What Happens After a Company Gets Delisted?

Introduction

The process of delisting is a significant event with major repercussions for both the investors and the entity itself. When a company gets delisted, it often leads to a host of questions. Understanding what delisting is, why it happens, and whether a delisted company can relist its shares on the exchange are all crucial aspects that you need to be aware of as investors. In this article, we are going to explore stock delisting and its impact on the company and its shareholders.  

What is Delisting?

Delisting refers to the removal of a company’s stock from a stock exchange. Once a company is delisted, its shares will no longer be traded on the exchange. This makes them less visible and accessible to investors. 

Stock delisting is a crucial event in a company’s life cycle. Depending on the type of delisting, the process can either indicate the intention of a company to move in a new strategic direction or a sign of financial distress. In addition to reduced liquidity, company delisting also has other consequences, such as diminished access to capital and potential loss of confidence in the company.     

Voluntary Delisting

Voluntary delisting is the process through which a company opts to remove its shares from a stock exchange of its own accord. The decision to delist shares in this case is often taken as part of a broader strategic reconstruction plan. Some companies may also choose to remove their shares from the stock exchange in a bid to go private.

Voluntary delisting can be highly advantageous for companies going through reconstruction or reorganization since it can help reduce the costs associated with regulatory compliance, which is more often than not quite substantial. Furthermore, by delisting, companies can operate with greater flexibility, away from the scrutiny of public markets and the pressure of meeting quarterly earnings expectations. 

Although voluntary delisting could potentially be a positive move for the company, it is generally not viewed as such by the shareholders, who will lose the ease and convenience of being able to trade their shares on an exchange. 

Involuntary Delisting

Involuntary delisting is the process through which a stock exchange removes the shares of a company from its bourses. Usually, the decision to delist shares is taken only when a company fails to meet the necessary listing requirements. This type of delisting is often viewed as a negative signal by investors and market participants since it essentially indicates that the company is struggling financially or operationally. 

How Does Delisting Work?  

Understanding how stock delisting works can help investors make informed decisions about their investments and manage potential risks. Here is a quick overview of the process of delisting. 

In the case of voluntary delisting, the process usually begins with the company’s board of directors. Once the board of directors has decided to remove the shares from an exchange, it is then communicated to the company’s shareholders via a general meeting. Here, the shareholders can vote in favour of or against this stock delisting. Once enough shareholders vote in favour of the removal, the decision is then communicated to the respective stock exchange, along with a timeline for the delisting and the reason behind the decision. Additionally, the shareholders are given the opportunity to sell their shares before the delisting takes effect.       

In the case of involuntary delisting, the process begins with the stock exchange providing a warning to the company regarding the non-compliance of the listing requirements. If the company does not comply by taking remedial measures, the exchange then passes an order for delisting stating the reason and the date by which the shares of the company would be removed from its bourse. The company that has been served with a stock delisting notice can choose to appeal the decision. However, if the appeal is unsuccessful, the delisting becomes final.        

What Are Some Common Reasons for Which Companies Get Delisted?

A company might get delisted for a variety of different voluntary and involuntary reasons. Here is a quick overview of some of the most common reasons. 

• Failure to Meet Listing Requirements

Every company that has its shares listed on the stock exchange must always comply with the listing standards set by the Securities and Exchange Board of India (SEBI). These standards are put in place to protect investors by ensuring that only companies with a certain level of financial stability and corporate governance can trade on the exchanges. 

Any failure to meet these requirements could result in the exchange moving to delist shares of the offending company. Some of the common triggers for involuntary delisting include sustained periods of low share prices, insufficient market capitalization, and the inability to maintain minimum public shareholder equity. 

• Regulatory Non-Compliance     

Every listed company is mandatorily required to get their financial statements for every quarter audited and published within a certain period. Any delays or failures to file the required financial reports on time could also lead to involuntary delisting. 

• Bankruptcy or Financial Distress

A company that has filed for bankruptcy or has insolvency proceedings initiated against it due to severe financial difficulties that threaten its existence could also be one of the reasons for voluntary or involuntary delisting. 

• Major Corporate Changes 

A company that goes through any major corporate actions such as mergers, acquisitions, conversion to a private company, or corporate restructuring usually opts for voluntary delisting.    

Can a Delisted Company Get Re-Listed?

A company whose shares have been delisted from an exchange, whether voluntarily or involuntarily, could potentially apply to get them relisted once again. However, the relisting process can be very challenging and may even require the company to meet all of the listing requirements once again. Additionally, the company must demonstrate improved financial health, comply with regulatory standards, and undergo a rigorous review process by the exchange.

In the case of voluntary delisting, the company may apply for relisting only after five years from the initial date of delisting. Meanwhile, if the company was involuntarily delisted, it may apply for relisting only after ten years from the initial date of delisting. 

Also Read: How to Calculate the Valuation of a Company?

Conclusion

The decision to delist shares is a major event that can significantly alter a company’s future and its relationship with its shareholders. Whether the process of delisting is voluntary or involuntary, it will have an impact on liquidity and the company’s ability to raise further capital. You can find the entire list of delisted companies on BSE and NSE’s official websites, along with the reason for removal. 

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