I'm sure you know that once a company goes public the shares get listed on the stock exchange and we can trade them whenever we want. But did you know that a company's share can be removed from the Stock Exchange and the shares can be barred from trading?
Read this article till the end to learn everything you need to know about it.
What is delisting?
So if a private company wants to go public, it will get its shares listed on the stock exchange to raise capital and then people can trade those stocks. This is what listing means. Now delisting is the opposite of it. So if a company’s shares get removed from the stock exchange, banning any trading in the shares, it means that the company has been delisted from the stock exchange.
In a delisting, it is a public company that now becomes private as its shares cannot be traded in the open market. But wait it is possible that a company may be delisted from one stock exchange but its shares are allowed to be traded on another stock exchange.
Companies may be delisted for various reasons. For example, it might have failed to fulfill certain listing requirements, an M&A might have happened, the business might have shut down, or the company became insolvent.
What happens when a stock gets delisted?
So when a company’s stock gets delisted, we cannot trade them on the stock market. So that's one thing that happens because of delisting. Even though a company gets delisted, the shareholders keep their stake in the company. The company will also not be required to publish annual reports like listed companies.
Finally, directors get control over the company, and they are less prone to a hostile takeover. But there is a downside to delisting. Once a company gets delisted from the stock exchanges, the shares may get devalued, its reputation may get tarnished, and the company may lose market share.
Types of delisting
Now that you know what delisting is and what happens when delisting happens, let's look at the types of delisting. There are mainly two types of delisting: voluntary and involuntary.
Voluntary delisting
A company may decide on its own to get delisted and become private. This may also happen because of any mergers, acquisitions, or liquidation. Sometimes a company may struggle in business, which usually leads to speculation in the stock market. So to avoid all this and avoid releasing the financial statements, they may choose to get delisted voluntarily.
Involuntary delisting
Sometimes a company may get delisted because the law or regulations require it. Usually, the exchanges have certain criteria that must be fulfilled. If it is not, then the shares may get delisted.
Examples
Now let's look at some of the stocks that were delisted. Recently, on 8th March 2022, NYSE announced a delisting of SCVX Corporation. The company had failed to maintain a market capitalization of 40 million dollars over 30 consecutive days.
On 11th March 2022, the SEC delisted almost 1.1 trillion dollars in shares of Chinese corporations Yum China, ACM Research, HutchMed, Xylab, and Beijing. The reason for delisting was that these companies failed to provide audit reports to certify their financial statements and hence were delisted by the regulator.
Advantages
We have already covered most of the advantages and disadvantages of delisting, but here is a list of advantages:
1. delisted firms do not have to publish annual reports or shareholding pattern.
2. private companies are no longer prone to hostile takeovers.
3. private companies are also free from market speculation.
4. directors retain decision making.
5. private companies are also not subject to minimum listing anymore.
6. companies save on costs like listing fee and annual trading costs.
Disadvantages
Here are some disadvantages of delisting:
1. private companies cannot raise capital from the public.
2. once a company gets delisted, it loses public trust and market share.
3. delisting can harm book value.
4. on delisting, stocks lose value and investors lose money.
That’s everything you need to know about delisting. We hope you found this article informative and helpful. We regularly publish content related to the stock market and finance, so be sure to bookmark our site and explore more of our articles to stay updated.