Delisting of Shares: What does it mean?
Published by Sharekhan Education | July 15, 2021
Delisting of Shares: What does it mean?
Delisting of shares requires the removal of listed company shares from being traded as well as listed on the stock exchange. The delisting of shares can be voluntary or involuntary.
An involuntary delisting of shares means a compulsory and permanent delisting of shares from the stock exchange. The involuntary delisting could be due to the failure of the company to follow the SEBI guidelines set out in the listing agreement within a prescribed period. Delisting causes the company to lose its value. Hence it makes sense for the shareholder to give up the shares in the involuntary delisting of shares. Tendering the shares in involuntary delisting can lead to gain or loss to the shareholder, depending on his or her purchase price.
Process of Delisting:
Voluntary delisting of shares involves permanently delisting of the shares from the exchange at the discretion of the promoter. To delist a company, its promoter provides the shareholders with an exit mechanism through a reverse book building process. The reverse book building process is a transparent auction that allows the shareholders to discover a price at which they can surrender all the shares to the promoter. A fully automated online bidding platform provided by the exchange can track the live bids of the shareholders who have offered the shares for delisting, at various prices. The offer price has a floor price but not a ceiling price, which is decided as per the SEBI regulation. In the case of infrequently traded securities, the offer price is as per SEBI regulation 20 (5).
Reasons for delisting:
Voluntary delisting takes place for various reasons. Some of these include mergers, amalgamations, business restructuring, and undervalued share prices compared to fair valuation. However, in the latter case, shareholders appreciate when promoters offer to delist shares at a higher premium. Attempting to delist at a significantly lower price than fair value doesn’t sit well with shareholders.
In voluntary delisting, shareholders are expected to provide a bid-offer at which they wish to offer their shares back to the company through the reverse book-building process. The shareholders have to take a smart approach to decide a price at which they wish to offer their shares. Shareholders decide to tender shares in a delisting offer by considering both qualitative and quantitative aspects of the company. Retail investors can rely on brokerage reports, such as those from Sharekhan Research, for this evaluation.
Success of delisting:
For a successful delisting offer, the promoter needs to accumulate at least 90% of the fully paid equity shares. If the promoter of the company fails to reach the threshold at a discovered price through reverse book building, then the offer is deemed to have failed. If the threshold of 90% is achieved, the promoter can decide to accept the discovered-price or make a counter-offer. A counter-offer can be lower than the discovered-price but not less than the book value. Once the promoter accepts a price, it becomes an exit-price.
The promoter is required to purchase all shares offered at exit price and pay the shareholders. Once the process of delisting is over, the shareholder can offer his shares at exit-price to the promoter for up to one year.
If you would like to understand more about the concept of ‘Investing’, then register for our free “Power Money Workshop”. And join our investing education program called “Stock Investor” to polish your investing skills. You’ll learn both stock analysis and professional investing techniques. So, come and experience it yourself!
By enrolling in this stock market course, a learner can learn the basics and the various aspects of trading.
