What Happens When a Company Gets Delisted?

• Stock delisting occurs when a company’s stock is removed from the stock exchange.

• Sometimes, companies may delist when they opt to go private or undergo mergers, resulting in voluntary delisting.

• Company stocks that fail to meet the exchange’s listing requirements may be automatically delisted, resulting in involuntary delisting.

• Delisted stocks can be relisted in keeping with SEBI’s guidelines.

As a new investor, you may have heard of the term ‘stock delisting’. Like most other beginners, you must be wondering what it is and why stocks get delisted from exchanges. Let's start with the definition of stock delisting. Delisting happens when a company removes its listed shares from the stock exchanges. In other words, it is simply the removal of a company’s previously listed stock from stock exchanges like the BSE and NSE. Once the shares are delisted, traders and investors cannot buy and sell shares of the company’s stock through the stock exchanges. In India, the delisting process and regulations are governed by the capital market regulator, SEBI (Securities and Exchange Board of India). 
 

There may be various reasons why stocks get delisted from exchanges, including insufficient market capitalisation, bankruptcy, failure to comply with listing requirements, and mergers. Stocks may also get delisted when the company ceases operations or decides to go private. Removal of a company’s stock from the stock exchange may be voluntary or involuntary, depending on the specific reason for delisting. For instance, each stock exchange has its own strict listing requirements and guidelines that companies must follow. If a company fails to meet these requirements, it risks being involuntarily delisted by the market regulator. Alternatively, a company may decide to go private to restructure operations and make operational changes. In this case, it may opt for a voluntary delisting.

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Delisting of stocks has major implications for shareholders in terms of the ease and flexibility of share trading. If you own shares of a company that gets delisted, you still remain a shareholder in the company. However, you cannot sell these shares on the stock exchange since delisted shares cannot be traded. You can sell these shares on the over-the-counter (OTC) market. However, OTC markets do not offer the same liquidity or accessibility as stock exchanges.

It is important to note that the reasons why stocks get delisted play a crucial role in determining what happens to shareholders. In other words, whether the company gets voluntarily or involuntarily delisted impacts shareholders. We discuss this in detail in the following section.

Generally, companies decide to voluntarily delist from stock exchanges when they decide to go private or due to mergers with other companies. Voluntary delisting may also occur when the company decides to cease operations due to non-performance. According to SEBI’s regulations, if the company you have invested in delists its shares voluntarily, it is required to provide you with one of two options:

• The promoters of the company can offer to buy back shares through a reverse book-building process. A public announcement must be made to announce such buybacks. Eligible shareholders receive an offer letter and bidding form from the company’s promoters to participate in the buyback exercise. If the delisting happens for expansion reasons, the buyback may be offered at a premium price.
• Alternatively, if you have not sold the delisted shares through reverse book-building or during the exit window, you can sell these shares outside of the stock exchange on the over-the-counter (OTC) market. However, OTC markets do not offer the same liquidity or accessibility as major stock exchanges. Moreover, it may be difficult to find buyers for delisted shares on the OTC market.

Involuntary delisting happens when the market regulator orders the forced removal of a listed company’s stock from the stock exchange. Non-compliance with listing regulations, failure to meet minimum financial standards like minimum share price, financial ratios, and sales, and late filing of reports may be some of the reasons why stocks get delisted involuntarily. In case of involuntary delisting, the company’s promoters initiate a share buyback. An independent evaluator determines the share buyback value. While delisting does not impact your ownership stake in the company, it can impact the value of the shares you hold. In other words, shares may be devalued to an extent after they are delisted.
 

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Now that you know all about why stocks get delisted and what happens to shareholders post-delisting, you may be wondering if delisted stocks get relisted again. Delisted companies may be relisted only if the Indian market regulator, SEBI, permits the same. According to SEBI’s guidelines, relisting protocols vary depending on why stocks get delisted. In other words, relisting requirements and regulations are different for voluntarily and involuntarily delisted stocks. Here’s a quick overview of both:

• Relisting of voluntarily delisted stocks: Shares of voluntarily delisted companies must wait 5 years before they can be relisted on the stock exchange.

• Relisting of involuntarily delisted stocks: Shares of companies delisted involuntarily must wait 10 years before they freshly relist on the stock exchange.
   

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Whether delisting is beneficial for companies or not will depend entirely on their goals and the circumstances of delisting. Here are a few ways delisting can be advantageous:

• Decreased compliance pressure: Listed companies have to adhere to a plethora of regulatory and compliance norms like regularly publishing financial statements and quarterly reports and holding yearly AGMs (annual general meetings). Delisted companies do not have to adhere to the various compliance requirements mandated for listed companies.

• Flexibility: Sometimes, companies can benefit from the enhanced flexibility and autonomy that comes with going private. They can enjoy better flexibility in financial management and greater autonomy in terms of decision-making without pressures of shareholder expectations.

• Pursuit of strategic objectives: Delisting may be part of the company’s broader strategy, like corporate restructuring.
   

However, delisting generally has more disadvantages than advantages for companies. While fewer in number, unlisted companies also need to adhere to certain regulatory norms. Additionally, delisting makes it more difficult for companies to raise capital for various purposes through the issue of shares.