Every year around 100+ companies get delisted from the stock exchange. Delisting of shares can be either voluntary or involuntary. While most of the involuntary delistings are due to non-compliance with the stock market index or the stock exchange, some can occur due to insolvency or poor market performance. Delisting shares in India can have a tremendous detrimental effect on the investors and the company.
So, why do many investors choose to invest in delisted companies?
To answer that question, first, we need to understand the definition of delisting shares and what happens to the company after getting delisted.
What Is Delisting of Shares?
When a company ceases to be on the stock exchange, it is called a delisted company. An unlisted company that has never been on the stock exchange cannot be delisted. Sometimes a company chooses to become delisted voluntarily. It can be due to an acquisition or to free the company from the control & regulations of the stock index.
Buy Unlisted Shares Online
Buy Pre Ipo Shares Online
What Happens if Shares are Delisted?
The delisted stock of a company can no longer be bought or sold on the NSE, BSE, or any other stock exchange. In such cases, the investors of the company can get their money back in two primary ways-
- Reverse Book Building Process( For Voluntary Delisting):
The company acquirer sends the shareholders an official letter about the repurchase or buyback. The shareholders have two choices- either retaining the shares or bidding for them at the required price.
- Independent Evaluation(For Involuntary Delisting):
In this case, an independent evaluator computes the cost for the acquirers to buy back the company shares. In involuntary delisting, most of the time, company shares lose value after delisting.
Does the company benefit from a delisting?
While a company does not directly benefit from delisting, it can aid in entering the over-the-counter market. A company can either be forced to delist or voluntarily opt for delisting from the stock exchange. Before investing in a company that is about to delist, an investor must understand the valuation, the shareholding data, and the reason for delisting-which can either be an acquisition or future organizational changes.
Some Famous Delisting of shares in India:
- Vedanta: Due to the losses incurred during the covid-19 pandemic, the company chose to delist and go private to stabilize financially and bring in more operational balance.
- In 2015, Panasonic Home Appliances India Ltd. got delisted. Its parent company acquired around 16.14 lakh shares, after which the delisting commenced.
- Cadbury India Ltd. got delisted in 2003 after its parent company declared to own 100% of the company and profit from the growing market.
Why do many investors choose to invest in delisted companies?
When a company is about to get delisted, the shares become available on NSE and BSE at cheaper rates due to faster liquidity requirements. Investors see this as an opportunity to buy at a dip and gain profits later.
Reasons for Delisting of Shares
- When a company fails to meet the Stock Exchange’s regulatory standards.
- Negative net worth in recent years.
- When the parent company or the acquirer desires to own more shares in the company.
- Public listing and trading can be expensive, so certain companies might decide to go private through the over-the-counter market.
- When a company plans to undergo restructuring to establish better financial and operational conditions.
- When a company fails to fulfill the requirements outlined in its Listing agreement within the specified timeframe, its securities are delisted from the stock exchange as a penal action.
Frequently Asked Questions on Delisting of Shares
- What happens to the shares of a delisted company?
While the liquidity and stock price are negatively affected, shareholders don’t lose the legal rights on the delisted stock. The shares are no longer eligible for stock exchange buying or selling after delisting.
- Why does a stock get delisted?
A stock can get delisted due to several reasons like- irregular filings, restructuring plans, and failure to meet the regulatory needs of the stock exchange index or market.
- Can any stock get delisted?
A stock that is registered on a stock exchange like NSE or BSE can get delisted involuntarily or voluntarily due to insolvency or other compliance issues.
- What types of companies get delisted?
A company gets delisted if it fails to live up to the SEBI regulations or chooses to go private voluntarily.
- What to do with delisted shares?
You cannot sell the shares on any stock exchange change however you can sell the delisted shares outside the stock exchange by approaching the promoters or owners of the company and going through the negotiation process to come to a mutual conclusion.
Conclusion:
Companies go through an intricate verification process to get listed on the National Stock Exchange, and delisting can either act as a turning point for a company or a point of bankruptcy. Security and Board of India(SEBI) offers a delisted company to be listed again after the cooling period.
However, this only happens if the company meets the SEBI criteria. A stock that has been delisted voluntarily has to wait for a period of five to six years before it gets relisted again. At the same time, an involuntarily delisted needs to wait for a ten-year period to get relisted again on the stock exchange.