The third article in the "In My View" series. Please feel free to leave a comment.

1. Why Do Companies List – In My View
If you are someone who is “in touch” with the financial world, two words that you will hear,
quite frequently, are “listed company”(orit’s plural of listed companies). A typical line in
business news is “Company X, which is listed in the …… Stock Exchange….” So what exactly is
a listed company? It is a company that is included in the official list of an accepted stock
exchange. In other words, the securities of the company, such as its shares or debentures,
are publicly traded in a stock exchange. An internet search of “Stock Exchange” will provide
more information.
So the next big question… why do companies list? Why is it necessary for them to be
included in an exchange? While a vast amount of literature is available out there on this
topic, I’ll just discuss the following fivepoints:
1. Find Capital
A company will need capital for its day to day running, for expansion and for
restructuring. A company can find this capital by issuing shares or debentures to the
public. When a company lists on a stock exchange for the purpose of finding capital,
it will have access to a much larger investor base, both retail and institutional. In
comparison, a private placement of shares or debentures, will only give access to a
limited number of investors.
Investors, both old and new, who are looking for investment avenues, can buy the
shares or debentures that are issued, after evaluating the growth prospects of the
company carefully.
The shares or debentures that are listed in an exchange are publicly traded; the
importance of this is explained in the next point.
2. Price Discovery
The shares or debentures that are listed will be publicly traded, which means that
there will be investors who are buying (those who think it is a good investment) and
selling (those who think it is overvalued). All the buying and selling prices are public
information. This means that these are available for public scrutiny via stock
exchange websites and publications, business media and research reports.
This is an advantage for both the investors and the listed companies as their
securities will have an acceptable “public” price which can be used in the valuation.
Investors can value the shares or debentures that they hold which will help them to
know the market value of their investment while the listed company will know its
worth.
If a “public” price did not exist, valuations can still be done but these will be quite
subjective as information will be from sources that are not available to everyone.
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2. 3. Transparency
When a company lists its securities in an exchange, it will have to abide by the
exchanges’ continuous listing requirements. Continuous listing requirements give
the requirements that a company will have to follow, in order to be included in the
official list of the exchange. These differ from country to country but generally
include rules for the filing of financial statements, disclosing of vital information such
as changes in the Board of Directors and changes in its business activities. All this
information is publicly available via the exchanges’ or other websites and
publications including the media.
This will improve the transparency of a company as the public will know its inner
workings. This transparency factor could help when the company is looking for new
investors or partnerships. It could also improve the public image of the company and
add value to its CSR (Corporate Social Responsibility) activities.
4. Regulatory Requirement
The regulator for a particular industry can mandate all the companies under its
purview to list in an exchange for reasons such as transparency or under special
circumstances such as when the company exceeds a specific number of investors.
This is done as investors’ money is invested in the company and as such, the
company is accountable to the investors (when transparency is needed to assure
investor confidence).
5. Other Reasons
There are other reasons for a company to list such as an exit mechanism for the
founders and as a way to separate ownership and management. The founders of a
company can list the company in an exchange; sell their shares to other investors
and retire with the money or simply invest it elsewhere.
A listed company can have a professional management team, particularly as its
public image can make recruitment easier, which will enable its founders or owners
to concentrate on other interests or investments and leave the daily running of the
company in the hands of professionals.
Hope this helps.
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