Delisting of Securities: A Comprehensive Overview

By Sahil Kumar 13 Minutes Read

Introduction

According to SEBI, ‘delisting’ refers to the permanent removal of a listed company’s securities from a stock exchange, resulting in those securities no longer being traded on that exchange. Delisting of securities occurs when a company chooses to withdraw its securities from the stock exchange where they were previously listed and traded. If a company decides it no longer wishes to offer trading opportunities for its specified securities on a particular stock exchange, it may opt to delist those securities.

Delisting can be initiated voluntarily by the company (voluntary delisting) or mandated by the stock exchange (compulsory delisting). This process is also a continuous listing requirement under Rule 19A of Securities Contracts (Regulation) Rules, 1957. In the case of delisting, the company’s promoters typically purchase the shares from public shareholders that are subject to delisting.

Conditions for Delisting

• The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 outline the conditions, types, and procedures for delisting shares.
• Delisting is prohibited following a buyback of equity shares or a preferential allotment made by the company.
• Additionally, delisting cannot occur unless the securities have been listed on the stock exchange for a minimum of three years.
• Companies are also barred from delisting their shares if any convertible instruments issued by the company, which are convertible into the same class of equity shares intended for delisting, are still outstanding.
• The SEBI (Delisting of Equity Shares) (Amendment) Regulations 2015 impose new restrictions on promoters and promoter groups regarding delisting. Regulation 4 (IA) stipulates that if any entity within the promoter or promoter group has sold equity shares of the company within six months prior to the board meeting approving the delisting proposal, they are ineligible to propose the delisting of the company’s equity shares.
• The objective of the SEBI Act is to protect investors’ interests and prevent market abuse. It is important to maintain transparency in securities transactions.^[1]
• Moreover, promoters are prohibited from using company funds for the purpose of delisting, including providing exit opportunities to shareholders. Any attempts to employ deceptive practices, schemes, or transactions that defraud or manipulate shareholders are strictly forbidden.

Types of Delisting

1. Voluntary Delisting

Voluntary delisting refers to the process by which a company chooses to remove its securities from being traded on a stock exchange. A company may choose to delist its equity shares from one or more recognized stock exchanges (RSEs).

This decision is typically made by the company’s promoters for various reasons, such as avoiding regulatory compliance, incurring trading losses, business suspension, financial distress, or corporate restructuring.

If the equity shares are delisted from only one or a few exchanges but remain listed on others with nationwide terminals, no exit opportunity needs to be provided to shareholders. However, if the shares will no longer be listed on any exchange with nationwide terminals, an exit opportunity must be provided to public shareholders.

For voluntary delisting, the company’s board of directors must approve the proposal and issue a public notice. The company must also submit a delisting application to the relevant stock exchange. Amendments in 2015 stipulate that before approval is granted, the board must:

• Disclose the intention to delist to the concerned stock exchange.
• Appoint a merchant banker to conduct due diligence and disclose the findings.
• Obtain trading details of shares from the top twenty-five shareholders for the two years preceding the board meeting.

The board must certify compliance with applicable securities laws and that the delisting is in shareholders’ best interests.

Once in-principle approval is obtained from the exchange, the promoters must announce the delisting and, if required, open an escrow account to deposit the estimated consideration based on the floor price and number of outstanding shares. The reverse book building process is then followed, allowing all public shareholders to participate.

The acquirer or promoter is not obligated to accept the final offer price and may choose not to proceed with the delisting if the price is unsatisfactory, in which case they will not acquire any shares or finalize the delisting application.

The delisting offer is considered successful if, post-offer, the promoter’s shareholding combined with shares accepted through eligible bids reaches either:

• Ninety percent of the total issued shares of that class, excluding shares held by a custodian and depository receipts issued overseas, or
• The aggregate percentage of pre-offer promoter shareholding plus fifty percent of the offer size.

Following the 2015 amendments, an offer is deemed successful only if:

• The post-offer promoter shareholding, combined with shares accepted through eligible bids, reaches ninety percent of the total issued shares of that class, excluding shares held by a custodian and depository receipts issued overseas.
• At least twenty-five percent of public shareholders holding shares in demat form on the date of the board meeting participate in the book building process.

