Delisting: meaning, types, and your options
Earlier this month, the mining major, Vedanta—a subsidiary of Vedanta Resources—filed to delist its shares from Indian stock exchanges. A week later, Diageo, one of the world’s largest distillers also hinted at possibly delisting United Spirits, its subsidiary.
What would happen if, one fine day, the company whose shares you hold announces delisting from the stock exchanges? Will you lose money? Or will you have to compulsorily sell the delisted shares? Or will you no longer have ownership rights and receive dividends? Tens of questions must be doing rounds in your mind. We have the answers, in here.
What is delisting?
When a company lists its securities on a stock exchange, it becomes a public entity. Shares of such a company are available to trade on the registered bourses. In contrast, when the entity delists its shares, it means the stock will no longer be available for trade on the stock exchanges. And, also that the company wants to be a private entity.
Types of delisting
There are two types of delisting:
Voluntary delisting
When a company, on its own accord, files for delisting of shares from a stock exchange, it is called voluntary delisting.
Involuntary delisting of shares
In contrast, involuntary delisting of shares is when the stock exchange decides to remove the company from the bourse. This can be a penalty imposed by the authorities of a bourse or the regulator of stock exchanges.
What can be the reasons for delisting of shares?
A company can get delisted for various reasons:
- It wants to shut shop
- It declares or is on the verge of bankruptcy
- It merges with another entity
- It doesn’t adhere to listing requirements
- It wants to become a private entity
What should you do when a company delists itself?
As mentioned, delisting of securities doesn’t necessarily mean that the company is shutting shop. So, there’s no need to get overwhelmed. However, be informed that, in certain cases, you may lose some of your money. We’ll learn how later.
What happens when a company delists itself?
Delisting of shares means to become a private entity, which is why the company is mandated to buy back its shares from the public by making a tender offer. Also known as a tender price, a tender offer is the company’s invitation to acquire its shares at a fixed, predetermined acquisition or selling price within a pre-decided time period.
What can you do when a company makes a tender offer?
Note that a tender offer is a mere OFFER, meaning it is not mandatory for you to sell your shares at the given price. When you receive a tender offer, you have the following options:
Accept the tender offer: By doing this, you agree to sell the stocks to the company at the specified price. This option is favourable when the offer price of a stock is higher than its current market price. That apart, accepting the tender offer is also a good option in extraordinary cases when a lower offer price supports timely buyout. For instance, when there’s uncertainty in the market due to economic slowdown.
Sell the stocks in the open market: After the company declares to delist its shares, you can sell your stock positions in the open market to a direct buyer, instead of selling them to the company. This is feasible when the market price of the stock is higher than the tender offer made by the company.
Decline the tender offer and hold your stock positions: Even after delisting, the company will continue to have a share capital. Ergo, you can choose not to sell your stocks if the tender offer fails to impress you or is lower than the price at which you bought them. However, you will have to convert these electronic shares into physical stock certificates. You can do this by consulting your broker. Once your shares are converted into physical form, they will no longer appear in your trading account. And, should you wish to sell these, you can only do it over-the-counter but not in the open market.
What happens when a stock gets delisted?
As mentioned, delisting doesn’t always mean the closure of the company. Since you hold shares in the delisted company, you still have ownership rights (meaning you have voting rights) as a shareholder of the company. Ergo, you will still receive dividends, when distributed, and can participate in the delisted company’s shareholders’ meetings.
However, things can get shaky on the stock price side, meaning the price might decline. This is because delisted shares are not traded on the stock exchange and so they lack liquidity and open market pricing. Instead, such shares are priced based on direct negotiations between the buyer and the seller.
What to do when you hold delisted shares?
You can either:
- Find a potential buyer and sell your stocks
- Hold on if there are hopes for the delisted company to relist itself after a few years when you can benefit from an appreciation in the price. The only thing to mind here is that the company may never get relisted
So, if a company goes for delisting, decide your move wisely!
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