Discover the reasons and consequences of
delisting of stocks on investors and companies. Learn about delisting types,
processes, and its implications for shareholders in this comprehensive guide.
𝗧𝗮𝗯𝗹𝗲 𝗢𝗳 𝗖𝗼𝗻𝘁𝗲𝗻𝘁𝘀
- 𝗜𝗻𝘁𝗿𝗼𝗱𝘂𝗰𝘁𝗶𝗼𝗻
- What is Delisting
- 𝗧𝘆p𝗲𝘀 𝗢𝗳 𝗗𝗲𝗹𝗶𝘀𝘁𝗶𝗻𝗴
- 𝐕𝐨𝐥𝐮𝐧𝐭𝐚𝐫𝐲 𝐃𝐞𝐥𝐢𝐬𝐭𝐢𝐧𝐠
- 𝐈𝐧𝐯𝐨𝐥𝐮𝐧𝐭𝐚𝐫𝐲 𝐃𝐞𝐥𝐢𝐬𝐭𝐢𝐧𝐠
- 𝗧𝗵𝗲 𝗗𝗲𝗹𝗶𝘀𝘁𝗶𝗻𝗴 𝗣𝗿𝗼𝗰𝗲𝘀𝘀
- 𝗜𝗺𝗽𝗹𝗶𝗰𝗮𝘁𝗶𝗼𝗻𝘀 𝗙𝗼𝗿 𝗦𝗵𝗮𝗿𝗲𝗵𝗼𝗹𝗱𝗲𝗿𝘀
- 𝗦𝘁𝗿𝗮𝘁𝗲𝗴𝗶𝗲𝘀 𝗙𝗼𝗿 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀
- 𝗖𝗼𝗻𝗰𝗹𝘂𝘀𝗶𝗼𝗻
- 𝗙𝗔𝗤𝘀 𝗢𝗻 Stocks 𝗗𝗲𝗹𝗶𝘀𝘁𝗶𝗻𝗴
Introduction:
When the shares of a
listed company permanently removed from the exchange, the event which is
regulated under the guidance of a particular regulatory authority, is
called delisting of shares. In this article we are going to discuss the reasons
behind delisting, types of delisting, effects of delisting on the investors and
the companies and all essential points relating to delisting of shares.
What is Delisting?
Delisting means
removal of a company's shares from the exchange. That means delisted shares can
no longer be traded on that particular exchange. The procedures for delisting
of shares of a company regulated by the regulatory authority, as in India, it
is regulated by the Securities Exchange Board of India (SEBI).
Types of Delisting
There are two types of
delisting of shares;
1. Voluntary Delisting
2. Involuntary
Delisting.
Voluntary Delisting
When a company decides to remove its shares from the exchange for internal reasons, we call it voluntary delisting of shares. Reasons behind the voluntary delisting are going private, restructuring, mergers with another companies, amalgamation, or non-performance.
Going Private:
If a company decides to go private, it voluntarily wants to remove it's shares from the stock exchange. In such a case, the company will buy back its shares from the shareholders at a fair price ensuring minimum disruption to the shareholders.
Lack of Liquidity:
Companies with low liquidity such as lower trading volume or less investors interest may opt for delisting to focus on restructuring or repositioning their business.
Regulatory Non-Compliance:
It is obligatory for companies to adhere various regulatory requirements such as timely financial results announcements, corporate governance standards maintenance. If any company fails to comply with any of these requirements, can result in delisting. Regulatory bodies impose stringent penalties affecting the company's ability to operate publicly.
Involuntary Delisting
Involuntary delisting
is enforced by the stock exchange due to failure to meet listing requirements.
Reasons include non-compliance with financial reporting standards, poor
financial performance, or bankruptcy. Involuntary delisting can significantly
impact shareholders, often leading to a sharp decline in stock value. There are
various reasons behind involuntary delisting:
Financial Performance:
Poor financial reasons of a company such as, facing severe economic challenges, including consistent losses or facing difficulties to maintain minimum financial threshold set by the exchange, or facing bankruptcy etc. In such cases the exchange can delist the offloading.
Mergers and Acquisitions:
In cases of mergers or acquisitions, the acquired company’s shares might be delisted from the exchange involuntarily as part of the integration process. The new entity may choose to operate as a private company or list on a different exchange, depending on its strategic goals.
The Delisting Process
Notification and
Communication:
When a company gets delisted, it receives formal notification from the stock exchange. The company is usually given a certain period to address the issues causing delisting. During this period, companies must communicate transparently with shareholders regarding their plans and potential outcomes.
Appeal and Review:
Companies
may appeal the delisting decision and may opt for undergoing through a review
process. This involves presenting a plan to regain compliance or meet listing
standards. If the appeal is successful, the company can continue trading on the
exchange. If not, the delisting process proceeds.
