Delisting is also a common practice where investors find that their shares are no longer listed on the stock exchange. Delisting may occur voluntarily when the promoters decide to withdraw a company from the exchange or involuntarily when compelled by regulatory factors. Delisting does not render the shares worthless; rather, it prevents liquidity. The company is still owned by shareholders and retains legal rights.
This blog discusses the meaning of delisted shares, why shares are delisted, and how delisted shares can be sold in India, as well as the major guidelines to be observed in the process.
What are Delisted Shares?
Delisted shares are equity shares of a company that is not listed in the recognised stock exchange, like NSE or BSE. When delisted, such shares cannot be traded using standard stock market exchanges.
The delisting process does not necessarily dissolve the company and terminate the rights of the shareholder. The shareholders still remain owners of the company, where they are eligible to receive dividends and other benefits, as declared by the company, depending on the financial position and governance of the company.
Reasons for Delisting
A company can be delisted due to a number of reasons. Voluntary delisting is usually done when the promoters desire to have absolute control, minimise the cost of compliance, and reorganise ownership. Mandatory delisting can occur because of long-term non-compliance with listing rules, the default in offering financial statements or financial distress.
The delisting reason is significant in specifying the manner and price at which shareholders can leave.
Sale of Shares in Voluntary Delisting
In voluntary delisting, where the firm is offering an exit opportunity to the public, the firm normally offers the same to the public. SEBI regulates this process, which is normally done within the Reverse Book Building (RBB) mechanism.
In this type of system, the shareholders have the option of selling their own shares at a price they consider to be suitable within a given time. Bids that enable the promoter to purchase the necessary share of the shareholding are used to determine the final exit price. Users who tender their shares at a price not lower than that discovered are paid by banking means.
Without involving the shareholders in the delisting offer, the shareholders can still sell their shares subsequently to the promoter at the same exit price under certain conditions.
The Sale of Shares After Delisting
If a company has been delisted, it is even more difficult, though not impossible, to sell shares. The following are some of the common methods:
1. Off-Market Transactions
Delisted shares may be disposed of by off-market transfers by identifying a willing buyer. These can be promoters, current shareholders or even private investors who have interests in the acquisition of stakes. The delivery instruction slip is carried out with a depository participant in order to effect the transaction.
The price in the off-market transactions is agreed upon and might depend on the financial position, assets, and future of the company.
2. Sale by Intermediaries or through Share Brokers
Some of the brokers and intermediaries deal in unlisted or delisted shares. They facilitate buyer-seller contacts and also aid in documentation and transfer formalities. Nevertheless, due diligence is imperative, whereby transparency in pricing might be impaired.
Investors would be advised to ensure that the middlemen are credible.
3. Promoter Purchase or Company Buyback
In other instances, promoters can still purchase shares from public shareholders after delisting, particularly if they plan to consolidate ownership. These are purchases and sales that are normally at negotiated prices and subject to agreement.
Use of Valuations in the Sale of Delisted Shares
Delisted shares are not as easy to value as listed ones. Pricing is determined by factors like book value, earnings, asset base, liabilities, future prospects and industry conditions. In some instances, the independent valuation reports can assist in the negotiation of a fair price.
Shareholders also must not distress sell without having knowledge of the intrinsic value of their ownership.
Tax Implications
Capital gains tax is imposed on the proceeds of the delisting sale. The tax treatment is based on the holding period and the original listing of the stock. Delisted shares are not traded on recognised exchanges, and therefore, there is no Securities Transaction Tax (STT) on delisted shares.
Investors should keep proper records of the purchase price, sale price, and retention period to enable accurate tax reporting.
Risks and Precautions
Sale of delisted shares is associated with some risks such as low liquidity, absence of price transparency and fraud potential. The shareholders are supposed to check the company information, where it is properly documented, and transactions include the use of reliable means.
One should also ensure that the company is operational; it is under liquidation or under legal proceedings, by seeking clarity on whether the company is operational before signing any sale agreement.
Conclusion
Although the process of selling delisted shares is more complicated than trading listed securities, it is not impossible. Shareholders can use several options, such as promoter exit deals, off-market deals, and those done with the help of brokers. The point of delisting is the major issue and should be interpreted in light of the purpose of delisting, the company’s financial status, and a credible sale strategy.
By making prudent judgments and seeking expert advice, investors can dispose of delisted investments at a reasonable price without risking their legal or financial rights.
Related Service
