Did you know a total of 9445 companies have been listed on the Bombay Stock Exchange, out of which 4140 companies have been delisted as of November 30, 2023?
Just as a company can list itself on the stock exchange to raise money from the public, it also has the option to delist itself. Listing allows a security to be publicly traded and begins with an IPO. Companies seeking to list their shares must meet certain eligibility criteria outlined by regulatory authorities. On the other hand, delisting is a process of transitioning from a publicly traded entity to a private one, which can be voluntary or involuntary.
This blog explores the key aspects of listing and delisting, the criteria companies must adhere to, and the implications for shareholders and investors.
What is the listing of shares?
Listing of securities refers to the formal process of allowing a security to be traded on a public stock exchange. When a security is listed, it has been officially approved for trading on that particular exchange. The entire process is called an initial public offering.
Securities eligible for listing on stock exchanges can belong to various entities such as public limited companies, government bodies (both central and state), quasi-government organisations, corporations and financial institutions. To qualify for listing on a stock exchange, a company must meet all the requirements outlined in the Companies Act of 1956. Additionally, the company must adhere to the listing standards periodically set forth by SEBI (Securities and Exchange Board of India), along with any other conditions, requirements, and regulations in effect at the time.
Eligibility and procedure of listing of securities
Here are the SEBI guidelines for listing securities for any company to get listed on NSE or BSE:
- The company is required to have a minimum post-issue paid-up capital of Rs. 10 crore for IPOs and Rs. 3 crore for FPOs.
- The minimum size of the offering must be Rs. 10 crore.
- The company should achieve a minimum market capitalization of Rs. 25 crore.
Furthermore, the applicant must satisfy the exchange on the following grounds:
- The applicant must have a mechanism in place for addressing grievances from investors.
- The exchange should be informed of any unresolved grievances pending against the issuer, its listed subsidiaries, and the top five listed group companies ranked by market capitalisation.
- The applicant should disclose any arrangements or mechanisms established to resolve investor grievances.
- If the applicant, its promoters, group companies, or subsidiary companies have defaulted on payments of interest and/or principal to debenture, bond, or fixed deposit holders, the company will not be allowed to list until all payment obligations have been fulfilled.
What is the delisting of shares?
Delisting of securities represents the opposite of listing on a stock exchange. It’s a procedure where a company transitions from being a publicly traded entity to a private one. When a company is delisted, its shares can no longer be bought or sold on the exchange. After delisting, only the company’s promoter or the company itself can repurchase shares from the public, and this method is known as a reverse book-building process.
There are two primary types of delisting:
Involuntary delisting is when a regulatory authority compels a company to remove all of its shares from the market, effectively ceasing all trading activity. Below are some of the causes behind involuntary delisting:
- If a company fails to adhere to the rules and regulations set by the exchange, it may face delisting.
- Delisting can occur involuntarily when a company’s shares have exhibited irregular trading patterns over six months, particularly if this inconsistency persists for three consecutive years.
- In cases where a company has incurred significant losses over the previous three years, resulting in a negative net value, involuntary delisting can be triggered.
Shareholders must understand the underlying reasons behind delisting to assess its impact on their investments.
Voluntary delisting occurs when a company, of its own accord, decides to remove all of its shares from the public market. In this type of transaction, the company is obligated to buy back all shares held by its shareholders. Voluntary delisting typically occurs when a significant shift in the company’s overall structure occurs.
Several scenarios can lead to voluntary delisting:
- It can occur when an investor acquires a majority stake in the company and subsequently sells it back to the company itself.
- Exchange regulations and rules may also play a role, as they can impose operational challenges that prompt a company to consider voluntary delisting as a way to streamline its operations.
- Some companies may choose to delist all their shares voluntarily to maintain smoother operations, avoiding the complexities and demands associated with being publicly traded.
In essence, voluntary delisting is a strategic decision made by a company to withdraw its shares from the public market, often driven by significant changes in ownership, compliance considerations, or the desire to enhance operational efficiency.
Whether a company is in the process of listing on a stock exchange or delisting from it, there are specific criteria that its directors must follow. Given the recent increase in IPOs in the latest financial year, you must be well-informed about the established market practices. Equipping yourself with this knowledge can enhance your skills as an investor, helping you make more informed decisions. So, keep investing and keep advancing your financial growth!