What is delisting of shares? Why do cos delist?
Salil Panchal/ Morpheus Inc
Delisting of shares from Indian stock exchanges has become a major issue for the financial regulator and the finance ministry to tackle.
Almost every shareholder/investor has faced a scenario of having shares of a company that is seeking delisting from the stock exchange.
This is either when a substantial acquisition of shares by acquirer (where the public holding dips below requisite levels) takes place and an exit offer made, or through mergers/ acquisitions or compulsory delisting enforced by the stock exchange.
Investors also face the bane of being stuck with shares of a company that has not witnessed trading for years. Over the past two years, at least 26 companies, mainly multinational companies have delisted themselves from the stock exchanges, while another 90 other firms propose to do the same in coming years.
Why are several companies delisting themselves from the bourses? Should they be allowed to do so, while keeping shareholder and investor interest paramount? A Securities and Exchange Board of India-appointed committee has prepared a final draft report on the delisting of shares.
What does the committee actually recommend? How have investor rights now been protected? Which are the key issues facing shareholders of these companies? Let us take a closer look.
How critical is the issue of delisting of shares from stock exchanges by Indian companies?
As observed by the Sebi-appointed committee, delisting of shares has created uneasiness amongst investors. The ministry of finance has discussed this issue with Sebi and the possible negative impact on the securities market.
There are more companies today which seek delisting from stock exchanges due to various factors.
In which ways in can a company delist its shares from a stock exchange?
There are several methods to delist from the Indian stock exchanges. Companies may upon request get voluntarily delisted from any stock exchange other than the regional stock exchange for the company, following the delisting guidelines.
In such cases, the companies are required to obtain prior approval of the holders of the securities sought to be delisted, by a special resolution at a General Meeting of the company.
The shareholders will be provided with an exit opportunity by the promoters or those who are in the control of the management.
Companies can get delisted from all stock exchanges following the substantial acquisition of shares. The regulation state that if the public shareholding slides to 10 per cent or less of the voting capital of the company, the acquirer making the offer, has the option to buy the outstanding shares from the remaining shareholders at the same offer price.
A stock exchange may compulsorily delist the shares of a listed company under certain circumstances. In such a case there is no provision for an exit route for the shareholders except that the stock exchanges would allow trading in the securities under the permitted category for a period of one year after delisting.
In scenarios like mergers and amalgamations and under legal directions for sick companies under Bureau for Industrial and Financial Reconstruction, companies can be delisted.
So is delisting of shares always detrimental to shareholders? Can guidelines be created to restrict delisting of shares?
In the currently liberalised scenario it would be improper to create fresh entry and exit conditions for companies.
Listing and delisting are commercial decisions and should be based on business considerations. As long as the principles of adequate corporate governance, necessary approvals of shareholders and interests of the minority shareholders supported and followed, there should be no case against delisting.
An interesting fact is that a study of companies which have been delisted from the BSE shows that in 14 out of 29 companies (which have been or are in the process of being delisted from the BSE), the 52-week average was greater than the 26 weeks average.
The Sebi committee had compared the averages of closing highs and lows of 52 weeks with those of averages of weekly closing highs and lows for 26 weeks from the date of offer.
So what has the Sebi committee now recommended?
The committee has broadly stated that while there would be no restrictions on delisting per se, the monitoring of events leading to delisting (to safeguard investor interests) should be stringent and improved upon.
The committee has discussed issues like an exit price for delisting, adopting a reverse book-building process to determine this and taking steps to ensure that there is no scrip price manipulation while the process is on.
The following recommendations have been made:
The exit price for delisting should be in accordance with the book-building process;
The offer price should have a floor price (a minimum base price) which will be the average of 26 weeks traded price and without a maximum price;
Market forces will determine the price above the base price. Stock exchanges will provide the infrastructure to ensure transparency whereby investors can see the prices on screens;
To reduce risk of price manipulation, the scrip will be under watch by the exchanges;
Comprehensive provisions should include procedures governing the entire subject of delisting of securities of companies, and should cover cases in which companies on their own seek delisting of their securities from all or some of the stock exchanges, as well as those where the stock exchanges can compulsorily delist the securities of a company.
There are some new terms which investors/shareholders will have to keep in mind. Let us take a closer look at some:
What is the 'reverse book-building' process? And what will the exit price be? How does the process work?
You would have heard about the book-building process (The process of securing the optimum price for a company's share. The issuing company decides the price of the security by asking investors how many shares and at what price they would be interested in) which is adopted when a initial public offering or divestment is made.
Well, it is the same process. It is called the 'reverse' book-building process because the aim is to sell the shares (exit from the company) while in the case of the normal book-building the process is to buy the shares (and invest into the company).
The process which would be adopted would be similar to that adopted in the initial public offering process where is a book is kept open for a specific number of days.
