Have you ever wondered what is delisting? As the term suggests, delisting is when a company that was listed removes its shares, or delists, from taking part in the stock exchange. Delisting of a stock or security can be both voluntary and involuntary. Delisting usually happens when a company stops its operations, merges with another company, wishes to expand or restructure, declares bankruptcy, wants to become private or fails to meet the listing requirements. When delisting is a voluntary decision, the company makes payments to investors and then withdraws its stocks from the exchange. The stock exchange can also force a company to delist if it does not comply with the rules. To put it simply, when a stock is removed from the stock exchange permanently, it is called delisting.
What is the delisting of shares?
A company must meet listing standards; each exchange has its own set of established rules and regulations.
Some companies choose to delist themselves when they figure out, with the help of cost-benefit analysis, that the costs they incur by being publicly listed outweigh the benefits it offers. Companies can request for delisting when they are bought by private equity firms where new shareholders will reorganize them.
Let us look at voluntary delisting first. When forced delisting happens, it leaves investors in a tricky position since they have a minimal choice but to sell the stocks off at whatever price is being offered at that moment.
If a company wishes to delist voluntarily, a premium to the regular price of the shares is generally offered to the shareholders. When an investor sells delisted shares, the transaction is taken off the exchange. So, any profit that is made is judged as a capital gain. If the delisting happens a year after the security has been purchased, capital gains tax is not charged. However, if the delisting takes place within a year, whatever gain is made will be taxable, based on the tax slab of the individual.
Involuntary delisting happens when there is a violation of the regulations, or the failure to meet the minimum financial expectations. The term monetary standard refers to the capability to maintain the share price at a certain minimal level, the financial ratios and level of sales. If a company fails to meet the listing requirements, a warning of non-compliance is issued by the listing exchange. If the company does not address this issue, the stocks are delisted by the listing exchange.
How does it affect you?
Now, the question is, how does the delisting of a company affect a shareholder? In case of voluntary delisting, in which a company removes its shares from the market on its own, it makes payments to shareholders to return the shares they hold, and then removes the shares from the exchange. The delisting is regarded as successful only if the shareholding of the acquirer and the shares offered by the public shareholders together make up 90% of the company’s entire share capital.
A voluntary delisting never happens suddenly. Investors are offered enough time to sell off their stocks. If an investor chooses to hold on to the shares after the delisting, he or she will continue to enjoy legal and beneficial ownership of the shares the person holds.