Delisting of Shares: Meaning, What Happens, & Options (2024)

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Delisting of shares meaning is a process that involves removing a company’s shares from a stock market. In this blog, we will provide you with a guide on everything you need to know about delisting, including its definition, reasons, types, processes, effects on shareholders, and strategies for dealing with delisted companies.

What is Delisting of Shares?

The delisting meaning occurs when a stock exchange removes a company’s shares, rendering them no longer publicly traded. This can occur voluntarily or involuntarily, depending on the circ*mstances.

Why Do Companies Delist Their Shares?

Companies may choose to delist their shares for various reasons, such as mergers and acquisitions, non-compliance with listing requirements, financial distress, and strategic reasons. Shareholders often see it as a last resort, given its significant implications.

• Mergers and Acquisitions: One common reason for delisting shares is the merger or acquisition of a company. In this case, the stock exchange may delist the shares of the acquired company, and shareholders may receive shares or cash in exchange for their shares.
• Non-Compliance with Listing Requirements: Companies that fail to comply with listing requirements may face stock delisting. Listing requirements vary depending on the stock exchange, but they typically include financial reporting, minimum share price, and minimum market capitalization.
• Financial Distress: Companies that are facing financial distress may choose to delist their shares to avoid scrutiny from investors and regulators. Stock delisting can also provide companies with more flexibility in restructuring or refinancing their debt.
• Strategic Reasons: Companies may choose to delist their shares for strategic reasons, such as going private or focusing on long-term goals without the pressure of meeting short-term performance expectations.

Types of Delisting

There are two types of: voluntary and involuntary.

• Voluntary Delisting of shares: Voluntary delisting occurs when a company decides to remove its shares from the stock exchange. Companies may choose to delist their shares for various reasons, such as restructuring their business, reducing costs, or going private.
• Involuntary Delisting of shares: The stock exchange forces a company to delist its shares in cases of involuntary delisting. This can happen if the company fails to meet the listing requirements or violates the exchange’s rules.

How Does the Delisting Process Work?

• Notification of Delisting: When a company decides to delist its shares, it must provide notice to the stock exchange and shareholders. The notice typically includes the reason for delisting, date, and the process for selling or transferring shares.
• Trading Halt and Suspension: Once the notice is provided, the stock exchange may halt trading of the company’s shares to allow shareholders to make informed decisions about their investments. The exchange may suspend trading if the company fails to comply with listing requirements.
• Approval of Delisting: It must be approved by the stock exchange and other regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States. The approval process typically involves a review of the company’s compliance with listing requirements and disclosure of relevant information to shareholders.
• Implementation of Delisting: Once the delisting of securities is approved, the company’s shares will be removed from the stock exchange. This means that investors can no longer buy or sell the shares through the exchange.

What Happens When Stocks Get Delisted?

In Case of Voluntary Delisting

In voluntary listing and delisting of securities, the acquirer purchases shares from shareholders through reverse book-building. Shareholders receive an official letter and a bidding form, with the option to reject the acquirer’s offer. Successful delisting requires the purchaser to buy back the necessary shares within a specified period. Failure leads to selling on the Over-The-Counter market, a time-consuming process due to decreased liquidity. Shareholders profit by selling delisted stock to promoters during the buyback window, but prices may decline after it closes.

In Case of Involuntary Delisting

In involuntary delisting, an independent evaluator determines the buyback cost. Unlike voluntary delisting, ownership remains unaffected, but delisted stocks may lose value. Delisting from most exchanges, except BSE and NSE in India, incurs no exit amount, allowing continued trading.

As an investment strategy, the 2010 government regulation led to increased delisting by promoters holding over 75% of securities. This attracted investors seeking gains when promoters buy back shares at a premium, especially in companies where promoters hold 80-90% of securities.

What is Voluntary Delisting of Shares?

When a company chooses to go private by voluntarily delisting from the stock exchange, investors holding its stocks are faced with crucial decisions.

