Know All About Stock Delisting and its Process
Just as listing a stock makes it available for trading on a recognized stocks exchange, delisting is about removing the shares from the stock exchange and ceasing it to be traded in the share market. Delisting can be either mandatory or voluntary. Mandatory delisting is enforced by the stock exchanges where the company has failed to comply with the listing agreement or where the public shareholding has gone below the threshold level.
We will focus on voluntary delisting of shares. Here the company voluntarily chooses to get the shares delisted and we have seen that in the case of many Nifty MNCs like Novartis and Cadbury as well as with domestic companies like Nirma. What does delisting entail and what happens to the stock in the share market after delisting?
Voluntary delisting for a variety of reasons
Companies choose to delist for a variety of reasons. Firstly, the company may want to avoid the hassles of being listed on the stock exchange. Secondly, delisting also makes sense when the promoters want greater and total control of the company. Thirdly, delisting can be done if the promoters are looking at privately finding a strategic investor. Delisting also makes sense when the company wants a difficult restructuring as price impact can be avoided. Lastly, companies may choose to delist when they don’t see any value addition in being listed on the share market.
What is the process for voluntary delisting?
When a Nifty or Sensex company or any other company intends to delist, the following steps need to be followed.
A resolution has to be passed in the board meeting for delisting the shares with prior intimation to the stock exchange. A Special Resolution must be moved and prior approval of shareholders is obtained via postal ballot.
An application for in-principle approval must be made to the stock exchange with details of shares to be delisted and the capital statement. At this stage, the stock exchange will insist on paying any pending dues to the stock exchanges before granting approval.
The investment banker is appointed by the company to manage the delisting. The first step is to open an escrow account and deposit the estimated amount of consideration for buyback of shares calculated on the basis of floor price. The Floor price is the minimum price that shall be paid to the public shareholders. Deposit to Escrow account can be made in the form of cash or as bank guarantee.
The next step is to make a public announcement with basic details in at least one large English national daily, one large Hindi national daily and one regional language newspaper of the region where the stock exchange is located. Post the public announcement, the letter of offer to public shareholders is sent within 45 working days to reach them at least 5 days before the opening of bidding.
During the offer period if physical shares are tendered, then it will be sent to the RTA for verification. Merchant banker will transfer these to the promoter after deciding the final price and making of payment to the shareholders.
Delisting is done through the book-built route and final price will be the price quoted by the majority of shareholders. If promoters agree to the price, acceptance of final price is communicated within 8 days of the closure of the offer. The delisting offer will be deemed successful if promoter stake + PAC stake + eligible bids touch 90% of shares issued. Otherwise, offer is deemed unsuccessful and the delisting is cancelled. Even the promoter is entitled to reject the offer within 8 days of close of offer.
Once the final price is accepted by the promoters, additional funds (if necessary) have to be transferred into the Escrow account. The final payment to the shareholders must be made within 10 days from the date of closure of the Offer. For shareholders who did not participate in the offer, once the acceptance crosses 90%, the promoters can cancel the shares of the remaining shareholders and remit the funds to them. That is absolutely legitimate.
After the payment to all shareholders is completed, company must make final application to the Stock exchanges (within 1 year) requesting for delisting of shares. Once the compliance department verifies that all requirements are met, the stock exchange will dispose the application and delist the shares. From that date, the shares are officially delisted.
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