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Companies are listed and delisted from the stock index. Delisting can occur due to performance issues or even mergers and acquisitions. It significantly impacts the shareholders and they must thoroughly understand the consequences of delisting.
In this article, we will look at what is delisting of shares, their types and their impact on shareholders.
What is delisting of shares?
Delisting of shares refers to the shares of a listed company that have been removed from the stock exchange permanently. These shares cannot be bought or sold any longer on the security exchanges National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The process of delisting shares is executed by the Stock Exchange Board of India and the market regulator.
The delisting of the shares can be either a voluntary decision of the company or involuntary based on the reason behind the delisting. Some common reasons behind delisting are insufficient market capitalization, bankruptcy or a failure to comply with the stock exchange regulatory framework. Based on the type of delisting, the consequences for stakeholders also vary.
How does delisting affect shareholders?
In case of delisting of securities, the shareholders still hold their share in the company but cannot sell that share on any exchange. These shares can be sold on the over-the-counter market, i.e., the shareholders can find a buyer outside of the stock exchange.
As a result, the shareholders get impacted when the company gets delisted on the stock exchange, irrespective of whether it’s voluntary or involuntary. Let us look at each of these categories to understand things better.
Types of delisting
There are two kinds of delisted stock, voluntary and involuntary based on the reasons behind the delisting.
Voluntary delisting
Under voluntary delisting, the company decides to voluntarily opt for permanent removal from the stock exchange due to its plan to go private. The common reasons for voluntary delisting include amalgamations, mergers with other companies, and non-performance. In case the company has voluntarily opted for delisting, they give the shareholders two options as per SEBI guidelines:
- Offload shares in reverse book building
In this case, the promoter or the buyer buys back the shares through the process of reverse book building. The promoters must make a public announcement of buyback through an offer letter along with a bidding form to eligible shareholders. The shareholders can then exit by tendering their shares.
The price of selling is determined based on the price at which the maximum number of shares are offered. As soon as the tendered shares reach their specified limit, the delisting is considered successful. In case the specified limit is not met then the company must remain listed.
- Hold till you find a buyer
If the shareholders do not sell their shares in the reverse book building or within the exit window, then they can sell the shares on the over-the-counter market by finding a suitable buyer. This process can take a long time to sell the shares at the expected price.
At times when companies aim to expand, they might also offer investors a buyback at a premium price which can help them earn profits. However, this is a rare case as usually the price of the share is dropped after the buyback window closes.
Involuntary delisting
As against voluntary delisting, involuntary delisting is when there is a forced removal of a listed company from the share market. It can happen due to reasons such as non-compliance with listing guidelines, low share price or late filing of reports. In this case, the share value is determined by an independent evaluator at which the promoter must buy the shares.
The shares do not hold any value after delisting and must be sold at the earliest possible. Shareholders can also sell the shares to the company when it announces buyback. It is integral for shareholders to timely decide their selling choices to get a good deal on their shares.
Is it possible for a delisted stock to come back?
Yes, a delisted share can be listed again if SEBI allows it. The regulator lays out guidelines for the process of relisting shares that must be followed.
- Relisting of voluntarily delisted shares: The voluntarily delisted shares have a timeline of 5 years before they can be relisted on the stock exchange.
- Relisting of involuntarily delisted shares: The involuntarily delisted shares have a timeline of 10 years before they can be relisted on the stock exchange.
The list of delisted shares is available on the NSE and SEBI websites.
Conclusion
Delisted stock can significantly impact the financial market holding of shareholders. Thus, it is imperative to understand the process of delisting of shares and how to sell delisted shares. Ideally, it is best to sell the shares in the window provided by the company to get the best value for the shares. Read StockGro blogs to learn more such concepts.
FAQs
Delisting of shares refers to the process of removal of listed shares from the stock exchange either voluntarily or involuntarily.
Share delisting can happen because of mergers, a company going private, insufficient market capitalization or failure to adhere to stock exchange guidelines.
Voluntary delisting happens when a company either wants to go private, merge with another company or has low performance. As against this, involuntary delisting usually happens in the case of failure to comply with stock exchange guidelines or delay in reporting.
Yes, delisted shares can be sold either during buyback or to promoters. They can also be sold through the over-the-counter market.
Shareholders must sell delisted stocks during the buyback window to get the best value for the stock. As soon as the window closes, the value of the stock decreases.