Option 1: Offload Your Shares in Reverse Book Building

In this scenario, the company’s promoters or acquirers initiate a buyback through a reverse book building process. Eligible shareholders receive a public announcement and a bidding form. As a shareholder, you can exit by tendering your shares, with the final price determined by the maximum offered share price. Once the specified limits are reached, the delisting is deemed successful; otherwise, the company remains listed.

Option 2: Hold Until You Find a Buyer

If you choose not to participate in the reverse book building or miss the exit window, you can retain your shares and seek a buyer in the over-the-counter market. While selling in this market requires patience due to a lack of immediate buyers, it can be a viable option over time.

When companies voluntarily delist for expansion reasons, they often offer a buyback at a premium price, potentially resulting in a significant gain for investors. However, it’s crucial to recognize that this opportunity is temporary, and once the buyback window closes, the stock price is likely to decrease.

What is Involuntary Delisting of Shares?

Involuntary delisting occurs when a listed company’s shares are forcibly removed from the stock exchange due to non-compliance with listing guidelines, delayed report filings, or a low share price. In such cases, promoters must repurchase the shares at a value determined by an independent evaluator. While delisting doesn’t impact ownership, the shares may lose value post-delisting.

If your stocks face delisting, consider selling them. Exit the market or sell during the company’s buyback announcement. Making informed decisions based on a thorough analysis can contribute to achieving long-term investment goals.

Effects of Delisting on Company

• Loss of Public Status: After delisting, the company loses its public status and is no longer required to file financial statements with the stock exchange.
• Reduced Access to Capital: This may also reduce the company’s access to capital, as it can no longer raise funds through public trading.
• Impact on Reputation: It can negatively impact the reputation of the company and its ability to attract investors.

Effects of Delisting on Shareholders

• Loss of Liquidity: After delisting of shares, it becomes illiquid, meaning that they cannot be traded on the stock exchange. This reduces the ability of shareholders to sell their shares quickly and easily.
• Impact on Stock Prices: Delisting of securities can cause a decline in the stock price due to reduced demand for shares.
• Limited Access to Information: After the delisting of securities, shareholders may have limited access to information about the company, making it difficult to evaluate the value of their shares.
• Rights and Options of Shareholders: Shareholders have several options when a company decides to delist its shares. These include selling their shares, holding onto them, participating in a tender offer, or participating in a reverse merger.

What To Do with Delisted Shares?

Here are some strategies to deal with delisted companies’ shares:

• Selling the Shares: One option for shareholders is to sell their shares in the open market before stock delisting. This may allow them to avoid the illiquidity and decline in stock prices later.
• Holding onto the Shares: Another option for shareholders is to hold onto their shares. This may allow them to benefit from any potential increase in stock prices in the future.
• Tender Offer: A tender offer is when the company offers to buy back shares from its shareholders at a premium price. Shareholders can participate in the tender offer to sell their shares at a premium price.
• Reverse Merger: A reverse merger is when a private company acquires a public company to become listed on the stock exchange. Shareholders of the delisted companies may receive shares in the private company as compensation.

Can Companies Get Relisted?

Absolutely. To relist a delisted stock, SEBI approval is essential, and specific guidelines apply.

• For voluntarily delisted stocks, a minimum waiting period of five years from the delisting date is mandatory.
• In the case of compulsory delisting, the waiting period extends to ten years before re-listing on exchanges is possible.

Are There Any Benefits of Delisting Shares?

Delisting from a stock exchange offers no advantages. Listed companies must adhere to regulations like disclosing financial statements, quarterly reports, and holding an annual general meeting (AGM).

Though these requirements may not bind unlisted firms, it doesn’t inherently favor them. Take Vedanta, for example; its delisting during the Covid-19 pandemic aimed at gaining operational and financial stability, not necessarily reaping benefits unique to unlisted status.

To Wrap It Up…

In this blog, we discussed everything you need to know about the delisting of shares, including its causes, effects on shareholders, and strategies for dealing with delisted securities.
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