Delisting of shares is a crucial corporate action that carries significant implications for companies, investors, and the broader market. Although it can be viewed as a purely technical occurrence that can only affect the financial community, delisting has a direct effect on shareholders’ rights, liquidity and long-term plans. It is crucial to learn the procedure, reasons, and dangers behind delisting, even to the Indian retail investors or those in the financial field, given that it is regulated by SEBI and followed by the NSE and the BSE.
This is an exhaustive guide that covers the nature of delisting, the process of delisting, its various implications on shareholders and the regulatory environment as established in India concerning the stock market.
What is Delisting of Shares?
Delisting means permanently withdrawing the equity shares of a company listed on a stock exchange, which are not available for further trading with the public at an exchange such as NSE or BSE. It is, in effect, the opposite of listing, by which a company sells its shares to the public and achieves access to the capital markets.
Delisting may be of two varieties:
- Voluntary Delisting: Becomes effective due to the choice of the company itself, very often in connection with some strategic or operational considerations.
- Involuntary (Compulsory) Delisting: Designated by the regulatory agencies or stock market in the case of breaching the listing standards, financial crisis or persistent non-compliance.
Why Do Companies Choose to Delist?
1. Strategic Flexibility
Delisting enables businesses to function without the continuous censoring by the public market. This makes long-term planning a possibility without being influenced by day-to-day changes in share prices or shareholder expectations.
2. Cost Savings
Public listing also comes with periodic costs that are associated with listing fee, compliance cost, investor relations cost and disclosure cost. Delisting eradicates these expenses.
3. Gaining Control
After delisting, promoters would have a majority stock holding without the influence of the minority and can make decisions decreasing restrictions.
4. Corporate Restructuring
Delisting can be a result of a consolidation strategy or privatisation strategy, which entails mergers, acquisitions, and restructuring of businesses.
The Delisting Process in India
A. Voluntary Delisting (Step-by-Step Process)
- Board Resolution: The board of directors resolves to propose delisting.
- Shareholder Approval: It should be approved by way of a postal ballot or e-voting. At least two-thirds must vote in favour of at least two-thirds of the public shareholders.
- Public Announcement: The company puts out a public announcement and sends a Letter of Offer to the shareholders.
- Reverse Book-Building Process: The shares are offered by the public shareholders. Demand and supply bids determine the price found.
- Promoter Buyback: In case the promoters get at least 90 per cent of all the shares, then delisting is successful.
- Final Delisting: Stocks are officially delisted from the stock exchange.
- Post-Delisting: Existing investors can hold illiquid shares and can trade in the unregulated OTC (over-the-counter) markets.
B. Involuntary Delisting
It happens when the companies do not meet listing requirements. The most important initiators are:
- Failure to submit financial results
- Suspended trading for shares for over six months
- Bankruptcy or insolvency of finances
- Violence or law offences, Regulatory or legal violations
In these situations, the stock market triggers the delisting, and the investor’s value is destroyed.
Implications for Shareholders
Although delisting takes shares out of circulation, the shareholders remain properly entitled to their shares until they sell. Nonetheless, the consequences are important:
- Loss of Liquidity: Shares that are delisted are difficult to sell and the price might be considerably low.
- Valuation Loss: There is low demand and visibility.
- Loss of Transparency: Companies can make less information disclosure and discontinue frequent communication with investors.
- Limited Exit Options: Particularly, in situations where there is no arrangement to buy backs, especially in the involuntary ones.