Final Delisting:
If
a company fails to address the issues or the company's appeal is unsuccessful,
the stock exchange will proceed with the delisting process. The company’s
shares are then removed from the exchange, and trading ceases. At this point,
shareholders may face challenges in selling their shares due to low liquidity, not
finding sufficient buyers.
Latest Regulation by SEBI on 27th June, 2024, Introducing New
Mechanism of Delisting Process:
Financial markets regulator, the
Securities and Exchange Board of India (SEBI), on 27rh June, 2024 introduced a
new mechanism allowing companies to delist shares via a fixed price which will
be set at a 15% premium over the floor price.
The previous system allowed the
companies to delist from stock exchanges through a reverse book building
process. There, the shareholders of the companies would have to submit offers
to sell their shares back to the promoters or the major shareholders.
It is believed that the new
mechanism will simplify the delisting process and ensure the shareholders to
recover the fair value of their shares.
Implications for Shareholders
Value and Liquidity:
Delisting often results in a sharp decline in stock value. Due to not getting listed in a formal exchange, can significantly reduce liquidity, making it difficult for shareholders to buy or sell shares. Investors may experience substantial losses, especially if the company’s financial outlook is bleak.
Trading on the OTC
Counter:
Once delisted, shares may trade on the OTC market. OTC means over the counter. OTC trading is less regulated and can be riskier, with higher spreads and lower liquidity. Investors should exercise caution and conduct thorough research before engaging in OTC transactions.
Tax Considerations:
Delisting can have tax implications for shareholders. Losses incurred due to delisting may be deductible, depending on the investor’s tax structures. It’s advisable to consult with a tax professional to understand the specific impacts and optimize suitable tax strategies.
Strategies for Investors
Investors should assess the reasons behind the delisting and try
to anticipate whether the company deserves to recover from the existing
situation potentially in future. Understanding the company’s financial health
and future prospects is crucial for making informed decisions whether to sell
the shares or to hold them in the portfolio.
Exit Strategies:
For some investors, exiting their position might be the best
option. This can involve selling shares before the delisting date to minimize
losses or waiting for a potential buyout offer from the company. Timing and
market conditions play a significant role in executing a successful exit
strategy.
Long-Term Holding:
In some cases, long-term holding may be viable or logical, especially
if the company has a solid recovery plan in future. Investors with a higher risk
tolerance and well-thought out knowledge may choose to hold their shares
and wait for the company to re-list or regain value over time.
Conclusion
Delisting can profoundly impact both companies and shareholders,
affecting stock value, liquidity, and trading opportunities. Understanding the
causes, processes, and implications of delisting is crucial for investors to
navigate this challenging event. By staying informed and proactive, investors
can better manage their portfolios and make strategic decisions in the face of
delisting.
FAQs on Stock Delisting
When a stock is delisted, it means the company’s shares are
removed from the stock exchange where they were being traded. The stock is no
longer available for buying and selling on that exchange, though it may still
trade on an over-the-counter (OTC) market or become illiquid.
2. What happens to my shares if a company is delisted?
If a company is delisted, you still own the shares, but their
value and liquidity might be significantly affected. You may be able to trade
them on an OTC market, but this is generally riskier and less liquid. In some
cases, the company may offer to buy back shares from shareholders.
3. What are the main reasons a company’s stock gets delisted?
Stocks may be delisted due to various reasons, including poor
financial performance, failure to comply with regulatory requirements, mergers
and acquisitions, or strategic decisions by the company to go private.
Involuntary delisting often occurs when the company no longer meets the
exchange’s listing standards.
4. Can a delisted company relist its shares on an exchange?
Yes, a delisted company can relist its shares if it meets the
listing requirements of the exchange again. This often involves restructuring
or improving financial performance to meet the necessary standards.
5. Are delisted stocks worthless?
Delisted stocks are not necessarily worthless, but their value
typically decreases due to reduced liquidity and investor confidence. The
actual worth depends on the company’s financial health and future prospects.
Some delisted companies recover and regain value, while others may go bankrupt.
6. How can I sell my shares after a delisting?
After a delisting, you can sell your shares on the OTC market if
there is a willing buyer. However, the process can be more challenging, with
fewer buyers and potentially lower prices. Consulting a financial advisor might
help you make the best decision based on your situation.
7. Should I sell my shares before a delisting occurs?
Whether to sell shares before a delisting depends on the
specific circumstances. If the company is delisted due to poor financial
health, selling before the delisting might minimize losses. However, if the
delisting is part of a strategic move, holding onto the shares could be more
beneficial in the long run.
8. What is the difference between voluntary and involuntary
delisting?
Voluntary delisting occurs when a company chooses to remove its
shares from the exchange, usually for strategic reasons like going private.
Involuntary delisting happens when the stock exchange forces the company off
the exchange due to non-compliance with listing standards, such as financial
instability or regulatory issues.
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
