What Is the Delisting of Shares? Learn What Happens When a Company’s Shares Are Delisted

While you might be aware of how a company gets listed in the stock markets through the process of IPO, are you aware of how a company is removed from the same?

To be removed from trading in the stock exchanges, the shares of a company must undergo delisting of shares. As an Indian investor, understanding this process can help you make informed decisions about your investments.

What is the Delisting of Shares?

Delisting of shares refers to the removal of a company’s stock from a stock exchange where it was previously traded. When a company decides to delist shares, its securities are no longer available for trading on that particular exchange. The delisting meaning in stock market is essentially the opposite of listing, where a company’s shares are made available for public trading.

Why Do Companies Delist Their Shares?

Companies may choose to delist a stock for various reasons. Some common motivations include:

• Going Private: A company might want to operate without the scrutiny and regulations that come with being publicly traded.
• Financial Struggles: If a company fails to meet the exchange’s listing requirements, it may face involuntary delisting.
• Mergers and Acquisitions: When one company acquires another, the acquired company’s shares may be delisted.
• Cost Reduction: Maintaining a listing on a stock exchange involves significant costs and compliance requirements.
• Strategic Decisions: Sometimes, companies delist from one exchange to list on another that better aligns with their business goals.

Understanding these reasons for delisting of shares from the stock market can help you anticipate potential delisting scenarios in your investment journey.

Types of Delisting

There are several types of delisting, each with its own implications for investors:

1. Voluntary Delisting

Voluntary delistingoccurs when a company chooses to remove its shares from the stock exchange. This decision is typically made by the company’s board of directors and approved by shareholders. The voluntary delisting of sharesprocess involves the company making an offer to buy back shares from public shareholders.

For instance, in 2003, Cadbury India opted for voluntary delisting to align with its parent company’s global strategy. The company offered ₹500 per share to its shareholders, which was a premium of about 27% over the market price at that time.

2. Involuntary Delisting

Involuntary delisting happens when a company fails to meet the stock exchange’s listing requirements. These requirements may include periodic public disclosures of audited financial statements, etc.

An example of this is when Kingfisher Airlines was delisted from the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in 2018 due to non-compliance with listing norms.

The stock exchange itself initiates compulsory delisting. This can occur if a company violates exchange regulations, fails to pay listing fees, or engages in fraudulent activities. In such cases, the exchange forcibly removes the company’s shares from trading.

3. Compulsory Delisting

Compulsory delisting occurs when the stock exchange forces a company to remove its shares from trading as a penalising measure at the stock exchange’s instruction. This delisting usually happens due to non-compliance with listing norms as decided by the Securities and Exchange Board of India (SEBI).

A great example of compulsory delisting is Amtek Auto. In 2018, Amtek Auto was unable to meet the stock exchange’s regulatory requirements and financial insolvency. The promoters were obliged to offer their public shareholders an exit option. This exit option was provided based on the fair value that an independent valuer determined.

4. Listing Suspension

While not a full delisting, a listing suspension temporarily halts the trading of a company’s shares. This can happen due to pending announcements, regulatory investigations, or other short-term issues. Suspensions are usually lifted once the underlying problems are resolved.

How Does the Delisting Process Work?

The delisting of shares procedure varies depending on whether it is voluntary or involuntary. Here is a general overview:

• Announcement: The company or exchange announces the intention to delist.
• Board Approval: For voluntary delisting, the company’s board must approve the decision.
• Shareholder Approval: Shareholders vote on the delisting proposal.
• Regulatory Approval: The company must obtain approval from SEBI and other relevant authorities.
• Exit Offer: In case of voluntary delisting, the company makes an offer to buy back shares from public shareholders.
• Delisting: If all conditions are met, the shares are removed from the exchange.

This process ensures that all stakeholders are informed and have a say in the decision to delist.

What Happens When Stocks Get Delisted?

When a stock gets delisted, it is removed from the exchange where it was traded. But what happens to delisted stock? The delisted stocks that have been purchased back by the company from shareholders become treasury stocks of the company. The company can reissue these treasury stocks on a private basis.

Effects of Delisting on Company and Shareholders

The effects of delisting on the company and its shareholders can be significant:

For the Company:

• Reduced Access to Capital: Delisted companies may find it harder to raise funds from capital markets.
• Lower Public Profile: Delisting often results in reduced media coverage and public awareness.
• Increased Flexibility: Private companies face fewer regulatory requirements and can focus more on long-term strategies.

For Shareholders:

• Reduced Liquidity: It becomes more difficult to buy or sell shares of the delisted company for shareholders who own the privately issued stocks of the company.
• Valuation Challenges: Without market-determined prices, it is harder to assess the true value of your holdings.
• Limited Information: Delisted companies are not required to make the same level of public disclosures as listed companies.

These effects underscore the importance of staying informed about the status of companies in your investment portfolio.

How Does it Affect You?

As an investor, delisting can have several impacts on your investments. Understanding the impact of delisting of shares on investors is crucial:

• Loss of Liquidity: After delisting, stocks of the company, that are privately issued, may lose liquidity.
• Decreased Transparency: Delisted companies are not subject to the same disclosure requirements as listed ones. This can make it harder for you to access important information about the company’s performance and financial health.
• Impact on Portfolio: Delisting can affect your overall portfolio balance. If a significant portion of your portfolio was invested in the delisted stock, you might need to reassess and rebalance your investments.
• Required Actions: When faced with a delisting, you typically have two main options:
  • Accept the exit offer (in case of voluntary delisting)
  • Hold onto your shares and potentially trade them in OTC markets

Each option has its pros and cons, and the most suitable choice depends on your individual financial situation and investment goals.

Conclusion

Understanding what is delisting and its implications is crucial for any investor in the Indian stock market. While it can present challenges, being aware of the process, its types, and potential impacts can help you make informed decisions about your investments.

Disclaimer: This content is only for educational/ informational purposes. It does not make any recommendation to act or invest.