Salil Panchal/ Morpheus Inc
Delisting of shares from Indian stock exchanges has become a major issue for the financial regulator and the finance ministry to tackle.
Almost every shareholder/investor has faced a scenario of having shares of a company that is seeking delisting from the stock exchange.
This is either when a substantial acquisition of shares by acquirer (where the public holding dips below requisite levels) takes place and an exit offer made, or through mergers/ acquisitions or compulsory delisting enforced by the stock exchange.
Investors also face the bane of being stuck with shares of a company that has not witnessed trading for years. Over the past two years, at least 26 companies, mainly multinational companies have delisted themselves from the stock exchanges, while another 90 other firms propose to do the same in coming years.
Why are several companies delisting themselves from the bourses? Should they be allowed to do so, while keeping shareholder and investor interest paramount? A Securities and Exchange Board of India-appointed committee has prepared a final draft report on the delisting of shares.
What does the committee actually recommend? How have investor rights now been protected? Which are the key issues facing shareholders of these companies? Let us take a closer look.
How critical is the issue of delisting of shares from stock exchanges by Indian companies?
As observed by the Sebi-appointed committee, delisting of shares has created uneasiness amongst investors. The ministry of finance has discussed this issue with Sebi and the possible negative impact on the securities market.
There are more companies today which seek delisting from stock exchanges due to various factors.
In which ways in can a company delist its shares from a stock exchange?
There are several methods to delist from the Indian stock exchanges. Companies may upon request get voluntarily delisted from any stock exchange other than the regional stock exchange for the company, following the delisting guidelines.
In such cases, the companies are required to obtain prior approval of the holders of the securities sought to be delisted, by a special resolution at a General Meeting of the company.
The shareholders will be provided with an exit opportunity by the promoters or those who are in the control of the management.
Companies can get delisted from all stock exchanges following the substantial acquisition of shares. The regulation state that if the public shareholding slides to 10 per cent or less of the voting capital of the company, the acquirer making the offer, has the option to buy the outstanding shares from the remaining shareholders at the same offer price.
A stock exchange may compulsorily delist the shares of a listed company under certain circumstances. In such a case there is no provision for an exit route for the shareholders except that the stock exchanges would allow trading in the securities under the permitted category for a period of one year after delisting.
In scenarios like mergers and amalgamations and under legal directions for sick companies under Bureau for Industrial and Financial Reconstruction, companies can be delisted.
So is delisting of shares always detrimental to shareholders? Can guidelines be created to restrict delisting of shares?
In the currently liberalised scenario it would be improper to create fresh entry and exit conditions for companies.
Listing and delisting are commercial decisions and should be based on business considerations. As long as the principles of adequate corporate governance, necessary approvals of shareholders and interests of the minority shareholders supported and followed, there should be no case against delisting.
An interesting fact is that a study of companies which have been delisted from the BSE shows that in 14 out of 29 companies (which have been or are in the process of being delisted from the BSE), the 52-week average was greater than the 26 weeks average.
The Sebi committee had compared the averages of closing highs and lows of 52 weeks with those of averages of weekly closing highs and lows for 26 weeks from the date of offer.
So what has the Sebi committee now recommended?
The committee has broadly stated that while there would be no restrictions on delisting per se, the monitoring of events leading to delisting (to safeguard investor interests) should be stringent and improved upon.
The committee has discussed issues like an exit price for delisting, adopting a reverse book-building process to determine this and taking steps to ensure that there is no scrip price manipulation while the process is on.
The following recommendations have been made:
The exit price for delisting should be in accordance with the book-building process;
The offer price should have a floor price (a minimum base price) which will be the average of 26 weeks traded price and without a maximum price;
Market forces will determine the price above the base price. Stock exchanges will provide the infrastructure to ensure transparency whereby investors can see the prices on screens;
To reduce risk of price manipulation, the scrip will be under watch by the exchanges;
Comprehensive provisions should include procedures governing the entire subject of delisting of securities of companies, and should cover cases in which companies on their own seek delisting of their securities from all or some of the stock exchanges, as well as those where the stock exchanges can compulsorily delist the securities of a company.
There are some new terms which investors/shareholders will have to keep in mind. Let us take a closer look at some:
What is the 'reverse book-building' process? And what will the exit price be? How does the process work?
You would have heard about the book-building process (The process of securing the optimum price for a company's share. The issuing company decides the price of the security by asking investors how many shares and at what price they would be interested in) which is adopted when a initial public offering or divestment is made.
Well, it is the same process. It is called the 'reverse' book-building process because the aim is to sell the shares (exit from the company) while in the case of the normal book-building the process is to buy the shares (and invest into the company).
The process which would be adopted would be similar to that adopted in the initial public offering process where is a book is kept open for a specific number of days.
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