Before jumping in to discuss whether or not to accept a share delisting offer, let’s first understand what is delisting. The simple meaning of delisting is the removal of listed stocks from a stock exchange, either voluntarily or involuntarily.
Voluntary desilting happens when a company chooses to get delisted in order to expand or facilitate business restructuring following an acquisition, or when the promoters want to raise their stake in the business.
Besides, a company may choose to delist keeping in mind the various responsibilities attached to being a listed entity, such as adhering to various disclosure and corporate governance requirements.
In involuntary delisting, a company may be forced to remove it shares from the stock exchanges for non-compliance of rules. In voluntary delisting, investors may opt to participate in the delisting process, as they have choice, but in the case of forced delisting due to any type of penal action such as non-compliance of listing norms and regulatory provisions, investors have no choice but to sell her holdings at whatever price the stock is trading in the current market, which may be less than the real value of the company.
In most cases, when there is rumour about delisting of a stock, prices increase and some investors hastily enter such stocks. It is advisable to understand why the company is delisting before jumping in to invest in such a stock simply because it is getting delisted. Any prudent retail investor should not look at delisting as a reason for investment. However, one should do regular stock picking with a focus on business fundamentals.
To decide whether to accept a delisting offer or not, one needs to study a range of qualitative and quantitative factors. One should take an objective look at what is being put on the table, rather than simply rejecting an offer outright. As said earlier, a company may go in for delisting if the promoters want to increase stake in it either to expand or restructure a business or the company is merged into or acquired by another firm.
If a firm is getting delisted for any of these reasons, that should not be a cause for alarm. However, one must assess the financial health of the business, valuation of its shares, and of course its shareholding patterns. If the company is successful in buying over 90 per cent shares, it will get delisted and the stock will not be available for trading.
So, investors who have chosen not to tender shares might end up holding non-tradable securities. The only option in such a case for public shareholders would be to tender their equity shares to the promoter up to a minimum period of one year from the date of delisting and, in such case, the promoter will accept those shares at the final exit offer price.
Those will be off-market trade and subject to tax, as applicable. It is always better to tender shares if the company reaches the 90 per cent threshold, and one may be able to use the funds elsewhere more productively. Apart from this, one should also take note of the period during which a delisting is taking place. If a company tries to delist it shares in times of a market downturn, it may be a strategy to buy back shares at a cheaper price. In a weak market environment, where one is unsure of market direction, delisting is a strong theme, as investors get an exit at a premium to the market price.
At times, a company may put off a delisting plan, if the promoters do not agree to the discovered price that has been arrived at through the reverse book-building process. If an investor has bought a stock at higher valuation compared to its peers, then she may end up losing heavily, if the delisting doesn’t go through, as the stock price in such cases tends to correct sharply.
On the contrary, one should start worrying in case of involuntary delisting of the company. In such a case, minority shareholders may end up getting a poor deal, as they have no option but to sell shares at the price decided by the exchange.
(DK Aggarwal is the Chairman and MD of SMC Investments and Advisors)