Delisting refers to the process through which a publicly traded company’s shares are removed from a stock exchange. This can happen for various reasons, and it often has significant implications for the company and its investors.
Delisting Meaning
When a listed company permanently removes shares from the stock exchange for buying and selling purposes, they are called delisted shares, and the process delisting. This implies that these shares will no longer undergo trading on the NSE and the BSE. SEBI oversees the process of delisting securities for any company.
Here are some common factors leading to the delisting of a company’s shares:
Non-compliance With Listing Requirements
Stock exchanges impose specific criteria that companies must meet to maintain their listing status. These criteria may include financial performance standards, minimum share price, timely submission of financial reports, and compliance with regulatory requirements. If a company fails to meet these standards, it may face the risk of delisting.
Financial Distress
Companies experiencing financial difficulties, such as declining revenues, increasing debt, or other financial challenges, may face the threat of delisting. Failure to meet the stock exchange's financial benchmarks can trigger the delisting process.
Bankruptcy or Insolvency
If a company enters bankruptcy or insolvency proceedings, it may result in the delisting of its shares. The severe financial distress and uncertainties associated with bankruptcy can lead to a loss of confidence among investors and regulators.
Violation of Exchange Rules
Enterprises that violate the rules and regulations of the stock exchange, including fraudulent activities, non-disclosure of material information, or other misconduct, may be subject to delisting.
Types of Delisting
Delisting is of two types, namely:
Voluntary Delisting
Some companies choose to go private by voluntarily delisting from the stock exchange. This decision may be driven by strategic considerations, mergers, acquisitions, or the desire to operate without the regulatory obligations associated with being publicly traded. In such cases, the company typically buys back its shares from existing shareholders.
Involuntary Delisting
A company undergoes involuntary delisting when it violates regulations or falls short of meeting minimum financial expectations. When a company doesn't meet listing requirements, the listing exchange warns of non-compliance. If the company neglects to rectify this issue, the listing exchange proceeds to delist the stocks.
Impact of Delisting on Investors
If a company chooses to delist its shares voluntarily, the acquirer will officially notify all shareholders of the buyback through a letter. Each shareholder will then receive an offer and a bidding form from the acquirer. It is within the shareholders’ discretion to either accept or decline the offer, opting to retain their shares. Delisting becomes official once the acquirer purchases the required number of shares.
Should shareholders fail to sell their shares to the acquirer or the promoter within the specified period, they are obligated to sell them on the over-the-counter (OTC) market to the buyer. However, this approach may result in decreased liquidity compared to the alternative. By retaining the shares after delisting, shareholders assume the shares' legal and beneficial ownership.
In instances of compulsory delisting, the promoter must buy shares from shareholders at a fair value determined by an independent evaluator. While compulsory delisting does not affect shareholders’ ownership, the value of shares typically decreases post-delisting. Moreover, promoters, whole-time directors, and group firms face a ten-year ban from accessing the securities market following the compulsory delisting date.
Implication of Delisting for Companies
Companies, too, get affected due to delisting. Some implications are:
Reduced Access to Capital
Publicly listed companies can raise capital by issuing stocks to the public. Delisting limits this avenue, making it more challenging for companies to access funds. This reduction in capital availability can impede growth opportunities, hinder expansion plans, and limit the ability to invest in research and development.
Decreased Visibility and Prestige
Being listed on a stock exchange provides a company with visibility and prestige. Delisting strips away this recognition, potentially diminishing the company’s standing in the eyes of investors, customers, and partners. Reduced visibility may also impact a company’s ability to attract top talent and form strategic partnerships.
Riskier Stock Valuation
The delisting process can cause a decline in a company’s stock valuation. Investors may perceive delisted stocks as riskier investments, leading to lower demand and a subsequent drop in stock prices. This can negatively affect the wealth of existing shareholders.
Debt Covenant Triggers
Many companies have debt agreements with specific covenants tied to their stock’s listing status. Delisting can trigger these debt covenants, leading to accelerated debt payments or other financial obligations. Managing these financial implications becomes a priority for the company to avoid further financial strain.
Increased Scrutiny and Investor Skepticism
Delisting can attract increased scrutiny and skepticism from investors and the financial community. Shareholders may question the reasons behind the delisting and the company’s ability to manage challenges effectively. Rebuilding trust and credibility may become a long-term endeavor for the delisted company.
Yes, they can with SEBI’s permission. Voluntary delisted shares can be back after five years from their delisting date. On the other hand, compulsory delisted shares will have to wait for ten years to be back on exchanges again.
To Sum Up
The implications of delisting are far-reaching, Whether due to non-compliance, financial distress, or voluntary decisions. Companies and investors must navigate these challenges carefully and strategically to mitigate potential negative effects.
