What happens when a company gets delisted? This is a common question of new investors. We often hear about the listing of companies on the stock exchange. The reverse of this process also happens and is known as delisting.
What is the Concept of Delisting?
Delisting is the process where the shares of a particular company are removed permanently from the stock exchange for buying and selling purposes.
As a result of this, the delisted shares will no longer trade on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The Securities and Exchange Board of India ( SEBI) is the market regulator that governs the process of delisting securities for any company.
The process of delisting shares can be voluntary or involuntary, based on the reason for delisting.
The shares of a listed company get delisted due to the following reasons:
- Company filing bankruptcy
- Insufficient Market Capitalization
- Failure to Comply with Exchange Regulatory Requirements
How Does Delisting Impact the Shareholders?
If you are a shareholder of a company and it gets delisted, you will not be able to sell your shares on any exchange. But you will be able to sell it on the over-the-counter market i.e. look for a buyer outside the stock exchange.
Both voluntary and involuntary type of delisting impacts the investors who own shares of these companies. Let’s understand each concept in detail.
Voluntary Delisting
Voluntary Delisting is a type of delisting where the companies voluntarily opt for the permanent removal of securities from the stock exchange and decide to go private.
Some of the reasons for delisting include amalgamation, merger with another company, or poor performance. If a company has opted for voluntary delisting, it is liable to give you two options as per the guidelines of SEBI:
- Offloading Shares via Reverse Book Building
In this case, the acquirer or promoter will buy back the shares via the reverse book building process. The promoters need to make an official announcement of the buyback by releasing a letter of offer to the eligible shareholders along with a bidding form.
In this scenario, you can exit the company by tendering your shares. The final price will be decided based on the price at which the maximum number of shares are offered.
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When the shares tendered by you reach the specified limits, the process of delisting is considered successful. In case the specified limit is not reached, the company will remain listed.
- Hold Shares Till You Find a Buyer
If you are a shareholder and you haven’t sold your shares during the exit window period or in the reverse book building, you can hold these shares till you find the buyer on the over-the-counter market.
It is difficult to sell delisted shares as there will be a few buyers. You will need full patience as it may take a long time to find a buyer who is willing to buy at the desired price.
When a company voluntarily opts for delisting citing expansion reasons, it will generally offer buyback to its investors at a premium price, which may result in good profits.
Please note that this is a temporary opportunity for the investors to gain profit. The price of the stock may drop once the buyback window is closed.
Vedanta is into mining and focuses on gold, iron ore, and aluminum mines. At the start of 2021, the stock was touching Rs 330-340 and it came down to the level of Rs 88-89 by May. The company wanted to delist and offered a delisting price of Rs 87.
Each company trying to delist has to opt for special voting, and the shareholders can take part in the process. In the case of Vedanta, the shareholders disagreed on the valuation of the company and it failed to delist. The shareholders were demanding a higher valuation but the promoter was trying to exit cheap.
Involuntary Delisting
Involuntary Delisting is a process of forced removal of the listed shares of a company from the stock exchange due to reasons like low share price, late reports’ filing, and non-compliance with the listing guidelines.
In this scenario, the promoters need to buy back the shares at the value that is determined by an independent evaluator. The process of delisting will not affect your ownership, but the shares you hold may not hold much value post-delisting.
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If you happen to own the shares of a company that gets delisted, you should sell your shares. You have two options here – either sell the shares to the company when it announces buyback or exits the market. Take your decision wisely to achieve your investment goals.
Is it Possible for a Delisted Stock to be Relisted?
Yes, a delisted stock can be relisted if SEBI allows it. The market regulator has laid out guidelines for relisting these types of shares.
- Relisting of Voluntarily Delisted Stocks – These types of stocks are required to wait for 5 years from their delisting date to get relisted again.
- Relisting of Stocks that were Delisted Compulsorily – These types of stocks will have to wait for 10 years before getting relisted on the stock exchange.
Do Companies Benefit if their Stock Gets Delisted?
There are no direct benefits to a company if it gets delisted from a stock exchange.
A listed company has to follow certain compliances and regulations. It includes compulsorily submitting its quarterly reports and financial statements as well as conducting AGM or Annual General Meeting each year within a given period.
A company trying to delist voluntarily may have valid reasons. For example, Vedanta was trading on both NSE and BSE and applied for delisting of its shares from the share market. The company said that Covid-19 has affected its business and believed that going private will offer better operational as well as financial stability to run its business. Vedanta was considering delisting to simplify its complex business structure but it failed to unlist.
