There are thousands of companies that have their shares listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Investors can use their demat accounts to buy and sell these shares easily. However, did you know that these shares can be removed from the stock exchanges even when you hold them in your demat accounts?
This is where the delisting of shares comes in, which can hugely impact shareholders. This blog will help you understand what is delisting of shares and what happens to the current shareholders.
What is the delisting of shares, and how does it work?
When a company offers its shares to the general public for the first time, it is called an Initial Public Offering (IPO). Once the IPO process is complete, the shares are listed on the stock exchanges such as the National Stock Exchange or the Bombay Stock Exchange. Retail investors can trade (buy or sell) these shares easily through their stockbroking platforms and demat accounts.
However, delisting meaning refers to when the shares that are already listed on the stock exchanges are removed from further trading. After the delisting of shares, investors can not buy or sell the shares of that specific company anymore.
There are numerous reasons for the delisting of shares:
- Public to private: When a company lists its shares to the general public, it dilutes the ownership of the company owners, who sell a percentage of their shares at the time of IPO. Hence, a company may choose to delist its shares to reverse its identity from that of a public limited company to that of a private limited company.
- Merger: A company may opt to delist its shares if it wants to merge with another company to expand its business or avoid constant losses. In such a case, the current shareholders are offered shares with almost the same value in the merged company.
- Cost reduction: A company must adhere to many listing requirements to continue listing its shares on the stock exchanges, costing them money. To reduce such costs, it may delist the shares.
- Improving corporate governance: Delisting of shares may allow a company to have better control over its business operations, making it easier to ensure effective corporate governance initiatives.
When a company considers delisting, it has to choose from a type mentioned below:
- Voluntary delisting: Voluntary delisting of shares occurs when a company voluntarily decides to remove its shares from the stock exchanges. The company may choose this type of delisting in case it is merging with another company or wants to go private.
- Involuntary delisting: Involuntary delisting is when a company’s shares are delisted by the Securities and Exchange Board of India if the company fails to meet the listing requirements set by SEBI. Some reasons for the involuntary delisting of shares include the share price reaching a very low level, the company failing to submit financial reports on time and not having an adequate number of shareholders.
What happens to the stock I hold that just got delisted?
Investors dislike the delisting of shares as they have no other option but to sell the shares they hold. If a company’s shares are delisted, and you are an investor, you can no longer sell the shares on the stock exchanges.
However, the selling of the shares differs depending on voluntary or involuntary delisting.
If the company voluntarily delists its shares, the promoters or acquirers (new owners) usually launch a reverse book-building issue. Under this, the current shareholders are asked to sell their existing shares to the promoters and acquirers at the current market price or at a premium.
In this case, you can easily sell your shares and receive the sale proceeds. Generally, in a reverse book-building issue, the company decides the final share price based on the price at which the maximum number of shares are offered.
However, if you fail to sell your shares during the reverse book-building issue and the promoters and acquirers have closed the share buyback window, you can sell them on the over-the-counter market after finding a direct buyer. An over-the-counter market is a marketplace that allows investors to buy and sell securities directly to each other without needing a broker or a stock exchange.
If a company involuntarily delists its shares from the stock exchanges, SEBI requires the company's promoters to provide a buyback window to the existing investors. Within this window, the investors can sell back their shares to the promoters. In this case, an independent evaluator determines the value of the shares through ratios such as earning per share or quick assets.
It is important to sell the shares you hold before they are delisted from the stock exchanges. You can either sell the shares on the stock exchange after the company announces a delisting date or sell the shares in the company buyback. This is because the shares lose all their value once they are delisted, which may result in hefty losses.
Conclusion
It is always disappointing for investors when a company announces the delisting of shares. Investors have no option but to sell the shares, either during the buyback or to direct buyers in the over-the-counter market. However, if the investors fail to sell the shares before delisting, it can result in losses as the share value ceases to exist and comes down to zero.
Now that you know the share delisting meaning, you can make informed decisions if any of the companies announce the delisting of shares while you hold them in your demat account.
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