What does delisting mean to an investor?

Source: Google images
  1. Exchange initiated delisting
  2. Issuer initiated delisting

Exchange initiated delisting

It’s also called involuntarily delisting, where exchange asks the company to delist their shares from the trading platform. All companies seeking a listing of their securities on the exchange are required to enter into a formal listing agreement with the exchange. The agreement specifies all the quantitative and qualitative requirements to be continuously complied with, by the issuer, for continued listing. Companies that fail to meet the minimum standards set by exchange will be delisted by the exchange itself. The agreement is being increasingly used as a means to improve corporate governance. An example of involuntarily delisting is Entegra.

  • Failing to maintain the minimum percentage of public shareholding in the listed companies.
  • Failing to maintain the minimum trading level of shares of a company on the stock exchanges.
  • If whereabouts of the company, directors, promoters, etc., are unknown.
  • Whether the company has become sick or bankruptcy.
  • Directors’ track record especially with regard to insider trading, manipulation of share prices, unfair market practices.

Impact on shareholders

Forced delisting by exchanges leaves investors in the lurch as they have no option but to sell at whatever price is decided, which may be less than the actual value of the company.

Issuer initiated delisting

It’s also called voluntarily delisting where listed companies voluntarily opt for permanent removal of securities from the stock exchange. Examples of voluntarily delisting are Vedanta, Hexaware.

  • Companies opt to delist their securities for eliminating ongoing costs associated with listing (such as annual listing fee, the fee payable to share transfer agents).
  • To avoid complicated compliances under listing agreements.
  • The management may be seeking greater freedom in decision-making, without having to adhere to tedious compliance rules of stock exchanges and approval of shareholders i.e. more operational and financial flexibility.
  • In the case of merger or acquisition.
  • It provides operational flexibility and cost savings i.e. the costs of being publicly listed exceed the benefits.
  • Companies generally delist when they want to expand or restructure.
  • If the delisting is proceeding after buyback of equity shares by the company.
  • If the delisting is proceeding after to a preferential allotment made by the company.
  • If three years haven’t passed since the listing of equity shares on a stock exchange.

Impact on shareholders

Voluntary delisting is done through the reverse book-building mechanism. So, it’s a win-win situation for both (promoters as well as shareholders).

How promoters or shareholders manipulate prices?

  • In order to get the floor prices to lower, the promoter may divest stake prior to the delisting to known people or friendly shareholders who can influence the price by bidding less.
  • During crises like the global financial crisis (2008), Covid-19, the company can take advantage of the depressed valuation and try to strike a deal with the equity stockholders who are desperate for an exit. The company takes advantage of the undervaluation.
  • Sometimes companies also window dress their financial report in order to manipulate share’s fair value.
  • Often when a company announces delisting plans or is speculated to be a delisting candidate, investors and brokers push up the stock price to reap short-term gains by forcing the firm to buy back shares from the public at a higher price.

What an investor should do?

Any rational investor should not buy a stock only on the basis of delisting for an investment. The share price will plummet in case the company didn’t go through a successful delisting i.e. holding 90% of outstanding shares. Before investing one should check whether a company is fundamentally strong or not. What’s the economic moat of a business? An investor should compare the offer price to the valuations of peer companies in the industry and consider surrendering the shares if it provides sufficient premiums to these valuations.

What happens when you don’t give back your shares to the company?

Once the company holds 90% of outstanding shares, it can delist from the exchange. In case you haven’t tendered your securities, you end up holding illiquid shares. There would be a few options left with investors:

  • You can approach the court for resolution, as minority shareholders of Cadbury move to court back in 2003 as they were not happy with the offer price.
  • If you are still holding on to them once the stock is delisted, you would continue to be a shareholder, receive dividends, and retain the right to cast votes at shareholder meetings.
  • If you want to unload shares after the delisting, you can do so by tendering them to promoters within one year from the date of delisting. As per regulation, the promoters are required to accept the shares tendered at the same price at which the delisting took place.

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