An Initial Public Offering is the most exciting event for investors and traders. A company’s IPO is the official listing on the stock exchange. Listing speaks volumes about a company’s growth and financial stability and widens its shares to the public. Delisting, on the other hand, is the opposite.
Delisting occurs when a company decides to remove its shares from the exchange and becomes a private limited company. This article explains how the Delisting of shares affects the shareholders and its various types.
What is the delisting of shares?
Delisting is when the company decides to withdraw its shares from the stock market. The shares are then no longer tradable. After the company stops allowing share trading, it is no more a listed company. Delisted of all the shares makes the company a private limited organisation. One of the reasons for delisting is the failure to meet the exchange's requirements. Delisting shares comes with significant consequences, and that is the reason companies strenuously avoid being delisted.
What are the types of delisting?
Involuntary Delisting of a Company
Involuntary delisting of shares occurs when it violates the norms and fails to meet minimum financial demands.
However, a non-compliance warning is issued to the company. But in case of perpetual occurrence of non-compliance, the shares of the company are delisted. There can be several other reasons for involuntary delistings such as–
1. When a company fails to fulfil the rules set by the exchange, it can demand compulsory delisting.
2. In case of inconsistent shares trading over the past three years, it results in the delisting of securities for six months.
3. When the company makes huge losses resulting in negative net worth in the past three years, the shares are involuntarily delisted.
Companies not benefiting from being listed on the stock exchange and paying a significant amount to trade publicly choose voluntary delisting. This type of delisting also occurs when there is a change in the entire structure of the company. Another reason could be an amalgamation, merging with another company or avoiding hindrance in the company operations.
It is achieved by permanently removing securities from the stock exchange and making them unavailable for trading. In such cases, the company is liable to pay all the shareholders in exchange for all their shares.
Then, how does the investor get their money back after delisting? Once delisted, you can’t sell those shares on NSE or BSE. Although, the ownership of the shares remains intact. And therefore, you are eligible to sell the share outside the exchange.
What happens when a stock is delisted?
In case of voluntary delisting, the acquirer will buy the shares from the shareholders through the reverse book-building process. All the shareholders receive an authorised letter from the acquirer informing them about the buyback. Along with an official letter, the shareholders receive a bidding form. The shareholders receive an offer from the acquirer. The shareholder has the option of rejecting the offer and keeping the shares.
Successful delisting of shares occurs when the purchaser buys back the required number of shares. The shareholders must sell the shares to the promoters in the designated period. If the shareholders fail to do so, they must sell on the Over-The-Counter market. Due to the decline in liquidity, selling shares Over the Counter is a time-consuming process. The shareholders receive significant gains when they sell the delisted stock to the promoters at a higher price during the buyback window. As shareholders, you have the chance to profit momentarily because the price may fall when the buyback window closes.
In the case of involuntary delisting, an independent evaluator determines the cost of the buyback of the delisted stock. Like voluntary listing, the involuntary listing has no impact on the ownership of shares, but if a firm is delisted, the delisted stocks are likely to lose some of their value.
In India, if a company is delisted from all the stock exchanges except for BSE and NSE, it does not have to pay any exit amount. It remains available for trading with NSE and BSE. As a result, stockholders can sell their shares whenever they want.
Using delisting as an investment strategy
In 2010, the government made it mandatory for organisations to make 25% of their shares accessible for trading to the general public. This regulation caused the delisting of securities by promoters who held more than 75% of the securities. As a result, there was an increase in investors who were keen to invest in the companies where the promoters hold 80-90% of securities. The purpose was to attain huge gains when the promoter decides to buy back shares at a premium price.