Delisting is a distressful signal for a particular company, affiliated individuals or entities, and the whole financial world. In general, stocks may be subject to delisting when they do not meet the requirements laid down by the stock exchange where the company is granted the listing. Delisting causes a significant headache for shareholders when liquidating their positions. The delisting itself carries information about the company's financial disorder. Therefore, investors receive imperative information that cannot be left unnoticed. Consequentially, it is hard to gain investors' trust, which may lead to legal actions.
This article provides thorough and additional material for you to become more aware of this corporate finance and stock market insight.
What is Meant By the Delisting of Shares?
The term “shares delisting” defines the process of removing a company's stock from the stock exchange. Delisting eliminates the opportunity to trade the shares of a company at the stock exchange where delisting occurs. Delisting can be performed on the company’s initiative, which is a voluntary procedure. However, it can also be initiated by the stock exchange, which is an involuntary situation.
What Happens When Stock Gets Delisted?
The consequences of a company’s stock being delisted are not minimal for the shareholders. This is how it happens.
- Trading restrictions: A delisted stock is not traded on the stock exchange where it was previously listed. This means the investor cannot sell or buy shares in this company through their regular brokerage account.
- Liquidity problems: Usually, delisted stocks are not liquid. That is, there is no sufficient number of buyers and sellers. It becomes difficult for investors to sell their shares due to the necessity of agreeing to a lower price. Moreover, the process can be significantly postponed.
- Lack of transparency: Delisted firms are not obliged to provide a report. They do not have to follow strict reporting and disclosure rules established by stock exchanges. This lack of information by investors complicates decision-making.
Types of Delisting of Shares of a Company
There are two types of delisting of shares: voluntary and involuntary.
1. Voluntary Delisting:
The voluntary type exists when a company removes its shares from a stock exchange. For several reasons, a company may voluntarily delist its shares.
- Going Private: Some companies decide to get private, which can be accomplished through a management buyout or a larger entity. In either case, the company will voluntarily pull its shares from the exchange to reduce the rules and expenses on which it is based to have shares traded.
- Lack of Liquidity: If a company’s shares have low trading volume and little liquidity, management may determine that the advantages of public trading no longer exceed the costs. A delisted company must not pay listing fees or meet repeated reporting requirements.
- Regulatory Compliance: A company may also choose to pull down its shares from the exchange to escape the rules that are added on, including the tighter reporting requirements and regulations of a publicly traded company.
2. Involuntary Delisting:
On the other hand, involuntary delisting is when the stock exchange decides to stop the company’s stocks from being traded. The stock exchange may do this for various reasons, including:
- Failure to Meet Listing Requirements: Listing in any stock exchange is subject to the company’s minimum requirement. In that case, some stockbrokers will have a minimum requirement to be listed. These include minimum share price, market capitalisation, and minimum shareholder. If the listed company fails to meet these minimum requirements, the stock exchange may start the delisting process.
- Financial Distress: In the case where a company is facing severe economic challenges, including regular loss and high indebtedness, or when a company commits forward or regular bankruptcy, the stock exchange can delist the offloading.
- Regulator Violation: If it's reported that your company has violated a security regulation, was a fraud, or has become a concern of the security exchange, the stock exchange may delist it.
- Merger or Acquisition: During a merger or acquisition, the target company’s shares may be delisted from the exchange involuntarily after the acquiring company chooses not to list the merged entity on multiple exchanges.
Can a Delisted Company List Again?
A question that frequently arises in this arena is: Can a delisted stock return? So, a company that has been delisted can sometimes relist its shares on a stock exchange. The process is known as relisting. Ideally, the relisting requirements are usually more complex than the initial listing ones. The company needs to meet the stock exchange set criteria to be relisted. Sometimes, the process may be long and complicated.
Conclusion
The delisting of shares may seem like a complicated and challenging subject for shareholders; however, knowledge of the consequences is vital. You have the knowledge needed to be informed about what occurs when a firm’s stock is delisted, enabling you to continue to make decisions and protect your investment.
What happens to a stock’s valuation when it is delisted?
Delisting reduces a stock’s valuation because investors will find it harder to value the company with limited or no available information.
If a stock gets delisted, what happens to your money?
If a stock gets delisted, your shares become worthless. Your money is lost, as the company is now publicly traded. And if you want to avoid losing money, invest in NIFTY stocks, one of the safest options. Read this guide to learn about NIFTY50 stocks to invest in the top 50 companies.
How can the investor recover the investment from a company’s delisted stock?
Investors who have shares in a company that was delisted can still recover them by selling them over the counter if buyers exist to purchase them or the company makes a buyout to exit their position.
Can anything be done to prevent a company from being involuntarily delisted?
Yes, a company can work harder to comply with listing standards such as share price requirements and market capitalisation set by the exchange where it is listed.
What are the risks and benefits of reissuing shares by a company delisted previously?
The risks of reissuing include stringent conditions, costs, time associated with the process, and continued illiquidity. The reward includes access to more substantial equity pools and more beneficial disclosure.