You might have come across or heard about companies delisting their shares. There are many companies that are delisted from the stock exchanges every day. This happens when companies are not willing to offer their shares for trading anymore. Hereâ€™s all you need to know on delisting.
What is delisting of shares?
When a companyâ€™s shares are removed from the stock exchange and the shares are not available for trading anymore, it is called delisting. In simple words, delisting is when a listed company removes its shares from trading on a stock exchange.
Once a company makes its shares unavailable for trading, it will become a private company. Note that if the shares of a company are listed on multiple stock exchanges and the shares are removed from only one of the stock exchanges it is not delisting. Delisting is when the shares are not there for trading on any of the stock exchanges.
What are the kinds of delisting?
Companies generally delist their shares when they want to expand their business or they are restructuring the business. They may also delist when they are acquired by others, or the promoters want to raise their stake in the company. There are two kinds of delisting and the reasons behind delisting a company will decide the kind of delisting it is.
When a company voluntarily decides to remove all its shares from the stock exchanges and makes them unavailable forÂ trading, it is voluntary delisting. If a company opts for this kind of delisting, it is required to pay all the shareholders money for all the shares held by them.
Most often a company delists its share voluntarily when there is a change in the entire structure of the company. For instance, if a company is acquired by an investor or another company, the company might delist its shares. A company may also delist voluntarily if the stock market regulations donâ€™t allow the company to be listed. To avoid hindrances from the regulatory authorities, the company may decide to delist all the shares.
When a company is asked by the stock market regulatory authorities to delist all the shares and they want the company shares to stop trading, it is called involuntary delisting. There are various reasons or situations why a companyâ€™s shares are involuntary delisted. Some of the reasons for this are as listed.
- When the shares of the company are hardly trading on the stock exchanges for the past three years, the company may be asked to delist its shares. In these cases, the shares are usually delisted for just a few months
- When a company does not comply with the regulations provided by the stock exchange authorities, it can be asked to compulsorily delist
- If a company has been reporting losses on its books for the past three years and its net worth is negative due to those losses, the company shares may be delisted involuntarily
How do investors get their money back after delisting?
Once the shares get delisted, you canâ€™t sell the shares on any stock exchange. However, you will still own the shares and can sell the shares outside stock exchanges. This isnâ€™t so easy. So, it is better to sell the stock before it is delisted.
There is no problem with getting your money in this delisting because the company will buy the shares from the shareholders. This done through the reverse book building process. Under this process, the company will send an official letter to all the shareholders informing them about the buyback of the shares. If you own the shares, you will receive a bidding form along with the official letter.
The company will set the price for the buyback and you can decide to exit by accepting the price offered by the company. However, you have the right to deny the offer and you can continue to hold the shares. When all the shares are bought back by the company delisting is considered as complete and successful.
If you deny or miss the buyback offer by the company within the assigned timeline, you will need to sell the shares to buyers using the over-the-counter stock market. Once the shares are delisted, there will be very less buyers and selling shares can be time-consuming and will require patience. So, if you want gains on selling your shares, it is best to use the buyback offer given by the company as most often the company will buy back the shares at a premium.
Even if the company is made to delist by the stock exchange authorities, they will need to provide money to their shareholders as they own the shares. So, the company will buy back the shares from the shareholders at the cost that is determined by an independent evaluator. Note that even if the company is asked to delist, investors are still owners and have the right to sell their shares. You can take the offer for buyback or sell your shares later. However, the companyâ€™s shares might have a much lesser value once it is delisted.
If the company is delisting of shares from all the stock exchanges in India except for the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), they donâ€™t need to buyback the shares. So, the company might not be offering any exit options to shareholders because the shares are still available for trading on the BSE and NSE. Shareholders can sell the shares and exit any time they want by way selling shares on NSE/BSE.
How to use delisting as an investment strategy?
You can get shares of delisted companies on the stock exchanges at a cheaper price and participate in the buyback process. This is because investors of the shares that are to be delisted might sell the shares before the buyback offer.
Note that delisting is a long process. You should invest in the company only if you think you have enough time to make good the investment.
What is the taxation for selling shares before delisting?
Any profit made on selling shares is considered as a capital gain. If delisting happens within a year of the purchase, you will need to pay short term capital gains tax of 15%. If delisting of shares takes place after one year from the purchase of the shares, the capital gains tax 10% be nil if gains are more than Rs.1 lakh. If gains are less than Rs. 1 lakh, you donâ€™t need to pay any capital gains tax. Â