What is Delisting of a Stock & Why Does Delisting Happen?

Stock markets are exciting places where companies list their shares for investors to buy and trade. But sometimes, you may hear about a company getting "delisted" from the stock exchange. If you're new to investing or curious about how the stock market works, the term "delisting" might sound confusing or even alarming. What does it mean? Why does it happen? And how does it affect investors, especially in a vibrant market like India? In this blog, we’ll dive deep into the concept of delisting, explore why it happens, and explain its impact in simple American English. Let’s keep the curiosity alive and uncover the mysteries of delisting in the Indian stock market!

What is Delisting of a Stock?

Delisting refers to the process of removing a company’s shares from a stock exchange, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in India. Once a stock is delisted, it can no longer be traded on that exchange. This means investors can’t buy or sell the company’s shares through the stock market anymore. The shares may still exist, but they are no longer available for public trading on the exchange.

Think of delisting like a store pulling a product off its shelves. The product might still exist somewhere, but it’s no longer available for customers to buy easily. Similarly, a delisted stock might still be traded privately or in over-the-counter (OTC) markets, but it loses the visibility, liquidity, and accessibility it had on a stock exchange.

Delisting can happen voluntarily, when the company itself decides to exit the stock market, or involuntarily, when the stock exchange forces the company to delist due to specific reasons. Let’s break down these two types of delisting to understand them better.

Types of Delisting

1. Voluntary Delisting: This happens when a company chooses to remove its shares from the stock exchange. The company’s management or promoters (those who own a significant stake) might decide that being publicly listed no longer serves their goals. They may offer to buy back shares from public investors at a fixed price, often at a premium, to take the company private.

2. Involuntary Delisting: This occurs when a stock exchange removes a company’s shares due to non-compliance with rules, financial troubles, or other regulatory issues. Involuntary delisting is often a red flag for investors, as it suggests the company is struggling.

Now that we know what delisting is, let’s explore why companies get delisted and what drives this decision.

Why Does Delisting Happen?

Delisting doesn’t happen randomly—it’s triggered by specific reasons. These can range from strategic business decisions to financial distress or regulatory violations. Let’s look at the most common reasons for delisting in the Indian stock market and why they matter to investors.

1. Voluntary Delisting by Promoters

Sometimes, a company’s promoters or owners decide they want to take the company private. This means they no longer want the company’s shares to be publicly traded. Why would they do this? Here are some reasons:

• Cost Savings: Being listed on a stock exchange comes with costs. Companies have to pay listing fees, comply with strict regulations, and spend money on audits, disclosures, and investor relations. By going private, they can save these expenses and focus on long-term goals without worrying about quarterly performance pressures.

• Greater Control: Public companies face scrutiny from shareholders and analysts. Promoters may want to delist to gain full control over decision-making without external pressure. For example, they might want to restructure the business or take risks that public investors may not support.

• Undervaluation: If promoters believe the market is undervaluing their company’s shares (i.e., the stock price is lower than what they think it’s worth), they may decide to buy back shares and delist. This allows them to retain ownership at a lower cost.

• Mergers and Acquisitions: If a company is acquired by another firm or merges with a larger entity, it may get delisted. For instance, when a multinational company acquires an Indian subsidiary, it might delist the subsidiary to integrate it into its global operations.

Example: In India, companies like Vedanta and Essar Oil have pursued voluntary delisting in the past to streamline operations or consolidate ownership.

2. Financial Distress

Companies facing financial troubles may get delisted if they can’t meet the stock exchange’s requirements. This is usually involuntary delisting, and it’s a warning sign for investors. Some financial issues that lead to delisting include:

• Insolvency or Bankruptcy: If a company can’t pay its debts and enters bankruptcy proceedings, it may be delisted. In India, the Insolvency and Bankruptcy Code (IBC) process often leads to delisting if a company is liquidated.

• Low Share Price: Stock exchanges like BSE and NSE have rules about minimum share prices. If a company’s stock price falls below a certain level (e.g., Rs. 1 for an extended period), it risks delisting.

• Low Market Capitalization: If a company’s market value becomes too small, it may not meet the exchange’s listing criteria, leading to delisting.

3. Non-Compliance with Regulations

Stock exchanges in India, regulated by the Securities and Exchange Board of India (SEBI), have strict rules for listed companies. Failure to comply can lead to delisting. Common violations include:

• Failure to File Financial Reports: Companies must submit quarterly and annual financial reports. If they miss deadlines or fail to disclose accurate information, the exchange may suspend trading and eventually delist the stock.

• Low Public Shareholding: SEBI mandates that listed companies maintain a minimum public shareholding (usually 25%). If promoters hold too many shares and public ownership falls below this threshold, the company may face delisting.

• Fraud or Misconduct: If a company is found guilty of fraud, insider trading, or other unethical practices, the stock exchange may delist it to protect investors.

4. Low Trading Volume

Stocks with very low trading volumes (i.e., few buyers and sellers) may be delisted. Low liquidity makes it hard for investors to trade the stock, and exchanges may remove such stocks to maintain market efficiency.

5. Strategic Restructuring

Sometimes, companies delist as part of a broader restructuring plan. For example, a company might want to merge with another entity, spin off a business unit, or change its business model. Delisting allows them to make these changes without the pressure of public scrutiny.

