Do Not Call
An in-depth guide to understanding the concept of delisting in the stock market, its various forms, processes, and implications for investors.
In the world of stock markets, companies are listed on stock exchanges to allow their shares to be traded publicly. However, not all companies remain listed permanently. Delisting refers to the process by which a company’s shares are removed from the stock exchange, making them no longer available for trading on that platform. This event can be initiated by the company itself or enforced by the regulatory authority. In either case, understanding what delisting means, how it works, and what it implies for shareholders is essential for any investor. This guide explores all aspects of delisting, including its types, process, regulatory framework, and how shareholders can manage their holdings in delisted companies.
To grasp the concept fully, it is important to understand the basic definition and motivations behind delisting:
Delisting refers to the removal of a listed company's equity shares from a stock exchange. Once delisted, the company’s shares cease to be traded on that exchange, although trading may still occur in the over-the-counter (OTC) market, subject to regulatory norms.
Companies may opt for delisting for strategic or financial reasons, while in other cases, it may be enforced due to non-compliance. Key reasons include:
Voluntary Delisting: When a company opts to delist on its own. This may happen during mergers, acquisitions, business restructuring, or when the promoters wish to take the company private.
Involuntary Delisting: When the stock exchange forces a company to delist due to failure in meeting compliance norms, consistent losses, insufficient public shareholding, or prolonged trading inactivity.
There are primarily two types of delisting in the Indian stock market:
This occurs when a company willingly decides to remove its shares from a stock exchange. The decision is typically approved by the board of directors and shareholders. It may be done for reasons such as:
Business restructuring or merger
Promoters wishing to buy out minority shareholders
Focus on core operations without the pressure of public markets
The voluntary delisting requires a special resolution passed by at least 90% of the public shareholders who tender their shares, as per SEBI regulations.
Also known as compulsory delisting, this is enforced by a stock exchange due to the company’s failure to adhere to listing requirements. Common triggers include:
Non-compliance with disclosure norms
Prolonged suspension of trading
Low market capitalisation over time
Fraudulent activities or legal violations
Promoters and directors of compulsorily delisted companies may face penalties, including a ban of up to 10 years from participating in the securities market.
Understanding the delisting procedure provides clarity on the protections in place for shareholders. The process varies slightly depending on the type of delisting.
The Securities and Exchange Board of India (SEBI) regulates the delisting process through the SEBI (Delisting of Equity Shares) Regulations. These aim to safeguard the interests of public shareholders while allowing legitimate business decisions to proceed.
The voluntary delisting process includes the following steps:
1. Board Meeting and Resolution: The company’s board passes a resolution proposing delisting.
2. Shareholder Approval: A special resolution is passed through postal ballot or e-voting, requiring at least two-thirds majority among public shareholders.
3. In-Principle Approval from Stock Exchange: An application is made to the exchange for preliminary approval.
4. Appointment of Merchant Banker: A SEBI-registered merchant banker is appointed to manage the process and determine the exit price.
5. Reverse Book Building (RBB): The exit price is discovered through the RBB mechanism where public shareholders tender their shares. Alternatively, for frequently traded shares, SEBI introduced a Fixed Price Process (from 2024), where the acquirer offers a fixed price at least 15% above the floor price, instead of RBB.
6. Public Announcement and Exit Offer: Promoters make a public announcement and offer to buy back shares.
7. Final Approval and Delisting: Once buyback conditions are met and final approval is obtained, the shares are delisted.
In the case of compulsory delisting:
1. Notice to the Company: The exchange issues a show-cause notice.
2. Review Period: The company is given an opportunity to rectify the non-compliance.
3. Delisting Order: If issues persist, the exchange passes a delisting order.
4. Compensation to Shareholders: The promoters are required to buy out public shareholding at a fair price as determined by an independent valuer.
Delisting impacts both the company and its shareholders. Understanding the consequences helps investors prepare for such events:
Operational Flexibility: With fewer compliance obligations, companies gain more control over strategic decisions.
Cost Reduction: Saving on listing fees, regulatory costs, and reporting expenses.
Focused Long-term Planning: Delisted firms can adopt a long-term view without market pressures.
Limited Liquidity: Shares can no longer be traded on the stock exchange, making them less liquid.
Exit Opportunity: In voluntary delisting, shareholders get a chance to exit at a discovered price.
Valuation Challenges: In the absence of market quotes, fair value assessment becomes harder.
Potential for OTC Sales: Shares may still be sold in the unlisted market, but transactions can be complex.
If an investor holds shares of a delisted company, here are the possible options to sell them:
In case of voluntary delisting, shareholders can sell their shares during the exit offer window as per SEBI regulations.
Shares of delisted companies can be sold via off-market transfers to willing buyers. This typically requires:
Identifying a buyer
Executing a share transfer deed
Informing the company’s Registrar and Transfer Agent (RTA)
In involuntary delisting cases, promoters may be obligated to buy the shares from public shareholders at a fair value.
SEBI has established a Dissemination Board (DB) to facilitate the sale and purchase of delisted shares. While it does not provide trading functionality, it helps in matchmaking for buyer-seller interactions.
Understanding the contrast between listing and delisting gives a clearer picture of a security’s market journey:
Aspect |
Listing |
Delisting |
|---|---|---|
Definition |
Inclusion of shares on a stock exchange |
Removal of shares from the stock exchange |
Accessibility |
Shares are publicly tradable |
Shares are not publicly tradable |
nvestor Base |
Wider, includes institutional and retail |
Limited, mainly existing shareholders |
Regulatory Oversight |
Subject to SEBI and exchange rules |
Limited post-delisting, unless relisted |
Liquidity |
High, due to active trading |
Low, unless sold off-market or to promoters |
Companies can apply for relisting only after a minimum two-year gap following delisting, subject to meeting listing criteria and approval by the Central Listing Authority.
Both listing and delisting represent crucial milestones in a company’s capital market lifecycle.
Delisting is a key event in a company’s lifecycle and carries significant implications for investors. Whether it is voluntary or compulsory, the process is governed by a robust regulatory framework designed to protect shareholders. Investors must stay informed about their rights and the steps involved during a delisting process. With proper understanding and timely action, shareholders can manage their investments effectively even in the event of a company’s delisting.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sources
Securities and Exchange Board of India (SEBI): https://www.sebi.gov.in/
National Stock Exchange of India (NSE): https://www.nseindia.com/
Bombay Stock Exchange (BSE): https://www.bseindia.com/
Kotak Securities: https://www.kotaksecurities.com/investing-guide/share-market/what-is-delisting/
Groww: https://groww.in/blog/what-happens-when-a-stock-is-delisted
WealthDesk: https://wealthdesk.in/blog/delisting-of-stocks/
Alice Blue: https://aliceblueonline.com/delisting-of-shares/
Religare Broking: https://www.religareonline.com/knowledge-centre/share-market/delisting-of-shares/
The stock is removed from the stock exchange and is no longer available for trading on that platform. Shareholders may still hold ownership and can explore off-market sale options.
Yes, you can sell delisted shares via exit offers, off-market transactions, or promoter buybacks, depending on the nature of delisting.
It is a price discovery process used in voluntary delisting where public shareholders bid for their shares, helping determine an acceptable exit price.
In voluntary delisting, an exit opportunity must be given. In involuntary delisting, promoters are required to buy back public shares at a fair value.
Not necessarily. While liquidity is reduced, the underlying value may still exist. Shares can sometimes be sold off-market or during relisting events.
