Delisting – Understanding the complete process and What Happens When a Company is Delisted, and You Still Have Its Shares?
What is Delisting?
Delisting is a process to remove the listed stock from the exchanges. In other words, the stock will no longer be trading on the NSE and BSE.
The delisting is a process where either the company or the promoters buy shares from every shareholder.
However, retail investors should understand one key point: if a company can acquire 90% of its shares from the market, it will be considered a successful delisting. Even if you wish not to sell at the delisting price, you can keep holding the shares, and the company can still get delisted.
The promoter of the company is not allowed to participate in the delisting process. The floor price is decided based on a reverse book building process.
There are Two Types of Delisting
The delisting of shares can be voluntary or involuntary.
Voluntary delisting happens when the company opts to delist the company and go private.
The main reason for a voluntary delisting is when the company finds the share price doesn’t reflect the true potential. However, other reasons can be mergers or acquisitions as well.
Every shareholder can exit by tendering the shares under the delisting offer.
If a shareholder doesn’t sell in the reverse book building process or during the exit window period, one can still hold them, but those shares will not be of any value as there will be no buyers for it. However, one can even sell them in the over-the-counter market, but it will be nearly impossible to find a buyer for it.
In the case of involuntary delisting, there is very little left for the investors. Promoters are forced to purchase the shares from the shareholders at a price determined by an independent valuer.
Bankruptcies, failure to maintain the exchange’s requirements, takeovers, or mergers are some reasons for forced delisting or involuntary delisting.
The delisted company, whole-time directors, promoters, and group firms are not allowed to re-list the company for ten years from the date of compulsory delisting.
What is the Reverse Book Building?
Reverse book building is the process for a company to arrive at a price to delist the company.
A well regulated and thorough process.
The company informs every shareholder about the floor price to buy all the shares back from all shareholders, excluding the promoter group shareholders.
Needless to say, the company has to appoint a merchant banker.
However, the price set by the promoter or the merchant banker is only a starting point.
Stock exchanges then facilitate the process of reverse book building where each shareholder has to place their tentative price to sell their shares in the company, which will be equal or above the price notified by the company.
If someone has not put in their price for the shares, the floor price is the bid.
The final price where all shareholders have to tender their shares is determined after the complete process finishes, and all shareholder’s bids are confirmed.
Once the process ends, the promoters decide the number of shares they need to buyback from the market to reach the 90% threshold limit to delist the shares.
They start from the lowest price bid going higher to decide on the highest price at which they will get 90% of shares.
So if a company has to purchase at least 90 Lakh shares out of the 1 Crore shares from the market, they will start with the lowest bid and move up the price and settle at a price when they get the last of the 90L shares from the market.
The price becomes the delisting price, and the process is the reverse book building process.
Even if a shareholder has put a tentative price for the reverse book building process higher or lower than the final delisting price, he will have to tender the same at the delisting price only.
Understand Delisting with an Example
Let’s take the recent demising example of Vedanta’s to understand the complete process.
The company’s share touched a peak of around Rs 350 levels in 2018.
Charts from Upstox
In March of 2020, it touched a low of 70ish.
In May 2020, the company was trading at ₹89 per share, and the promoters to delist it at ₹87.
As I explained above, it is the floor price for the reverse book building process.
The reverse book building process set the floor price of ₹160 to ₹170.
However, LIC, which holds a 6.37% stake in Vedanta and some smaller investors, asked for the price of ₹320.
It is one of the main reasons that even after Vedanta’s reverse book building process and the price of ₹170 wasn’t enough to delist the shares.
What happens when you own the shares of a delisted company?
The best option is you shouldn’t own the shares of a delisted company.
The complete process, as you can understand now, is long.
First, the company sets a floor price to delist. Then there is a reverse book building process to put in your bids you wish to delist.
Next, we have the actual process to tender the share at the delisting price.
Still, investors who fail to tender their shares have the option of selling their shares to the promoters. The promoters are under an obligation to accept the shares at the delisting price for at least one year from the date of closure of the delisting process.
And if you still hold the shares of a company, their value practically becomes 0 unless you can find someone willing to buy your shares in the over-the-counter market.
The process of delisting a company is thorough. It doesn’t allow companies to take advantage of minority shareholders. However, minority shareholders can’t do much when it comes to setting the delisting price.
If all the large shareholders decide to tender their shares at a much lower price than your purchase price, it is wise to tender.
In Vedanta’s case, if LIC would have come tendered their share at ₹160-170, there is very little the small investors have a say.
Shalini kv says
Why can’t investors bid for a high price, say Rs.1000 for vedanta. Is the upper limit fixed?
Shabbir Bhimani says
They can but it will be of no use because the price will be selected based on the lower price value till they get to the price of acquiring 90%.
The same applies to when you want to sell.
You can place the order to sell a stock at 10% higher than the current price but it will be of no use because buyers are buying the one available at lower price.
In de-listing there is no actual trade for the reverse book building process but only price discovery.
Thanks.Excellent and simple education to the common investor on DELISTING.
Shabbir Bhimani says
Glad you like it.