in return, under certain circumstances.

One of the key elements of any security is its transferability and can represent ownership or a debt (can be both as well).

In the legal sense, securities, according to Section 2(81) of the Companies Act, 2013, refers to securities as defined in clause (h) of Section 2 of Securities (Contracts) Regulations Act, 1956.

However, this definition is highly vague. Therefore, it is imperative to understand the definition given in the latter Act, which states that:

“Securities include:

1. Shares, scrips, stocks, bonds, debentures, debenture stock or marketable securities of a like nature in or of any incorporated company or other body corporate;
2. Derivative;
3. Units of any other instrument issued by any collective instrument scheme to the investors in such schemes;
4. Security receipt as defined in clause (zg) of Section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
5. Units or any other such instrument issued to the investors under any mutual fund scheme;
6. Any certificate or instrument, issued to an investor by an issuer being a special purpose distinct entity which possesses any debt receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable including mortgage debt, as the case may be;
7. Government securities;
8. Such other instruments as may be declared by the Central Government to be securities;
9. Rights or interest in securities.”

Securities can belong to both capital and money markets, and their key aspect is their marketability.

This can be better explained with the case DahibanUnedbhai Patel v Norman James Hamilton[1], where it was held that a reading of Section 2(h) of the Securities (Contracts) Regulation Act, 1956 clarifies that the Legislature has enumerated different kinds of securities and by way of a residuary clause used the words “or other marketable securities of a like nature”. The use of these words was clearly intended to mean that the earlier categories of securities had to be marketable and any other securities of “like nature”, like those which were categorized or enumerated earlier, were also to be marketable before they could be held to fall within the definition of “securities”.

Another case that explains this concept is Naresh K. Aggarwala and Co. Canbank Financial Services Ltd.[2], in which it was held that Section 2(h) of the Securities Contracts (Regulation) Act, 1956, gives emphasis to the words “other marketable securities”, giving an expansive meaning to the word “securities” and gives a clear indication of the marketability of the securities. It also includes hybrid instruments.

Hybrid instruments, a new addition to the current definition in Section 2(h), is best explained in Sahara India Real Estate Corporations Ltd. v. Securities and Exchange Board of India[3], where it was held that a combination of debt instruments and security instruments is known as “hybrid instruments”, and would also qualify as “security” if it is marketable.

Listing of a Security

The listing of security refers to the admission of those securities on a recognized stock company and can be of any public limited company, Central or State Government, quasi-governmental and other financial institutions, corporations, etc.

The listing provides liquidity to securities, mobilizes savings for economic development and protects the interest of investors by ensuring full disclosure.

The stock exchange releases a list of various companies which are eligible to trade in these securities, and once a company gets itself registered in that list in order to qualify as a recognized entity in the stock exchange, that company will be labelled as a listed company, and those who choose not to get themselves registered are labelled as an unlisted company.

Public Listed Companies

Once a public company starts to openly distribute its securities, it needs to enlist itself in recognized stock exchange to increase its potential investors, thereby creating a bigger presence in the market.

The moment it is successfully a member of the stock exchange, it becomes a public limited company, also known as a listed company.

According to Section 2(52) of the Companies Act, a listed company refers to a company that has any of its securities listed on any recognized stock exchange.

Therefore, a listed company is a company that, after following various pre-requisites, is included and traded on a particular stock exchange.

A private company needs to convert to a public one to sell its shares to the general public, and once its company goes public, it can register with any recognized stock exchange, however, a public company need not always be listed.

The investors, once they purchase shares and securities of a listed company, become shareholders of the company.

Once a company becomes listed, it re-affirms an investor’s faith that they are making the right decision by investing their company in the securities market, as it is assumed that if a company is listed on any recognized stock exchange, it is financially sound, has high profits, and other affairs of the company are in sound and favourable conditions.

Under Section 21 of the Securities Contracts (Regulation) Act, 1956, the Central Government has made a mandate for public limited companies to get all of their securities listed on any of the stock exchanges in the country.

If a company shows any interest in getting its securities listed, an application needs to be filed before the prospectus gets issued, if the mode of issuing the securities is to be mentioned in the prospectus.

A listed company’s decisions are taken by the Board of Directors, which is comprised of both executive and non-executive directors, and are appointed by the shareholders.

