When a company’s shares are exchanged on a stock exchange, like BSE or NSE, it’s termed a listed company. People can purchase and sell these shares conveniently through trading apps or brokers. But occasionally, a company chooses to delete its shares from the stock exchange, implying they are no longer present for trading. This procedure is termed delisting. When a company delists, it frequently becomes a private limited company, which means it’s no longer open for public trading.
Meaning of Delisting
Imagine a stock exchange as a vast marketplace where people buy and sell shares of companies, much like you would purchase vegetables in a market. When a company lists its shares, it places its shares in that marketplace for all to trade. Delisting is the opposite; it occurs when a company removes its shares from the market so people can no longer buy or sell them there.
When a company delists, it turns into a private company. This implies that just a few people, such as big investors or company owners, can hold their shares. The general public can no longer trade them. Delisting can occur for two primary reasons: either the company elects to delist (termed voluntary delisting) or it’s compelled to delist by the stock exchange (termed compulsory delisting).
Stock delisting is a key event in a company’s life cycle. The way a company gets taken off the stock exchange can point to a shift in its game plan or suggest it’s in financial trouble. When a company leaves the market, it doesn’t just mean less trading of its shares. It also makes it harder to raise cash and might shake investors’ trust in the business.
Types of Delisting
Let’s break down the two types of delisting so it’s apparent.
1. Voluntary Delisting
Voluntary delisting is when a company elects by itself to remove its shares from the stock exchange. Consider a shop owner choosing to close their store because they wish to run their business privately. Here’s why a company may do this:
- An investor desires to purchase the company. Occasionally, a large investor or another company wishes to acquire a majority stake in the company. They might buy shares to gain control, and to simplify the process, they delist the company.
- The company desires privacy: Public companies are required to disclose a great deal of information to the public, including their financial performance. A few companies opt to keep things private.
- Fewer rules to follow: Listed companies must observe strict rules specified by the stock exchange. Delisting enables them to avoid these rules and save money.
How Does Voluntary Delisting Function?
When a company wishes to delist, it must buy back its shares from the public shareholders who hold them. The company provides these shareholders a price to give back their shares. This price is determined through a process known as reverse book building. It’s akin to the company querying shareholders, “What price will you sell your shares for?” The company then selects a fair price based on the input from shareholders.
Who can sell shares?
Shareholders can sell their shares to the firm via their stockbroker during regular trading hours. They complete a form to cite how many shares they wish to sell.
What if you don’t sell?
If you don’t sell your shares during this procedure, you can still sell them to the company’s promoter (the primary owner) later at the same price. The option is available for a minimum of one year following the end of the delisting process.
When is delisting effective?
Delisting works if the investor or company purchasing the company finishes up owning 90% or more of the company’s shares.
For instance, in 2023, Vedanta Limited, a company based in India, voluntarily delisted its shares from the stock exchange. The promoters offered to buy back shares at a fixed price, and after getting sufficient shares, the company left the stock exchange and went private.
2. Compulsory Delisting
Compulsory delisting occurs when the stock exchange or a controlling authority (like SEBI in India) compels a company to remove its shares. This is similar to a shop being closed by the government because it’s not observing the rules. Here’s why this may occur:
Breaking rules:
If a company is not adhering to the rules of the stock exchange, for instance, not providing financial reports in a timely manner, it can be forced to delist.
Financial problems:
If a company makes a large financial loss and its net worth (its assets minus its liabilities) goes into the negative for three years running, it can be delisted.
Irregular trading:
If the company’s shares are not traded frequently (for instance, very few people purchase or sell them over three years), the stock exchange may delist them.
When a company is compulsorily delisted, it’s not its preference. The stock exchange suspends trading of its shares for 6 months as a warning. If the company doesn’t rectify the problems, it will be delisted permanently.
Example:
Various small companies in India, such as Kingfisher Airlines, were compulsorily delisted because they were unable to recover from financial losses and failed to meet SEBI’s requirements.
Can a Delisted Company Become Re-listed?
A company whose shares have been delisted from an exchange, whether involuntarily or voluntarily, could apply to get them relisted once more. However, the relisting process can be very difficult and can even require the company to comply with all the listing requirements again. Additionally, the company has to demonstrate better financial health, comply with regulatory requirements, and go through a rigorous review process by the exchange.
In the event of voluntary delisting, the company may apply for relisting only after 5 years from the initial date of delisting. In the meantime, if the company is involuntarily delisted, it may apply for relisting only within 10 years from the initial date of delisting.
What Happens When a Company Becomes Delisted?
Once a company gets delisted, its stock is taken off the stock exchange, and in essence, public trading is brought to a halt. This can significantly impact the shareholders since it becomes more difficult to sell stocks, and thereby the share price is usually reduced. Delisting may be an indicator of company restructuring, financial battles, or a strategic decision to go private.
Companies choose to delist often to go private or get bought out. This usually means they offer to buy back shares from their stockholders at a set price. It helps strengthen ownership and can give shareholders a chance to cash out at a profit.
On the other hand, involuntary delisting happens when a company breaks the rules, goes bankrupt, or can’t stay afloat. When this occurs, shareholders might see their stocks lose value and have fewer chances to sell. This can hurt their investment, sometimes wiping it out.
Advantages of Delisting From the Stock Exchange
The primary benefits of delisting from a stock exchange for a company comprise decreased regulatory compliance and related costs, greater privacy and control over business operations, flexibility in making business decisions, and likely cost savings from not needing to attend to public company reporting and governance standards.
- Decreased Regulatory Compliance: Delisting can substantially lower a company’s burden of complying with the stringent and often expensive regulations imposed by stock exchanges and securities officials, resulting in reduced operational expenses and decreased administrative overhead.
- More Control and Privacy: Without the scrutiny of public markets, delisted firms have greater freedom and confidentiality in running their business affairs and long-term plans. This independence can prove useful in making quick, discreet business decisions.
- Cost Savings: Being listed involves continuing expenses in the form of compliance costs with respect to financial reporting, listing charges, and investor relations expenses. Delisting eliminates these expenses, allowing the firm to allocate resources better towards business development and expansion.
- Flexibility in Decision-Making: Without public shareholders breathing down their necks, companies that go private can think more about the big picture instead of worrying about every little market hiccup. This freedom lets them take on bolder, more forward-thinking projects.
- Chances for Takeovers or Shaking Things Up: When a company goes private, it often opens the door to major changes or buyouts. For instance, in a management-led buyout, executives are able to acquire a high percentage share without the restriction of market valuation and can possibly design more effective business turnaround strategies.
Wrapping Up
A significant turning point in a company’s corporate history is when its stock becomes delisted. When a company’s stock is delisted, it is one of the most critical moments in a corporation’s corporate history. Once a corporation’s stock is delisted, it will cease to be a public company and become a private corporation, which has some significant ramifications. Once delisted, a company must observe the rules of private corporations, prudent management, and communicate with its existing owners. After a firm is delisted, a process ensues that is affected by the company’s goals, the state of the market, and overcoming the hardships of being a private corporation.
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