2. Compulsory Delisting

Compulsory delisting is the forced removal of a company’s securities from a stock exchange by the exchange itself, typically due to non-compliance with regulatory requirements or listing rules.

An RSE may compulsorily delist securities based on specific grounds outlined in Rule 21 of the Securities Contracts (Regulation) Rules, 1957, including:

• The company has incurred losses for three consecutive years and has a negative net worth.
• Suspension of trading in securities for over six months.
• Infrequent trading of securities over the past three years.
• Conviction of the company, its promoters, or directors for non-compliance with the SCRA, 1956, SEBI Act, 1992, or Depositories Act, 1996, resulting in a penalty of at least one crore or imprisonment for three years or more.
• Unknown or false addresses of the company, promoters, or directors, or a change in the company’s registered office.
• Public shareholding has fallen below the minimum required level and has not been raised within the prescribed time.

The company is given an opportunity to present its case before a panel appointed by the RSE. The RSE must make a public announcement of the delisting and appoint an independent valuer to determine the fair value of the delisted shares.

Special Provisions related to Delisting

1. Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 

An offer for delisting is considered successful if, after the offer, the promoter’s shareholding, combined with shares accepted through eligible bids at the final price, reaches at least:

• Ninety percent of the total issued shares of that class, excluding shares held by a custodian and depository receipts issued overseas, or
• The sum of pre-offer promoter shareholding plus fifty percent of the offer size.

2. SEBI (Delisting of Equity Shares) (Amendment) Regulations 2015

For an offer to be deemed successful under the amended regulations, it must meet the following criteria:

• The post-offer promoter shareholding, together with shares accepted through eligible bids at the final price, must reach ninety percent of the total issued shares of that class.
• At least twenty-five percent of public shareholders holding shares in demat form as of the date of the board meeting must participate in the book building process.

For small companies with a paid-up capital of up to one crore, where there has been no trading of equity shares in the past year or the number of public shareholders is three hundred or fewer with less than one crore in paid-up value, the exit opportunity procedure does not apply.

In the case of Trichy Distilleries and Chemicals Ltd v. CIT^[2], the issue was whether the consent required was based on the number of shareholders or the value of public shareholding.

Although the company obtained consent from over ninety percent of shareholders by value, the number of consenting shareholders was less than ninety percent of public shareholders, leading to the Madras Stock Exchange’s refusal to delist the shares.

The Securities Appellate Tribunal referred to the principle of “one share, one vote” under Section 87 of the Companies Act, 1956, and found that rejecting the value-based consent would lead to absurd outcomes.

Implications of Delisting

• For voluntary delisting, a company must comply fully with the regulations and ensure sufficient funds are available for buying back shares from shareholders. If the delisted shares will no longer be traded on nationwide terminals, an exit opportunity must be provided to those shareholders.
• In cases of compulsory delisting, the company, its whole-time directors, promoters, and affiliated companies are barred from accessing the securities market or seeking listing for ten years from the delisting date.
• SEBI is revising delisting regulations to prevent manipulation while simplifying the process for voluntary delisting. Current concerns include the lengthy delisting process, the potential for price manipulation by non-promoter shareholder groups, and the complexity of compliance.
• Proposed changes aim to reduce the delisting timeline from 250 days, address manipulations during the reverse book building process, and ensure fair price determination.

Conclusion

Delisting, whether voluntary or compulsory, involves removing securities from a stock exchange and is regulated to prevent market manipulation and protect minority shareholders. The SEBI’s regulations ensure that delisting is conducted fairly, requiring companies to provide exit opportunities to shareholders when necessary and prohibiting deceptive practices. The conditions and procedures outlined, including the reverse book building process and the criteria for successful delisting offers, aim to balance corporate interests with investor protection. Recent amendments and proposals seek to streamline the delisting process and address issues such as price manipulation and regulatory compliance. Overall, these regulatory frameworks are crucial for maintaining market transparency, ensuring fair trading practices, and safeguarding investor rights in the dynamic environment of securities markets.

^[1] Securities and Exchange Board Of India v. Rakhi Trading Private Limited 2018 SCC ONLINE SC 101.

^[2] [1999] 235 ITR 194.

Sahil Kumar