What is Delisting & How Does it Affect You?

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.

Voluntary delisting

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

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.

Reasons for Delisting Shares

Non-compliance with listing requirements

Stock exchanges have strict criteria for maintaining a listing, such as financial performance, minimum share price, and timely financial disclosures. Companies failing to meet these standards may be delisted due to non-compliance with exchange regulations.

Financial distress

Companies facing significant financial difficulties, such as declining profits, high debt levels, or poor financial health, are at risk of delisting. If they fail to meet the stock exchange’s financial benchmarks, delisting may occur as a consequence.

Bankruptcy or insolvency

When a company declares bankruptcy or enters insolvency proceedings, its shares may be delisted. The financial instability associated with bankruptcy often leads to a loss of investor confidence, prompting delisting by the exchange.

Violation of exchange rules

Companies engaging in rule violations, such as fraud, non-disclosure of critical information, or other misconduct, may face delisting. Such violations undermine the integrity of the market and often result in regulatory action, leading to delisting.

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.

Impact of Delisting on Companies

Limited access to capital

Delisting removes the option of raising capital through public stock offerings. This limits a company’s ability to generate funds, which may hinder growth plans, expansion projects, and investments in innovation. The lack of public financing can force companies to rely more on private funding, which can be more restrictive and costly.

Loss of visibility and status

Being publicly listed enhances a company’s visibility and prestige, helping it attract investors, partners, and top talent. When a company delists, it loses this visibility, which may affect its brand reputation. This reduced visibility can also make it harder to attract new business opportunities and strategic alliances.

Higher perceived investment risk

Delisted companies may be viewed as riskier investments by potential investors. The perception of increased risk can lead to a drop in stock demand, lowering the overall stock valuation. This impacts the wealth of current shareholders as share prices tend to fall post-delisting.

Debt covenant violations

Many debt agreements include covenants that require a company to remain publicly listed. Delisting could violate these covenants, resulting in accelerated loan repayments or additional financial penalties. This can strain a company’s financial resources, requiring careful management to avoid further debt issues.

Increased investor scepticism

Investors and stakeholders may become sceptical after delisting, raising concerns about the company’s future prospects and financial health. Restoring investor confidence and rebuilding credibility may take significant time and effort following a delisting event.