Compliance Followed by Listed Companies

While a listed company may enjoy certain benefits once its securities are trading in the stock exchange before it can get itself listed, a company needs to comply with certain provisions which are as follows:

• Section 21 of the Securities Contracts (Regulation) Act, 1956 refers to the listing of public companies and states that where securities are listed on the application of any person in any recognized stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.
• Section 23(1) of the Companies Act, 2013 states that a public company may issue securities either to the public through prospectus, or through private placement, or through a rights issue or a bonus issue.
• Section 91 of the Companies Act, 2013 states the time as to when the register of members needs to be closed, the time period not exceeding an aggregate of forty-five days in a year or thirty days in one time, subject to giving of a previous notice of at least seven days or lesser period as specified as SEBI.
• Section 108 of the Companies Act provides the right to a listed company’s members and shareholders to vote at all general meetings through electronic means.

Unlisted Companies: A Murky Concept

While there is no legal definition for an unlisted company, through various sources, it can be deduced that an unlisted company is a public company that is not listed in any stock exchange due to it not having any limited number of shares.

Therefore, it can have an unlimited number of shareholders for raising capital for any commercial venture.

All the companies, other than the Companies Act, 2013, also abide with Rules of Unlisted Public Companies (Preferential Allocation), 2003, which control the mode of issuing shares, fully convertible bonds, partially convertible bonds, and other forms of securities via private placement.

Any investor in any public unlisted company enjoys the following rights:

• Right to request information of the proposed private placement
• Right to reserve the knowledge that buying shares of the company does not mean that those shares will be included in the list.
• Right to reserve the liability that the directors offering shares in a private placement do not incur any liability if they have complied with the provisions of the Companies Act.
• Right to sue if the private placement is misleading or if the directors have committed fraud with the investors.

Compliances for Unlisted Public Companies

• Section 173 of the Companies Act illustrates Board meetings, which, in this case, refer to discussions related to appointment or reappointment of auditor or any such related issues, and it states that these discussions need to be conducted four times a year.
• Section 148(3) of the Companies Act refers to the appointment of a cost auditor and states that when a cost auditor is appointed, the Central Government needs to be intimated regarding this, and the original appointment is to be decided within 30 days of a board meeting or 180 days of the financial year (whichever is earlier).
• Section 135 of the Companies Act states that a CSR committee needs to be created for the sole purpose of holding meetings to approve CSR activities, and in order to decide this, four board meetings, with a gap of not less than 120 days between two board meetings, need to be conducted.

Difference Between Listed and Unlisted Companies

Both being mainly public companies, with the same profit maximization motive, there is not much difference between the two types of companies:

On the basis of definition, a listed company is a sort of company that has securities registered in the stock market, it is codified under the Companies Act, 2013, however, an unlisted company is a sort of company that does not have any securities registered, and it does not have a codified meaning.

On the basis of the type of company, a listed company has to be public limited, while unlisted can be either public or private.

On the basis of ownership, a listed company is owned by many shareholders, while an unlisted company is usually owned by private investors.

Lastly, on the basis of shares, a listed company has to ensure that their shares are liquid, ready to be traded, while an unlisted company does not have a readily available market, therefore the liquidity cannot be determined.

Conclusion

A public company is a company which, according to its prospectus, offers shares to the general public, and invites investors for taking up the position as shareholders. A public limited company is more of a subsidiary to the public company, in the sense that it has limited liability.

On the basis of securities, it is divided into two: a listed company, which refers to any company which is a registered member of any recognized stock exchange, while an unlisted company doesn’t.

However, despite the differences, all listed and unlisted companies are governed by three primary bare acts, after the Companies Act, 2013: Securities and Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, and Depositories Act, 1996.

References:

• Krishan Keshav, Investment and Competition Law (Singhal Law Publications, 5^thedn. (2021))
• CS Divesh Goyal, Compliances for Listed Company under Companies Act, 2013, TAXGURU, https://taxguru.in/company-law/compliances-listed-company-companies-act-2013.html
• Sudarshana Thapa, Difference between Listed and Unlisted Company, IPLEADERS, https://blog.ipleaders.in/listed-and-unlisted-company/
• Dili, Difference between Listed and Unlisted Company, DIFFERENCEBETWEEN.COM, https://www.differencebetween.com/difference-between-listed-and-vs-unlisted-company/
• Aakanksha Negi, Unlisted Public Company and its Compliance, TAXGURU, https://taxguru.in/company-law/unlisted-public-limited-company-compliance.html
• Deepti Shikha, Annual Compliance of a Public Limited Company: Rules and Procedures, CORPBIZ, https://corpbiz.io/learning/annual-compliance-of-a-public-limited-company/
• Vinay Ranjan, Listing and Delisting of Securities, LEGAL SERVICES INDIA, http://www.legalserviceindia.com/article/l329-Listing-&-Delisting-Of-Securities.html

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Other Sources:

[1][1985] 57 Comp. Cas. 700 (Bom.)

[2] (2010) 6 SCC 178

[3] (2013) 1 SCC 1