The most exciting thing for investors and traders is the initial public offering. An initial public offering is the official stock market listing of a company. The company listing reflects a firm's growth and financial stability, broadening its reach to the public. On the contrary, delisting is a different matter. Delisting is when the company withdraws its shares from the exchange and becomes a limited liability company. For more details on the delisting of shares, see this article.
Understanding Delisting Meaning
When a company decides to withdraw its shares from the market, it is delisting. As a consequence, the shares are no longer capable of being traded. It is no longer a publicly listed company when it ceases to allow share trading. The company is a private limited company due to delisting all the shares. Failure to fulfil the exchange's requirements is one of the reasons for listing. The delisting of shares has significant consequences, which is why companies are reluctant to be delisted.
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How Does Delisting Work?
Companies may opt for delisting for a multitude of reasons, each driven by strategic, financial, or regulatory considerations. One common motive is the decision to go private. Going private entails the company's shares no longer being available for trading on the open market. This move often provides the company's management or a group of investors with increased control and flexibility in managing the business without the pressure of public market expectations.
Moreover, the costs associated with maintaining a listing on a public exchange can be substantial. Companies need to pay listing fees to the exchange and allocate resources to fulfil regulatory compliance and reporting requirements. For smaller companies, these expenses can be particularly burdensome, leading them to consider delisting as a cost-saving measure.
Delisting might be prompted by low trading volumes of a company's shares. If the stock experiences consistently low levels of trading activity, it becomes challenging for investors to buy or sell shares at favourable prices. This illiquidity can deter investors and adversely affect the company's valuation. In such cases, delisting could be seen as a practical step to reduce the issues associated with low trading volume.
What is the Process of Delisting of shares?
The process of delisting is multifaceted and involves coordination between the company, stock exchange, regulatory authorities, and stakeholders. While specific steps may vary based on regulatory requirements and the stock exchange's rules, a general outline of the delisting process includes.
Company Decision and Evaluation
The decision to delist is typically made by the company's management and board of directors. This decision is often driven by a thorough evaluation of the company's financial health, strategic direction, and regulatory considerations.
Notification to Stock Exchange
After the decision is made, the company formally notifies the stock exchange where its shares are listed. This notification triggers the regulatory and procedural processes associated with delisting.
Depending on regulatory requirements and exchange rules, the company may require shareholder approval for delisting. This step ensures that shareholders' interests are taken into account before proceeding with delisting.
The company publicly announces its intention to delist. This announcement provides transparency to shareholders, investors, and the broader market about the company's decision.
Exchange Review and Approval
The company submits a formal application for delisting to the stock exchange. The exchange reviews the application, assesses the company's compliance with delisting rules, and decides whether to approve the delisting request.
Once the exchange approves the delisting request, the company's shares are officially removed from trading on the exchange. This marks the completion of the delisting process.
Types of Delisting
The various types of delisting are as follows:
1. Voluntary delisting from the company
When a company breaches the standards and does not fulfil the minimum financial requirements, an involuntary delisting of shares occurs. The company has, however, issued a warning for failure to comply. However, the company's shares will be delisted in cases of continuous failure to fulfil obligations. Several other grounds can also justify involuntary delisting, for example, the following:
1. It may require mandatory delisting if it fails to meet the rules laid down by the exchange.
2. It leads to delisting stocks for six months in the case of multiple share transactions during the past three years.
3. The company's shares are involuntarily delisted when it incurs significant losses in the last three years, resulting in a negative net worth.
2. Voluntary delisting
Voluntary delisting is preferred for companies that do not benefit from listing on the stock exchange and undertake to pay substantial sums for trading publicly. The same type of delisting also occurs when the company's structure changes. Another reason is consolidation, merger, or avoiding obstacles in the company's operations. This is accomplished by permanently removing securities from the stock market and making them unavailable for trading. In such cases, the company shall be liable to pay all shareholders in exchange for all their shares.
What happens when a Stock is Delisted?
In the event of a voluntary delisting, the acquirer will use an accelerated book-building process to buy shares from its shareholders. An authorised letter from the acquirer advising the shareholders of the buyback is sent to each shareholder. A bid form and official letter will also be sent to the shareholders. The acquirer makes an offer to shareholders. There is a chance for the shareholders to reject the proposal and keep their shares.
When the purchaser buys back the required number of shares, the successful delisting of shares occurs. In the prescribed period, shareholders must hand over their shares to promoters. The shareholders must sell their shares on the Over The Counter market if they fail to do so. Selling shares over the counter is a time-consuming process due to decreased liquidity. When shareholders sell their delisted shares to promoters at higher prices during the stock repurchase, they make significant profits. As an investor, you have a window of opportunity for profits as the stock price may drop once the repurchase period is over.
The price of the delisted stock's buy back in the event of an involuntary delisting is decided by a third-party evaluator. Involuntary listing, like voluntary listing, does not affect share ownership; nevertheless, if a company is delisted, the delisted stocks will lose part of their value.
Can Delisted Shares be listed again?
Only when they comply with the following guidelines provided by the market regulator may shares be relisted.
1. Voluntarily delisted stocks
For these shares, five years after the date of delistment, they will be required to relist.
2. Compulsorily delisted stocks
In this case, delisting companies will have waited 10 years before being relisted on an exchange.
When a company's shares are removed from the stock exchanges, it is said to be delisted. Voluntary or involuntarily, the delisting of a company may take place. It is important to note that delisting voluntarily does not necessarily decrease the price of shares; however, it may reduce their value. Yet, you may continue to own them as shareholders and apply for a share repurchase or sell shares on the over-the-counter market. To invest in the stock market, use the BlinkX trading app to get lots of features & options to trade online.
What are delisting FAQs?
Delisting shares are bad as they depict the bad image of the company.
The delisting will be unsuccessful, and the company will continue to be listed on the stock exchanges if the minimum share repurchase limit is unmet. A company must buy back its shares from its shareholders if it is forced to delist them.
If the company ceases to be listed, you will still own a significant portion of its shares. But on any exchange, you cannot transfer those shares. However, it can be sold on the Over-the-counter market.
To relist on the stock exchange, the company needs to fulfil all the requirements of the stock exchange.
As soon as the stocks get delisted they start to lose their worth, so better to sell them.