What Happens When a Stock Share is Delisted?

A once-promising investment may now be worthless, draining your overall returns. Investors often find themselves holding inactive stock after a company goes through the delisting process. This can be a frustrating situation, as the value of these shares has significantly declined.

In this blog, we will learn about the process of delisting, its impact on shareholders, types of delisting, and whether a delisted company can get listed again.

What is Share Delisting?

It refers to the removal of a company’s stock from a stock exchange. This means the stock can no longer be traded on that exchange. Delisting can happen for a couple of reasons: voluntarily and involuntarily. Let’s understand them in detail.

Voluntary Delisting

A company opts for voluntary delisting if it chooses to go private or get acquired by another company. In this case, the company will generally offer shareholders a way to sell their shares through a reverse book-building process in case of a merger or acquisition. Shareholders also have the option to sell their shares in the OTC market, which is a little tough to execute.

Involuntary Delisting

This happens when a company does not follow the rules of the stock exchange. There are different requirements a company needs to meet to stay listed, such as maintaining a certain price or filing financial reports on time. If a company does not meet these requirements, the exchange can delist them.

Examples of Delisting in India

1. Capgemini Technology voluntarily delisted itself in 2008.
2. Atlas Copco India Limited was delisted from the BSE in 2011.

What Happens to the Delisted Shares?

Let’s have a quick overview of the status of the delisted shares. Even though delisting makes things trickier, you still own some stake in the company, as indicated by your holdings.

Once the company is delisted, you can no longer trade them on the stock exchange. This significantly reduces liquidity and makes the process of finding a buyer difficult. You might be able to sell your shares on the OTC market, which is essentially a network of dealers who trade securities outside of exchanges. However, OTC markets are less regulated and generally have wider bid-ask spreads than the stock exchange spreads.

Shareholders might find it challenging to sell their shares as there may be limited buyers in the OTC market.

Also, during the buyback window, shareholders can profit by selling their delisted stock to promoters.

Impact on the Shareholders

Shareholders are significantly affected in the following ways if the shares they hold get delisted:

• Loss of Liquidity – The main impact of delisting is the loss of liquidity, which makes it difficult to sell shares or turn your investment into cash.
• Reduced Market Value – Delisting usually causes a drop in the share price because there is less interest in buying the shares. The absence of a public market can have a significant impact on the valuation.
• Corporate Governance Concerns – After delisting, it becomes difficult for investors to get company information, leading to lower transparency in financial reporting. It also makes the process of analyzing a company’s performance complex.

Important Recommendations by the Committee formed by SEBI

1. No prohibition should exist against delisting securities as long as the company’s securities have been listed on a stock exchange for at least three years.
2. No selective restriction or discrimination should be imposed on any type of company when it comes to delisting. However, the regulatory framework may need to be stronger to prevent misuse by companies and protect investors’ interests.
3. Acquisitions resulting in delisting must comply with SEBI regulations, circulars, guidelines, and the Listing Agreement to protect investors.
4. SEBI should reiterate that companies cannot use the buy-back provision to de-list companies.
5. Delisting provisions apply when public ownership (excluding promoters) falls below the required limit due to a takeover process.
6. A company listed on a stock exchange can be removed from that exchange without making an exit offer to its shareholders, provided that the securities of the company are listed on BSE or NSE. When a company that is listed on any stock exchange other than BSE or NSE seeks is delisting, an exit offer must be made to the shareholders.
7. A separate agency called the Central Listing Authority (CLA) should be formed to ensure consistent due diligence in reviewing listing applications.

Can delisted stock get listed again?

Yes, securities can be re-listed after a three-year period in case of voluntary delisting and a ten-year period for involuntary delisting. The listing will be based on the respective norms and criteria applicable at the time of application. The application will undergo thorough scrutiny by the CLA.

Conclusion

To summarize, delisting can be an important event for both investors and companies. Delisting does not always mean business failure, although it may indicate financial or operational issues. It can cause investments to turn illiquid and decrease their value. Understanding the reasons behind delisting and evaluating the long-term prospects of the company can help investors make better decisions. It is important to analyze the available information and consider the impact on one’s investment strategy. For further guidance, an investor must consult a financial advisor before investing.

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