Options Available to Investors Holding Delisted Shares
Once a stock is delisted from the exchange, investors are left with limited but important exit options. While these shares cannot be traded on the NSE or BSE, here are the routes available:
1. Publicised over-the-counter (OTC) selling
OTC markets allow trading in delisted shares between a seller and a buyer without participation by the formal market. These transactions, however, are generally:
- Less regulated
- Offline is carried out by brokers or through brokers
- Subject to broader bid-ask spreads
2. Buyback Offers as a Participant
Voluntary delisting is when promoters or the company are willing to buy off the shares back to the public shareholders. This is brought about by:
- The reverse book-building process
- A price discovery mechanism which regards shareholders’ bids
- A small period in which you have to submit your shares
3. Visiting the Negotiated Sales or Private Sales
In case buyback offers are not availed of or missed, the owners of the shares can consider engaging in one-on-one negotiations with willing buyers. But such an approach is commonly:
- Challenging with no demand
- Subject to inefficient pricing
- Alternative to personal network or broker support
Challenges with Selling Delisted Shares
Although these channels are available, it is accompanied by several practical limitations that may affect liquidity and price:
1. Poor liquidity and Low Demand
After the stocks have been taken off the exchange, the demand drastically decreases. The buyers in OTC are restricted, and the majority of the investors avoid illiquid stocks.
2. Broader Bid-Ask Spreads and Pricing Problems
There is no controlled exchange to establish the price, which means that the gap expands between the expectations of the buyer and the seller, which ultimately compels the sellers to accept a lower price.
3. Greater Timelines Executing Trades
OTC markets or private sale transactions are not automated and are opaque; therefore, the process is ineffective and unreliable. It can take weeks or months when an investor to find a buyer.
Future Prospects: Can Delisted Shares be Relisted?
It is possible to relist the delisted shares, but the process is dependent on the form of delisting, and it comes with some rigid regulatory provisions.
Voluntary Delisting
Voluntary delisted companies are eligible to reapply to state their names again after a 5-year cooling-off period upon approval of the SEBI and adherence to listing conditions such as the minimum public holding of shares and financial disclosures.
Involuntary Delisting
This is done to prevent re-listing, as in case of compulsory delisting due to non-compliant or financial reasons, the listing can only be restored after 10 years with all the regulatory permission and dues payment involved and demonstration of operational recovery.
SEBI Conditions
SEBI requires in both instances:
- A complete disclosure of the reasons of delisting in the past
- New employee application and economic vetting
- Regulatory and governance compliance assurance
- A re-listing may be done but it is on condition that companies have shown they can be and will be long-term compliant and credible.
Regulatory Framework Governing Delisting in India
The delisting scenario in India is regulated through the SEBI (Delisting of Equity Shares) Regulations, 2021. The prominent characteristics are:
- Fair Pricing Mechanism: Reverse book-building will make sure that the public shareholders receive a fair exit price.
- Shareholder Protection: Minority requirements are secured through a minimum acceptance percentage (usually 90 per cent).
- Reason, Process and Timeline Disclosure Requirements: Companies have to publish reasons, procedures, and schedules.
The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) also have rigid operational guidelines which are keen to be observed in order to ensure compliance and safety of investors.
Tax Implications for Investors
The consideration which is derived as a result of delisting, especially in the event of a buyback offer, is taxable as capital gains under the Indian Income Tax:
- Short-term Capital Gains (STCG): Less than 12 months of ownership-15%.
- Long-term Capital Gains (LTCG): In case of a long-term investment (i.e. over 12 months), 10 per cent tax on gains above 1 lakh (according to the existing provisions).
- Buyback Price Consideration: The price as it is offered by the company is taken as the sale value on which tax is charged.
Such transactions are to be stated in the ITR by the investors, and they may also require demat account statements as evidence.
How to Identify Potential Involuntary Delisting Risks
Dealing with regulatory or financial distress may become a future issue in delisting, and proactive investors are advised to keep an eye on such indicators:
- Recurring missing of financial results or auditing
- Suspension of share trading during long durations
- Large concentrations of promoter shareholders and low public float
- SEBI or stock exchange regulatory action or notice of investigation
- Falling financial performance or debt reorganisations
Delisting notices are periodically issued by NSE as well as BSE, whose investors can trace them on their respective websites.
Conclusion
Delisting is not an entirely back-end corporate process, but it is an important factor in investor sentiment, portfolio liquidity, and access to markets. Although it benefits companies in terms of strategy, shareholders will have to deal with less transparency and fewer escape hatches. Investor knowledge of the process, regulatory protection, and rights is necessary to make informed decisions.