What Happens After A Company Gets Delisted?

Key Highlights

• Delisting is a procedure that corporations on stock exchanges might go through voluntarily or involuntarily off from public market.

• When a firm doesn't satisfy the minimum requirements specified by the exchange, frequently as a result of circumstances, involuntary delisting takes place.

• Companies may also voluntarily want to be delisted, usually when they decide the drawbacks of continuing to be publicly traded go beyond the advantages.

• Companies that had previously been split up may choose to delist themselves voluntarily as a result of mergers and the creation of new entities.

What Is It?

Delisting is the process of removing a security from a stock exchange. This removal can take place freely or involuntarily and often occurs when a business ceases operations, declares bankruptcy, merges, fails to meet the listing requirements of the exchange or decides to become a private corporation.

In order to get a listing on an exchange, businesses need to stick to strict guidelines known as listing requirements. Each exchange creates a unique set of rules and requirements for possible listings. Companies that don't meet an exchange's basic standards risk being delisted in the share market without their consent. The share price is the most frequently used factor. For instance, Think about a company whose shares are trading too low. For instance , let's say there's a company called "XYZ Ltd" listed on the National Stock Exchange (NSE). The price of their shares has been consistently below ₹10 for a while, which could lead to them being removed from the NSE.

Instead of waiting for that, XYZ Ltd may decide to act. They evaluate all the costs and benefits of being a publicly traded company. If they realize that the expenses, like following rules and regulations, are more than the advantages, such as getting money from the stock market, they might choose to willingly leave the stock exchange. This means they become a private company again and stop selling their shares on the NSE.

When private equity firms buy businesses with the intention of restructuring them with new stakeholders, delisting requests are frequently submitted. These companies can ask to be delisted in the share market in order to go to private trading. In addition, listed firms that merge and start trading as a new entity may voluntarily ask to be delisted in order to streamline operations.

Depending on whether a stock is delisted from a stock exchange voluntarily or involuntarily, the consequences for shareholders may be profound. After comprehending the delisting meaning, we will look at the following two scenarios main effects on shareholders:

Involuntary Delisting

Loss of Liquidity: Imagine you have a special toy, but suddenly, no one wants to trade or buy it. This can happen to a company's stock if it's removed from the stock market without their choice. This usually happens because the company didn't follow the rules of the stock market. So, it becomes tricky for people who own the stock to find someone to buy or sell it to, like having a toy that no one wants to play with.

b) Market Problems: Sometimes, companies have financial troubles, like not making enough money, and their stock price goes down a lot. When this happens, the stock market might say they have to leave. It's like when a student has trouble with their homework and has to leave class for a while.

c) Less Information: When a company is removed from the stock market, they don't have to tell their owners (shareholders) as much about how they're doing. This means shareholders might not know what's happening with the company, which can make them feel unsure or not sure about what's going on.

d) Risk of Losing Everything: In some cases, especially when a company doesn't have enough money to pay its bills (like when they're bankrupt), people who put their money into that company might lose all of it. This happens because the company's things and funds are used to pay the people they owe, and there's nothing left for the regular shareholders.

Voluntary Delisting

a) Being Bought: Sometimes, a company decides to leave the stock market because another company, like a private equity firm, buys it. They might offer shareholders more money for their stock than it's worth so shareholders can make a profit.

b) Fewer Places to Trade: After a voluntary delisting, the company's stock can still be traded, but not on the regular stock market. There are fewer places to change it, so it might be more challenging for shareholders to buy or sell their shares.

c) Less Reporting: When a company decides to leave the stock market alone, they don't have to tell the public as much about its finances and operations. Shareholders might get less information.

In both cases, shareholders need to think about the specific details of the Delisting and talk to financial experts. The impact on shareholders can differ depending on the company's situation and why they leave the stock market.

What Are Common Reasons Companies Get Delisted?

There are a few common reasons why companies get kicked off stock exchanges. Here's what they are:

• Money Troubles: When a company is not doing well financially, like if they're not selling enough stuff or making enough money, they can get delisted. If they can't keep up with their money reports or pay their debts, they might also get kicked out because they can't give investors a clear picture of how they're doing financially.

• Low Stock Price: If a company's stock is worth very little and it keeps staying that way, the exchange may remove them. A super low stock price can make it hard for the company to raise money and compete with other businesses. It can also show that investors don't have much confidence in the company, and it might have trouble turning its assets into cash.

• Not Enough Value: Exchanges often say companies need to be worth a certain amount. If a company's overall worth drops below that amount, they could get delisted.

• Breaking the Rules: Companies have to follow the rules of the exchange and the law. If they do things like insider trading (people inside the company buy or sell stock based on secret info), use tricky accounting, lie about their finances, or do other bad stuff, they could get kicked off the exchange.

• Not Paying the Bills: Companies need to pay fees to stay on the exchange. If they don't pay these fees, it can show they're not interested in being on the exchange or helping the exchange work properly. So, they might get delisted.

• Illegal Behavior: The company or its management may be delisted if they engage in illegal activity, such as accounting fraud, embezzlement, or other wrongdoing. Such behaviors harm the company's brand in addition to posing major legal and regulatory issues.

The substantial occurrence of delisting has an impact on a company's ability to acquire financing, investor confidence, and general market position. Typically, businesses work to keep their listing status in order to be competitive and in compliance with regulatory regulations.

On the official BSE and NSE websites, you can view a list of the stocks that have been delisted. A few businesses that have been delisted are listed below:

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions.

Do Businesses Benefit When Their Stocks are Delisted?

Delisting a company's shares may be advantageous for them, but this will mostly rely on their unique circumstances and goals. Here are various advantages on why a business might decide to delist its stocks:

• Decreased Compliance with Rules Costs: Financial reporting and transparency duties are only two of the many regulatory requirements that apply to publicly traded organizations. Delisting can lower the expenses related to complying with these criteria.

• Enhanced Security: Public companies must disclose extensive financial and operational information to the public, which occasionally puts them at a competitive disadvantage.

• Flexibility and Autonomy: Public companies are often subject to the demands and expectations of shareholders and market analysts. Delisting can provide greater autonomy in decision-making without the pressure of quarterly earnings reports.

• Reduced Short-Term Focus: Public markets can sometimes encourage a short-term focus on quarterly results. Delisting may allow a company to adopt a longer-term perspective and make strategic decisions.

• Cost Savings: Maintaining a public listing can be expensive due to listing fees, legal and accounting costs, and the need to meet regulatory compliance standards. Delisting can result in cost savings.

• Focus on Strategic Objectives: Delisting can be part of a broader corporate strategy to focus on specific business objectives, such as restructuring or entering new markets, without the rules of public ownership.

Delisting can make it more challenging for a company to raise funds through the sale of new shares, and it may lead to a loss of investor confidence. Ultimately, the decision to delist depends on a company's unique events, goals, and estimation of the potential benefits and drawbacks.

Conclusion

A major turning point in a company's corporate history is when its stock gets delisted. When a corporation delisted, it switched from being a publicly traded firm to a private one, which has various repercussions. Compliance with rules for private corporations, cautious management, and contact with current owners are all necessary during the post-delisting phase. After a firm is delisted, a process follows that is impacted by the company's objectives, the state of the market, and overcoming the difficulties of being a private corporation.