As equity investors, we have to deal with various corporate actions like dividend, buyback, bonus, stock splits, delisting etc. One of the most important of them is delisting of shares, which impacts investor’s interest. A lot of companies are in the process of delisting now a day’s which makes it important for investors to understand delisting process and various exit options. In this article, we will try to figure out delisting process and various exit options for the common investor.
What is Delisting of Shares?
Delisting of share means permanent removal of shares of a listed company from a stock exchange. This is reverse process of listing and post delisting, shares of the company are no longer available for trading on the stock exchange.
Voluntary delisting and compulsory delisting
Compulsory delisting is a penalizing step invoked by stock exchanges as a result of noncompliance to listing norms leading to permanent removal of shares of a listed company from stock exchange. In voluntary delisting, a listed company voluntarily removes its securities from a stock exchange because of various reasons like recession, merger & acquisition etc.
What happens to existing shareholders of company which files for delisting? Shareholders are given an exit option at a specific price to tender their shares although tendering of shares is not mandatory. SEBI has stipulated exit guidelines for voluntary and compulsory delisting using which exit price is calculated. Exit price offered in voluntary delisting of securities is decided by the promoter using book building process. There is a floor price of offer equal to average of 26 weeks traded price quoted on the stock exchange. There is no cap on the maximum price offered. Voluntary delisting is beneficial for investors as exit price offered is at premium to market price most of the time.
Compulsory delisting is rarely beneficial for shareholders as most of the time company is in defaulters list and there in no value left in company stocks.
To tender or not to tender
Tendering shares in case of delisting is not mandatory for a shareholder. You will continue to remain a shareholder of the company in case you do not tender your shares. You will be entitled to benefits like dividend and bonus, but it will be difficult for you to sell delisted shares as they are no longer traded. I have listed below various investor actions and it’s implication in the table below.
Action by Investor
What happens post Delisting
|Investor decides to tender his shares at offer price||Everyone is happy, company delists successfully and investor gets a handsome profit by tendering shares.||You are no longer a share holder and you are free to invest in other options.|
|Investor did not like the offer and rejects the offer.||Shareholders don’t like the delisting price. They can move to court, but litigation can be a long and tedious process. Share holder is stuck as the litigation is on. He can take an exit by selling on stock exchange as the delisting process has not been successful, but share holder doesn’t want to exit otherwise he wouldn’t have filed a suit. It’s a catch 22 situation.||It’s recommended to tender shares if the company is sure to reach the 90 per cent threshold. If company doesn’t reach 90% threshold, delisting will not be successful, so investor can take an exit via stock exchange. In case of litigation he can wait and watch or exit.|
|Investor is indifferent. He did not tender his shares post successful delisting.||Investor continues to remain a shareholder of the company and is eligible for benefits such as bonus and dividend. He can be a beneficiary in case of relisting of shares.||If you want to sell shares after the delisting, you can do so by tendering them to promoters within one year from the date of delisting. After one year it will be difficult to exit as shares will not trade on exchange. Only option of exit is via off market transaction or selling to a firm which deals in non-tradable securities.|
A lot of investors simply do not tender their shares in the hope of relisting gains, but there is a “cooling period” of five years in case of voluntary delisted company. Since there will be no formal place where you can trade the shares post delisting, it will be difficult to arrive at correct selling price of the share. Keeping above points in mind, it’s recommended that small investors should sell shares or tender their share in the offer before the company gets delisted.
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