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What Is Delisting Of Stock: Type, Impact And How It Works?

Delisting Of Stock

Picture this: a company that once welcomed investors with open arms suddenly decides to step away from the stock market. This unexpected move is known as delisting—when a company removes its shares from trading, making them inaccessible for public investment. With delisting making headlines, understanding why companies take this step and how it impacts your investments has never been more important. Let’s break down the details.

Understanding Delisting

Delisting occurs when a company removes its shares from the stock exchanges where it was previously listed. This means the shares will no longer be traded on major exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). The Securities and Exchange Board of India (SEBI) regulates this process to ensure proper procedures are followed. Companies may deliwst due to reasons such as low market value, bankruptcy, or structural changes. For instance, SPS Finquest Limited and Bombay Potteries & Tiles Ltd have both undergone delisting. Let’s dive deeper into the types of delisting.

Types of Delisting

Voluntary Delisting

In voluntary delisting, a company chooses to remove its shares from the stock exchange, often to go private. This typically happens due to mergers, amalgamations, or poor performance. If you own shares in a company that opts for voluntary delisting, you have two options:

  • Exit Through Reverse Book Building: The company or promoters will buy back shares through a reverse book building process. This process is publicly announced, and eligible shareholders receive a letter of offer. You can exit by tendering your shares, and the final price is determined by the price at which the most shares are offered. If enough shares are tendered, the delisting is successful; otherwise, the company remains listed.
  • Hold and Sell in the Over-the-Counter Market: If you don’t sell your shares during the buyback process, you can hold them and try to sell in the over-the-counter market. However, finding a buyer can be challenging, and it might take time to sell at your desired price.

In some cases, companies may offer a premium buyback price during voluntary delisting, providing a potential gain. However, once the buyback window closes, the stock price may decline.

Involuntary Delisting

Involuntary delisting occurs when a company is forced to remove its shares from the exchange due to non-compliance with listing rules, late report filings, or low share prices. In this case, the company is required to buy back shares at a price determined by an independent evaluator. While delisting doesn’t affect your ownership, the shares may lose value afterward.

If your shares are delisted, it’s wise to carefully consider your options, whether that involves selling in the market or taking advantage of the buyback. Thoughtful decision-making can help you achieve your long-term investment goals.

Impacts of Delisting

  • Limited Access to Capital: Delisting removes a company’s ability to raise funds through public stock offerings, limiting its capacity for growth, expansion, and innovation. Without public financing, companies may need to rely on more expensive private funding.
  • Loss of Visibility and Status: Publicly listed companies benefit from greater visibility, which attracts investors, partners, and talent. Once delisted, a company loses this visibility, which can harm its brand reputation and hinder its ability to secure new business opportunities.
  • Higher Perceived Investment Risk: Delisted companies are often viewed as riskier investments, which can reduce demand for their stock and lead to a drop in share prices, impacting the wealth of shareholders.
  • Debt Covenant Violations: Some debt agreements require companies to remain publicly listed. Delisting may violate these covenants, leading to accelerated loan repayments or additional penalties, straining the company’s finances.
  • Increased Investor Skepticism: After delisting, investors may become more cautious, questioning the company’s financial health and future prospects. Rebuilding investor confidence can take considerable time and effort.

Can a Delisted Stock Be Relisted?

Shares may be relisted if they meet specific guidelines set by market regulators:

  • Voluntarily Delisted Stocks: These stocks must wait for 5 years after delisting before they can be relisted.
  • Compulsorily Delisted Stocks: These companies must wait for 10 years before they can relist on the stock exchanges.

Understanding these aspects of delisting is vital for both current and prospective investors to make informed decisions in the face of changing market dynamics.

Bottom Line

Delisting can significantly impact both the company and its investors. For companies, it means losing access to public capital and visibility, which can hinder growth and raise perceptions of risk. For investors, delisting presents both challenges and opportunities, such as the chance to exit through buybacks or holding shares in the over-the-counter market. Whether voluntary or involuntary, delisting should prompt careful consideration of your investment strategy. Understanding the implications and knowing your options can help safeguard your portfolio and guide your next steps in the market.

Frequently Asked Questions (FAQs)

What is delisting?

Delisting occurs when a company removes its shares from stock exchanges, making them unavailable for public trading.

What are the types of delisting?

Delisting can be voluntary, where a company chooses to go private, or involuntary, when forced due to non-compliance or low share prices.

How does delisting affect investors?

Investors may face limited opportunities to sell shares, reduced stock value, and increased risk. However, they might also get a chance to exit via a buyback offer.

Can a delisted stock be relisted?

Yes, but voluntarily delisted stocks can relist after 5 years, while compulsorily delisted stocks must wait 10 years.

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