Most of us know about the process of how stocks are listed on stock exchanges and how the IPO process takes place, but are you aware of the process followed when a company no longer wants to trade on a stock exchange.
Delisting in Indian stock markets is a complex topic, with a number of implications for shareholders, companies, and the market as a whole.
In this blog post, we will provide a comprehensive overview of delisting, including its definition, reasons, types, consequences, and recent examples.
What is Delisting?
Delisting is the process through which a listed company’s shares are permanently removed from public trading on stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
In India, SEBI regulates this process, ensuring transparency and fairness so that retail investors’ interests can be protected.
Reasons for Delisting
There are a number of reasons why a company might choose to delist its shares. Some common reasons include
To go private
A company may choose to delist its shares if it wants to go private. This means that the company will no longer be owned by public shareholders, and its shares will no longer be traded on the stock exchange.
To merge with another company
A company may choose to delist its shares if it is merging with another company. In this case, the shareholders of the delisted company will typically be offered shares in the merged company.
To reduce costs
Delisting can help a company to reduce its costs, as it will no longer have to comply with the listing requirements of the stock exchange.
To improve corporate governance
Delisting can give a company more control over its operations and make it easier to implement corporate governance initiatives.
Companies may also choose to delist for various other reasons, such as insufficient market capitalization, filing for bankruptcy, or failing to meet exchange regulatory requirements.
Types of Delisting
Delisting can be categorized into two primary types: Voluntary and Involuntary.
1. Voluntary Delisting
When a listed company voluntarily chooses to remove itself from trading on a stock exchange it is called voluntary delisting.
There are many reasons why a company might choose to do this, such as merging with another company, combining its operations with another company, or performing poorly.
If you own shares in a company that has decided to voluntarily delist, you have two options:
Sell your shares in a reverse book building process
In the reverse book building process, the company’s promoters or acquirers will buy back your shares. The promoters are required by law to make a public announcement of the buyback. They do this by sending a letter of offer to all eligible shareholders and a bidding form.
A final price is set based on the price at which the most shares are offered. The promoters or acquirers have the option to accept the price. If they do accept it, all valid offers up to the final price are accepted.
Investors also have the option to sell their shares to the promoters. They are allowed to do this for up to one year from the date of delisting. The promoters are required to accept the shares at the final price.
Hold your shares until you find a buyer
If you decide not to sell your shares in the reverse book building process or during the exit window, you can keep your shares until you find a buyer in the over-the-counter market. Delisted shares are hard to sell because there is less liquidity when they are no longer traded on a stock exchange. It can take a long time to find a buyer who is willing to pay your desired price. You need to be patient.
When a company voluntarily delists because it wants to expand, it will usually offer to buy back its shares at a premium price. This can lead to significant gains. But it is important to remember that this is a time-bound opportunity for gain. Once the buyback window closes, the price of the stock is likely to drop.
2. Involuntary Delisting
Involuntary delisting is a process by which a company is removed from the stock market because it does not meet the listing requirements.
This can happen for a number of reasons, such as if
- The company’s share price is too low
- If it does not have enough public shareholders
- If it has failed to file its financial reports on time.
When a company is delisted, its shares can no longer be traded on the stock market. This can make it difficult for investors to sell their shares and can lead to a loss in value.
How Does Delisting Work in India?
The delisting process in India is overseen by SEBI, ensuring adherence to regulatory norms. Voluntary delisting involves a reverse book building process where promoters buy back shares.
Involuntary delisting occurs when companies violate listing regulations, leading to forced removal from stock exchanges.
Implications of Delisting for Shareholders
Shareholders in a delisted company continue to own shares but can no longer trade them on stock exchanges. While voluntary delisting offers exit options through buyback processes, involuntary delisting may result in shares losing their market value.
Pros and Cons of Delisting:
Pros:
– Streamlined operations for the company.
– Enhanced control and flexibility for promoters in strategic decisions.
Cons:
– Limited liquidity for shareholders in the absence of exchange trading.
– Potential loss of market value for shares.
Recent Examples of Delistings in India
Recently the shares of Shreyas Shipping and Logistics went through the successful completion of the reverse book-building process for delisting the company from the stock exchanges.
After the reverse book-building process a share price of Rs 890 for the company was determined. However, Transworld Holdings the promoter chose to present a counteroffer, valuing each share at Rs 400. Due to this the delisting process has failed for the stock.
Apart from the above example, on June 5 2020, the promoter HT Global of Hexaware Technologies Ltd, a mid-sized IT company announced a delisting plan for the company. The stock was successfully delisted after the company’s promoter accepted the discovered delisting price of Rs 475 per share for the stock.
What is Relisting?
In direct contrast to delisting, relisting is the procedure by which a previously delisted company reintroduces its shares to the stock exchange for trading.
Nevertheless, the re-listing journey is meticulously regulated, with stringent oversight from SEBI shaping the process. The intricacies of the guidelines are contingent upon the circumstances surrounding the company’s initial delisting. Let’s delve into the specifics.
Voluntary delisting: In cases where a company has willingly delisted its shares, the prospect of relisting can be pursued only following a mandatory waiting period of 5 years from the delisting date.
Compulsory delisting: For companies that undergo compulsory delisting, the window for initiating relisting endeavors opens up solely after the passage of 10 years from the date of the original delisting.
Conclusion
Delisting in the Indian stock market is a complex phenomenon with far-reaching implications for companies and shareholders alike. Understanding the intricacies of voluntary and involuntary delisting, the reasons behind such decisions, and the subsequent impact on shareholders to save their hard earned money.
As the market continues to witness changes, staying informed about delisting processes ensures that investors can make correct decisions aligned with their long-term financial goals.
FAQs
Any gains or losses that you make on the sale of your shares in a delisted company will be taxed as capital gains or losses. The tax rate will depend on your holding period for the shares and your income tax slab.
Even though your shares are no longer traded on the stock exchange, you still have certain rights as a shareholder in a delisted company. These rights include the right to vote on corporate resolutions, the right to receive dividends, and the right to inspect the company’s books and records.
You will continue to own your shares in a delisted company, but you will no longer be able to trade them on the stock exchange. This can make it difficult to sell your shares and may lead to a loss in value.
