Delisting refers to the process through which a publicly traded company’s shares are removed from a stock exchange. This can happen for various reasons, and it often has significant implications for the company and its investors.
When a listed company permanently removes shares from the stock exchange for buying and selling purposes, they are called delisted shares, and the process delisting. This implies that these shares will no longer undergo trading on the NSE and the BSE. SEBI oversees the process of delisting securities for any company.
Here are some common factors leading to the delisting of a company’s shares:
Stock exchanges impose specific criteria that companies must meet to maintain their listing status. These criteria may include financial performance standards, minimum share price, timely submission of financial reports, and compliance with regulatory requirements. If a company fails to meet these standards, it may face the risk of delisting.
Companies experiencing financial difficulties, such as declining revenues, increasing debt, or other financial challenges, may face the threat of delisting. Failure to meet the stock exchange's financial benchmarks can trigger the delisting process.
If a company enters bankruptcy or insolvency proceedings, it may result in the delisting of its shares. The severe financial distress and uncertainties associated with bankruptcy can lead to a loss of confidence among investors and regulators.
Enterprises that violate the rules and regulations of the stock exchange, including fraudulent activities, non-disclosure of material information, or other misconduct, may be subject to delisting.
Delisting is of two types, namely:
Some companies choose to go private by voluntarily delisting from the stock exchange. This decision may be driven by strategic considerations, mergers, acquisitions, or the desire to operate without the regulatory obligations associated with being publicly traded. In such cases, the company typically buys back its shares from existing shareholders.
A company undergoes involuntary delisting when it violates regulations or falls short of meeting minimum financial expectations. When a company doesn't meet listing requirements, the listing exchange warns of non-compliance. If the company neglects to rectify this issue, the listing exchange proceeds to delist the stocks.
If a company chooses to delist its shares voluntarily, the acquirer will officially notify all shareholders of the buyback through a letter. Each shareholder will then receive an offer and a bidding form from the acquirer. It is within the shareholders’ discretion to either accept or decline the offer, opting to retain their shares. Delisting becomes official once the acquirer purchases the required number of shares.
Should shareholders fail to sell their shares to the acquirer or the promoter within the specified period, they are obligated to sell them on the over-the-counter (OTC) market to the buyer. However, this approach may result in decreased liquidity compared to the alternative. By retaining the shares after delisting, shareholders assume the shares' legal and beneficial ownership.
In instances of compulsory delisting, the promoter must buy shares from shareholders at a fair value determined by an independent evaluator. While compulsory delisting does not affect shareholders’ ownership, the value of shares typically decreases post-delisting. Moreover, promoters, whole-time directors, and group firms face a ten-year ban from accessing the securities market following the compulsory delisting date.
Companies, too, get affected due to delisting. Some implications are:
Publicly listed companies can raise capital by issuing stocks to the public. Delisting limits this avenue, making it more challenging for companies to access funds. This reduction in capital availability can impede growth opportunities, hinder expansion plans, and limit the ability to invest in research and development.
Being listed on a stock exchange provides a company with visibility and prestige. Delisting strips away this recognition, potentially diminishing the company’s standing in the eyes of investors, customers, and partners. Reduced visibility may also impact a company’s ability to attract top talent and form strategic partnerships.
The delisting process can cause a decline in a company’s stock valuation. Investors may perceive delisted stocks as riskier investments, leading to lower demand and a subsequent drop in stock prices. This can negatively affect the wealth of existing shareholders.
Many companies have debt agreements with specific covenants tied to their stock’s listing status. Delisting can trigger these debt covenants, leading to accelerated debt payments or other financial obligations. Managing these financial implications becomes a priority for the company to avoid further financial strain.
Delisting can attract increased scrutiny and skepticism from investors and the financial community. Shareholders may question the reasons behind the delisting and the company’s ability to manage challenges effectively. Rebuilding trust and credibility may become a long-term endeavor for the delisted company.
Yes, they can with SEBI’s permission. Voluntary delisted shares can be back after five years from their delisting date. On the other hand, compulsory delisted shares will have to wait for ten years to be back on exchanges again.
The implications of delisting are far-reaching, Whether due to non-compliance, financial distress, or voluntary decisions. Companies and investors must navigate these challenges carefully and strategically to mitigate potential negative effects.
Delisting is the procedure by which a company’s publicly traded shares are taken off a stock exchange.
If you, as an investor, hold a stock that undergoes delisting, you retain ownership of the stock, but its value is likely to experience a significant decline. Investors typically perceive mandatory delisting as an indication of financial distress, often signaling an impending bankruptcy that diminishes the stock’s value severely.
According to SEBI’s delisting regulations, once shareholders approve through postal ballot and/or e-voting with the necessary majority, and stock exchanges grant in-principle approval, the subsequent step in the process involves issuing a detailed public announcement and the letter of offer.
You must meet the minimum share buyback requirement to avoid the delisting process falling through, allowing the company to remain listed on stock exchanges. If a company is compelled to delist its shares, it must repurchase them from its shareholders.
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