The stock market is meant for taking companies public – once shares are placed in the market, anyone can buy them there, which generally turns into higher demand for these shares. That’s why most startups are excited about Initial Public Offerings (IPOs) – the process through which the shares of a company get listed. However, the delisting of shares is a lesser-known phenomenon.
So, what does delisting of shares mean?
Put delisting of shares occurs when a company, due to one reason or the other, decides to take its shares off the stock market. Delisting can be done for claims as well as different types of securities. Once it’s done, delisted shares (or securities) will no longer be available for trading at the stock exchange. However, one can still buy and sell them in the over-the-counter market.
Needless to say, the process is highly regulated as the stake of investors may be hurt by delisting. Thus the regulatory body of India, the Securities and Exchange Board of India (SEBI), is responsible for regulating the process of delisting.
But why would a company delist shares at all?
There are several reasons that a company may decide to delist its shares despite the attractive advantages offered by stock exchanges. Some of the most important of those reasons include the following:
- The company didn’t find sufficient market capitalization. In such cases, the companies may delist their shares with the hope of listing their shares once again in the future.
- The company may have merged or amalgamated with another company.
- The company has gone bankrupt.
- The company may have been found to have failed to comply with regulatory requirements and thus was forced to delist its shares.
Does it happen frequently?
Only a very small percentage of companies ever delist, and yet it happens that some company or other has delisted every few days. Symbol Ltd, Pradeep Overseas Ltd, Kwality Ltd, etc., are some of the companies that have delisted their shares in recent years. One can easily find lists of companies that have delisted from various stock exchanges online.
Does delisting mean that a shareholder will lose their rights?
No. The shareholders keep the ownership of shares as before. The only difference is that they will not be able to deal with their stocks on a stock exchange. They will have to make over-the-counter deals by finding interesting buyers outside the market. This process involves a lot more effort and trouble on the part of shareholders and thus may make their life difficult. Moreover, this may also reduce the value of their holdings.
Apart from this, the shareholder will continue to enjoy all the rights they conventionally do. They may still, for example, attend shareholder meetings, enjoy the voting rights, and will be eligible for their share in profits and dividends if and when a company chooses to pay any.
Voluntary delisting of shares
However, the above scenario is in the case of involuntary delisting of shares by companies. Voluntary listing of shares is made easier on investors thanks to regulations by SEBI. According to SEBI guidelines, the promoters of the company may decide to buy back the shares if the delisting of shares was done voluntarily. In such cases, sometimes promoters actually offer a premium price for the buyback of securities which can be a quick way to make money for investors as well. Once the shares are delisted, it may grow difficult to trade these shares as only over-the-counter (OTC) options are available.
Involuntary delisting of shares
Involuntary delisting, on the contrary, is caused by the exchange or investment regulatory authorities like SEBI. Failure to comply with listing guidelines, very low share prices, etc., are some of the causes which may force these authorities to order the company to delist its shares.
In these cases, the buyback price is determined by an independent evaluator, and the promotors must buy the shares at that very price. There are almost no reasons to stay invested in an involuntarily delisted company, and one must sell one’s shares on the first opportunity or to promotors. It must also be noted that the promotors may not be able to return the full value of shares.
Relisting of shares
A company may also choose to list its shares after having once delisted. That is called relisting and is regulated by SEBI. The relisted shares can then be traded on the stock exchange.
The Bottom Line
One can easily wrap up the above discussion by concluding that the delisting of shares can be both a desirable and undesirable phenomenon depending on what caused it. One should be careful when dealing with securities that are being delisted. It is important if one has shares of such securities to keep an eye on all developments. One should also take a note of whether a company intends to list shares again in the near future, in which case, the temporary delisting of shares need not affect those with long-term investment goals.