6. Foreign Companies Exiting India

Multinational companies sometimes delist their Indian subsidiaries to focus on global operations or exit the Indian market entirely. For instance, if a foreign company finds it unprofitable to operate in India, it may buy back shares and delist the subsidiary.

Real-Life Example: In 2020, Vedanta Limited attempted to delist its shares from Indian stock exchanges. The promoters offered to buy back shares at Rs. 87.25 per share, but the delisting failed as they couldn’t secure enough shareholder approval. This shows how voluntary delisting can be a complex process involving investor consent.

How Does Delisting Work in India?

In India, delisting follows a structured process governed by SEBI’s Delisting Regulations, 2021. Whether it’s voluntary or involuntary, the process ensures fairness for shareholders. Here’s a simplified overview:

Voluntary Delisting Process

1. Board Approval: The company’s board of directors approves the delisting proposal.
2. Shareholder Approval: The company seeks approval from public shareholders through a special resolution. At least 75% of shareholders must agree.
3. Reverse Book Building: Promoters announce a price at which they’ll buy back shares from public investors. This price is determined through a reverse book-building process, where shareholders bid the price at which they’re willing to sell. The final price is usually the one at which promoters can acquire at least 90% of the shares.
4. Payment to Shareholders: Once the price is finalized, promoters pay shareholders who tender their shares. The company then exits the stock exchange.

Involuntary Delisting Process

1. Warning or Suspension: If a company violates exchange rules, it may receive warnings or face trading suspension.
2. Delisting Notice: The stock exchange issues a delisting notice if the company doesn’t rectify the issues within a specified period.
3. Exit Opportunity: In some cases, promoters must offer an exit price to public shareholders, as per SEBI guidelines.
4. Removal from Exchange: The stock is officially delisted, and trading stops.

Impact of Delisting on Investors

Delisting can have significant consequences for investors, especially retail investors in India who rely on stock market investments for wealth creation. Here’s how it affects them:

Positive Impacts

• Premium Payout in Voluntary Delisting: In voluntary delisting, promoters often offer a premium price to buy back shares, giving investors a chance to exit at a profit.
• Exit from Risky Investments: If a company is struggling financially, delisting may allow investors to sell their shares and avoid further losses.

Negative Impacts

• Loss of Liquidity: Once delisted, shares can’t be traded on the stock exchange, making it hard to sell them. Investors may have to rely on OTC markets, which have lower liquidity and transparency.
• Lower Returns: In involuntary delisting, the exit price offered (if any) may be lower than the investor’s purchase price, leading to losses.
• Loss of Information: Public companies must disclose financials and other details regularly. After delisting, this transparency disappears, leaving investors in the dark.

How Can Investors Protect Themselves?

Delisting can catch investors off guard, but there are ways to minimize risks:

1. Research Before Investing: Always check a company’s financial health, compliance history, and promoter track record before buying its shares.
2. Monitor News: Keep an eye on company announcements, SEBI notices, and stock exchange updates for signs of trouble.
3. Diversify Your Portfolio: Don’t put all your money in one stock. Diversification reduces the impact of a single company’s delisting.
4. Understand the Exit Offer: In voluntary delisting, evaluate the buyback price carefully. If it’s too low, you may choose to hold onto your shares (though liquidity will be limited).

Delisting in India: A Growing Trend?

In recent years, several companies in India have pursued delisting, especially multinational firms and those with strong promoter control. For example, companies like Hexaware Technologies and Adani Power have successfully delisted in the past. The trend is driven by factors like low valuations, high compliance costs, and strategic business decisions.

However, SEBI’s strict regulations ensure that delisting isn’t a simple process. The reverse book-building mechanism protects public shareholders by ensuring they get a fair price. Still, delisting remains a topic of debate, as some investors feel it limits their ability to participate in a company’s growth.

Conclusion

Delisting is a significant event in the stock market that can affect companies, investors, and the market’s overall dynamics. Whether it’s a strategic move by promoters or a forced action due to financial or regulatory issues, delisting has far-reaching implications. For Indian investors, understanding why delisting happens and how it works is crucial for making informed investment decisions.

By staying vigilant, researching thoroughly, and diversifying investments, you can navigate the uncertainties of delisting. The Indian stock market, with its growth potential, offers plenty of opportunities, but it also comes with risks like delisting. Stay curious, stay informed, and keep exploring the world of investing!

Frequently Asked Questions 

1. What happens to my shares after delisting?
   After delisting, your shares are no longer traded on the stock exchange. In voluntary delisting, you may receive a buyback offer from promoters. In involuntary delisting, you might need to sell shares in OTC markets, but liquidity will be low.
2. Can a delisted company relist on the stock exchange?
   Yes, a delisted company can relist if it meets the stock exchange’s listing criteria and SEBI’s regulations. However, this is rare and depends on the company’s financial health and compliance.
3. Is delisting bad for investors?
   It depends. In voluntary delisting, investors may get a premium price for their shares. In involuntary delisting, they may face losses due to low exit prices or lack of liquidity.
4. How can I know if a company is at risk of delisting?
   Look for signs like consistent financial losses, low share prices, low trading volumes, or non-compliance with SEBI regulations. Regular monitoring of company announcements can help.
5. What is reverse book building in delisting?
   Reverse book building is a process where shareholders bid the price at which they’re willing to sell their shares during voluntary delisting. The final price is set to ensure promoters acquire at least 90% of the shares.