Companies delisting shares is a common occurrence and those privy to the stock markets often hear about such news. Many companies delist from the stock exchanges each day, and this is primarily attributable to a company’s decision of not offering its stocks for trading.
Let us try to understand what delisting of shares means, how it takes place, and how it impacts shareholders.
Once a company takes its shares off all stock exchanges where it is listed and does not allow public trading of its shares, it is called delisting of shares. After taking its shares off stock exchanges, a company changes from public limited to a private company.
It is important to note that taking off shares of a company from only one or a few of all the stock exchanges on which it is listed does not result in delisting of shares. Only after removal of shares from all the stock exchanges that results in the general public being unable to trade in them results in delisting.
Different types of delisting
A company delisting is categorised on the basis of the reasons attached to the delisting. Here are the common types of delisting:
1. Voluntary delisting
If a company voluntarily removes all of its shares from being traded on stock exchanges, it is known as voluntary delisting. In voluntary delisting:
- A company must pay all its shareholders towards all the shares held by them.
- A company may opt for voluntary delisting if the entire company structure is to be changed. This is usually seen in cases when an investor offers to hold a majority stake in the company.
This method is also opted by companies which see a hindrance to their operations due to exchange regulations. To avoid these, the company may delist all the shares.
2. Involuntary or mandatory delisting
In case a company has to delist its shares due to a mandate from the regulatory authorities, it is termed as involuntary delisting. There are many reasons or possibilities why a company has to involuntarily or mandatorily delist its shares. Here are some of them:
- In case a company is unable to comply with the regulations established by a stock exchange, it must mandatorily delist its shares
- If a company’s shares are inconsistently being traded in the market for the past three years, it can result in mandatory delisting of securities for a period of at least six months
- In case a company’s net worth is negative as a result of substantial losses in the past three years, the company’s shares may be mandatorily delisted
When a company’s shares are delisted, for investors this means an inability to sell such shares on any stock exchange. However, an investor who has invested in such shares will still continue to have ownership of the shares and may sell such shares outside stock exchanges. Here is how an investor of a delisted company can get his/her money back:
1. Impact due to voluntary delisting
In case a company voluntarily delists its shares, a shareholder can sell his/her shares to an acquirer via the reverse book building process. In this case:
- All the shareholders get an official intimation about the buyback from the acquirer.
- Along with the intimation, shareholders are sent a bidding form
- Shareholders get an offer from the acquirer, post which they can choose to exit the investment by accepting the offer.
- Shareholders can also refuse the offer and remain invested in the shares. In case a shareholder does not sell the shares to the acquirer within the time frame, he/she can sell it through the over-the-counter market. However, since the liquidity of the share goes down, selling it through the over-the-counter market may be time consuming.
Once the desired number shares are bought back by the acquirer, share delisting is successfully completed.
2. Impact due to involuntary delisting
Under this method, acquirers or promoters offer to buy back shares from the existing shareholders using a predetermined cost or a cost determined by an independent agency. Just like the previous method, this too does not affect a shareholder’s ownership in the company. However, under this method, the value of the company’s shares may go down once it is delisted.
In case a company delists its shares from all the stock exchanges in India except BSE and NSE, it need not offer an exit value to shareholders since the shares will still be available for trading on these exchanges. Thus, the shareholders can exit at any time by selling shares on BSE or NSE.
Investors can make the most of company delisting by fetching huge gains through buybacks and also as an opportunity to avail shares of such companies at a cheaper cost. However, investors must bear in mind that company delisting can be a long and elongated process, thereby affecting liquidity levels for some investors.
Shareholders can fetch substantial gains by selling the delisted shares for a premium to the acquirers or promoters within the buyback period.
A delisted share can be relisted if the company obtains permission for the same from SEBI and as per its guidelines. Shares that have been voluntarily delisted need to wait for five years to be relisted from the date of delisting. If a company has compulsorily delisted, the wait period is 10 years to list them again on exchanges.
A company can realign and reorganise its ownership by delisting. This can allow company operations to be better managed as the number of shareholders will be lesser with private ownership post delisting.
If a company delists from all stock exchanges except National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), it is called as partial delisting as the company need not buyback the shares.
Any gain from sale of shares is called capital gain. In case of delisting of shares within a year of their purchase, a 15% short-term capital gains tax is applicable . If delisting happens after one year of share purchase, a capital gains tax of 10% is payable if gains exceed Rs.1 lakh and if gains are under Rs. 1 lakh, no capital gains tax is applicable.