You might have heard of many companies turning public and getting listed through an IPO in the stock market. But have you heard of companies being listed on the stock exchange WITHOUT an IPO? Let’s find out about this.
Through certain provisions, a company can get listed in the stock market without going through the process of IPO.
Recently, Vodafone India merged with Idea Cellular Ltd. Vodafone was not listed in the stock market before this merger but as Idea was already in the market, the new company Vodafone Idea Ltd. got listed through Idea Ltd. Thus, Vodafone didn’t have to go through any IPO process to get listed. This is known as back door listing/reverse listing/reverse merger.
Backdoor Listing
In the above example, both the companies were equal and thus Vodafone getting listed in the market was even acceptable this way. But in several cases, some companies leaned on smaller listed companies just to get listed in the market. This is done for several reasons.
- If the company doesn’t fulfil SEBI criteria for listing on the stock market or conducting an IPO, it takes the route of backdoor listing. For example, XYZ Company wants to get listed in the market but does not have 3 financial years worth Rs. 75 crores. The company might try and get listed in other ways.
- IPO is a very long, expensive and time taking process. If a company doesn’t want to take the hassle of this long process, it might want to list through back door.
- When an IPO is conducted, all the details of a company are thoroughly checked. If there are some loopholes and faults in the company and its working, it might want to hide them by getting listed directly.
Although a back-door listing gives unlisted companies a chance to stand in the market, it tends to hide a lot of backlogs from this method.
No Prospectus and Underwriting
As the company doesn’t go through the process of IPO, it doesn’t have a prospectus. Thus, if you think of investing in it, you might not be able to analyse the company so well. You may also not know if the company has unpaid debts. Thus, there are chances of fraud in this type of company.
There is also a reputation loss when a company performs a backdoor listing. It becomes suspicious for investors.
Preventive Measures by SEBI
As these kinds of companies may increase fraud and disrupt the stability of the market, SEBI (Securities and Exchange Board of India) has taken several steps.
After the guidelines of 2017, the QIB (Qualified Institutional Buyers) of the unlisted company and the shareholding of the pre-listed company should not be less than 25%. Also, SEBI mandates the approval of public shareholders of the pre-listed company before any kind of merger.
Conclusion
Back-door listing is sometimes an unethical way for a company to get into the stock market. It is even termed as a ‘poor man’s IPO’.
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