The stock exchange has several rules and regulations that a company has to fulfil if it wants its stocks to be listed in the exchange. This is done to maintain the standard of the exchange and regulate membership. Stock market stability depends substantially on the confidence of the investors in the stocks being traded. To ensure that the trust is maintained, only public companies that meet the requirements are allowed to enlist themselves on the exchange.
The delisting of shares is the process in which a listed stock is removed from the stock exchange, and thus can no longer be traded. Delisting, simply put, is the withdrawal of a company’s stock permanently from the stock exchange.
What happens to delisted shares?
You might wonder what happens when a stock is delisted. The company primarily has two options if some stock is delisted- trade on either the Over-the-Counter Bulletin Board or the pink sheets system. If the company is up-to-date in releasing its financial statements, it chooses to trade on Over-the-Counter Bulletin Board since it is regulated better than the pink sheets. If this is not possible, then it opts for pink sheets, which is the least regulated as far as the public-traded equity market is concerned.
If a particular stock drops down to either of these, it generally loses the confidence of investors, since the company has not met the required criteria of the major exchanges. If the company continues to be delisted for some time, institutional investors will lose interest and stop trading the stock and researching on it. This results in lesser available information about the stock and the company to the individual investor. Because of this, liquidity and trading volume become lower.
How does this affect you?
During the entire process, a person still owns the shares of the company they have, if they decide not to sell them off. But, in widespread knowledge, when a company is delisted, that is considered as a sign of future bankruptcy. If a significant exchange delists one of the stocks you have, it is advisable to carefully look into the reasons for the delisting and the impact it can potentially have on you, and consider whether you wish to continue holding it.
Delisting can be voluntary or involuntary. In voluntary delisting, the process is considered to be successful only if the shareholding of the acquirer and the shares presented by public shareholders taken together makes up 90% of the company’s total share capital. The company’s promoter is not permitted to take part in this. The floor price is arrived at by using a reverse book building process.
The shares are delisted formally only after the delisting process is approved of officially. From that point, a one-year exit window is offered to the residual shareholders to tender the shares they hold at a price fixed upon during delisting. So, a voluntary delisting can never happen suddenly. The investors are given ample time to sell off their stocks. If an investor chooses to keep the shares after the delisting, he or she will continue to enjoy legal ownership and rights over those shares.
If involuntary delisting occurs, the company that is delisted, its directors, group firms and promoters get prohibited from entering the securities market for a decade, as calculated from the date of the delisting. The promoters must purchase the shares held by public shareholders at a value that is fixed upon by an independent valuer.