Last Updated on September 20, 2023 by BFSLTeam BFSLTeam
A company is listed on a stock exchange after a successful Initial Public Offering. However, such listings are not always permanent. There have been many instances where companies listed on a stock exchange have been subsequently delisted. Delisting of shares impacts both the company and the investors significantly.
Therefore, it is crucial to know why such an action might be undertaken and under what circumstances. This can help you be better prepared if you’re ever to encounter such a situation during your trading or investment journey. So, here’s everything you need to know about the delisting of shares.
Table of Content
Delisting of shares is the act of removing a listed company from a stock exchange. Once a company’s shares are delisted, they cannot be bought or sold online through the exchanges. The Securities and Exchange Board of India (SEBI) has formulated certain specific guidelines for the delisting of shares.
There are two different types of delisting – voluntary delisting and mandatory delisting. Here’s a closer look at each type.
- Voluntary Delisting
A voluntary delisting happens when a company, on its own, approaches the stock exchange and files a request for the delisting of its shares.
- Involuntary or Mandatory Delisting
An involuntary or mandatory delisting happens when the stock exchange, on its own, decides to remove the shares of the company from the exchange.
A company’s shares may be delisted from the stock exchange for a plethora of different reasons. As an investor, it is crucial for you to know what they are. Now that you’ve seen what the delisting of shares is, let’s look at a few key reasons why this might happen.
- Non-Compliance of Listing Regulations
Stock exchanges have certain listing rules and regulations a company must follow to be listed. Failure to meet these regulations can lead to the exchanges delisting the company’s shares. Falling below the minimum share price or market capitalisation and failing to publish its financial reports on time are two of the most common reasons for the involuntary delisting of shares.
- Financial Issues or Bankruptcy
A company that’s facing financial troubles like high debt, little to no sales or revenue or consistent losses can have their shares delisted from the exchanges. Additionally, stock exchanges may also mandatorily delist companies that have filed for bankruptcy or are under the process of significant restructuring.
- Low Liquidity
Stock exchanges generally have minimum liquidity and trading volume levels that every listed company is required to meet. If a company’s shares have been consistently exhibiting low trading volumes, the exchanges may end up delisting its shares.
- Failure to Meet Corporate Governance Standards
Corporate governance issues are something that stock exchanges take very seriously. For instance, if a company is found to be contravening corporate governance standards such as non-appointment of the required number of independent directors or an audit committee, the process for delisting of shares may be initiated by the exchanges.
- Privatisation of the Company
Sometimes a publicly listed company may want to become a private entity once again. In such situations, the said company desirous of going private may apply for delisting of shares with the stock exchanges.
- Mergers or Amalgamations
A company may voluntarily opt to delist its shares from the stock exchanges if it is being merged or amalgamated with another entity. That said, this is usually done only if the company ceases to exist due to the said merger or amalgamation.
Additional Read: What are Authorized Stocks?
Delisting of shares of a company is rarely favourable to shareholders since it makes exiting very challenging. That said, there may be situations where you might be left holding the shares of a company that’s either in the process of delisting or has already been delisted. In such cases, here’s what you can do.
- Offload Via Reverse Book Building
In the case of voluntary delisting of shares, most companies often conduct an extensive process known as reverse book building. The process starts with the company announcing a buyback of shares of investors. Interested investors can offer their shares via a bidding process, much like an Initial Public Offering.
The final cut-off price is determined by the company after taking into account all of the bids received. Once the cut-off price is determined, the company will buy back all the investors who offered their shares at or below the cut-off price. The reverse book-building process is deemed successful if the company buys back the requisite number of shares required for the delisting of shares.
If the company you’re invested in opts to voluntarily delist its shares, offloading your shares via the reverse book-building process is a good way to make a clean exit. To ensure you qualify for the buyback, make sure to select the cut-off price option when bidding.
- Attempt to Sell via the OTC market
If you miss the reverse book-building process or the exit window, you can attempt to sell the delisted company’s shares through the OTC market. The OTC market, also known as the Over-The-Counter market, is an informal marketplace where investors buy and sell shares outside the ambit of the stock exchanges.
That said, buying or selling shares via the OTC market can be very challenging since there are no regulations or entities governing it. Also, finding a buyer for delisted shares can be very tough since most investors would not want to purchase shares that are basically illiquid. In some cases, you might even be forced to sell the shares for a fraction of the cost.
- Continue to Hold Your Shares
Alternatively, you can continue to hold onto your shares even if the company has been delisted from the stock exchanges. In some cases, a company that’s been delisted from the exchanges due to minor transgressions may be relisted once again. You can hold onto the shares until the company is relisted once again, at which point you can exit by selling your stake on the exchange.
Additional Read: What is a Stock Symbol?
Can a Delisted Stock be Relisted Once Again?
Yes. The Securities and Exchange Board of India (SEBI) has laid out certain specific guidelines for relisting of shares.
- In the case of voluntary delisting of shares, a company can only apply for relisting of its shares on exchanges after the expiry of 5 years from the date of delisting.
- In the case of involuntary or mandatory delisting, a company can only apply for relisting after the expiry of 10 years from the date of delisting.
Conclusion
Delisting, whether voluntary or involuntary, is disadvantageous for both the company and the investors. Purchasing and especially selling shares becomes very challenging once the delisting of shares happens. Therefore, if you hold shares of a company going through a voluntary delisting process, it is advisable to offload your stake within the specified exit window through the reverse book-building process. Missing this short exit window can severely dent your prospects of being able to offload your stake.
If, by any chance, you do miss the exit window, consider selling the shares through the OTC market even if it means having to book a loss. Holding on to the company’s shares in the hopes of it being relisted again is not advisable since there’s usually very little chance of a delisted company applying for relisting once again.
