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Why Do Companies Voluntarily Delist From Stock Exchanges? What Happens To Shares You Hold?

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On Friday, Hexaware Technologies informed the stock exchanges that it had received a proposal from its promoter, HT Global IT Solutions Holdings, expressing its intention to voluntarily delist. Recently, two more companies- Vedanta and Adani Power- also proposed plans to delist.

Some news reports suggest that Diageo Plc is also exploring options to delist its Indian arm, United Spirits.

Why Do Companies Voluntarily Delist? What Happens To Shares You Hold?
 

What is delisting?

Share delisting is the removal of a company's shares listed from the stock exchange, making it no longer tradeable-that is to be bought or sold- on the exchange. Basically, the stock is permanently removed from the stock exchange. This could be done voluntarily or involuntarily.

Involuntary delisting is when the company is forced to be removed from being publically traded for not being able to meet the requirements/rules set by the exchanges, bankruptcy, etc.

However, the recent announcements have been that of voluntarily delisting, making it an interesting bet for investors.

Voluntary Delisting

The COVID-19 outbreak has been hard on stock valuations as well. Experts say that the recent proposals made by promoters of Vedanta, Adani Power and Hexaware Technologies to voluntary delist, may be seen as an opportunity for them to purchase shares from shareholders at discounted prices.

Promoters generally increase their stake in the company when valuations are stressed.

Before making the delisting proposal announcement, shares of Vedanta were trading at Rs 79.60 (when compared to its 52-week high of Rs 179.95), Adani Power was trading at Rs 36.40 (52-week high is Rs 73.75) and Hexaware Technologies at Rs 259.45 (52-week high at Rs 439).

Reasons to voluntarily delist could vary. Companies usually delist to rebalance or restructure their accounts. The costs of being publicly listed could be high for some and may not be justifiable if their market capitalisation (market cap) is low. Deregistering from the stock exchanges could help such companies save costs and increase net income.

Voluntary delisting, though the opposite of an IPO (initial public offering), is seen as an equal opportunity to make short term gains. Whatever may be the reason for promoters to make their company a privately held entity, shareholders are offered a premium to the price at which the shares are being traded on the exchange. When a shareholder sells to a promoter wishing to delist, the transaction is off the exchange, making the profit a capital gain.

 

On the other hand, delisting by force leaves investors in the lurch as they have no option but to sell at whatever price they get.

If you check now, share prices of Vedanta, Adani Power and Hexaware Tech have picked up as investors look for profit-making opportunities. In fact, even rumours of delisting could cause a reaction.

What happens to shares held by you?

As mentioned before, if you hold shares in any of these companies, the company will pay you to return the shares held and removes the entire lot from the exchange. Profit, if any, is considered a capital gain. This means that if delisting takes place after one year of holding the shares, it will be taxed as LTCG and if it happens within a year of the purchase, it will be taxed according to an individual's tax slab (STCG).

In the case of voluntary delisting, the delisting shall be considered successful only when the acquirer's shareholding together with the shares tendered by public shareholders reaches 90% of the total share capital of the company.

Promoters are allowed to participate in the process and the floor price is decided based on a reverse book building process.

Eligible shareholders can tender the equity shares through their stockbrokers during the normal trading hours of the secondary market.

Those investors fail to participate have the option of selling their shares to the promoters. This facility will usually be open for at least one year from the date of delisting of shares and promoters are under an obligation to accept the shares at the same exit price.

Therefore, the process is long and investors are given enough time to offload their stocks. If an investor continues to hold on to the shares post-delisting, he/she will continue to have legal and beneficial ownership rights over the shares held.

The downside of holding shares to be delisted

If the voluntary delisting plans are not successful, the stock may crash, making the short term gain opportunity quite risky. As mentioned before, the company has to able to buy back 90 percent of the outstanding shares. Besides, they also need to seek necessary regulatory approvals.

If the plan fails, the stock will collapse from the surge seen after the delisting announcement.

Read more about: delisting
Story first published: Saturday, June 6, 2020, 16:33 [IST]
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