Listing and Delisting of Securities Listing Listing means admission of securities to dealings on a recognized stock exchange. The securities may be of any public limited company, Central or State Government, quasi governmental and other financial institutions/corporations, municipalities, etc.
In addition to all these rules, regulation and compliance every stock exchange have a set of guidelines of its own for the companies to be listed on them. For example they may provide for the minimum issue size and market capitalization of the company A company has to enter into a listing agreement before being given permission to be listed on the exchange.
Under this agreement the company undertakes amongst other things, to provide facilities for prompt transfer, registration, sub-division and consolidation of securities: to give proper notice of closure of transfer books and record dates, to forward 6 copies of unabridged Annual reports, balance sheets and profit & loss accounts, to file shareholding patters and financial results on quarterly basis and to intimate promptly to the exchange the happenings which are likely to materially affect the financial performance of the company and its stock price and to comply with the conditions of Corporate governance.
The companies are also required to pay to the exchange some listing fee as prescribed by the exchange every financial year. A company not complying with these requirements are may face some disciplinary action, including suspension/ delisting of their securities. In case the exchange does not give permission to the company for listing of securities, the company cannot proceed with the allotment of shares. Delisting
Delisting of securities means removal of the securities of a listed company from the stock exchange. It may happen either when the company does not comply with the guidelines of the stock exchange, or that the company has not witnessed trading for years, or that it voluntary wants to get delisted or in case of merger or acquisition of a company with/by some other company. So, broadly it can be classified under two head: 1. Compulsory delisting. 2. Voluntary delisting
Compulsory delisting refers to permanent removal of securities of a listed company from a stock exchange as a penalizing measure at the behest of the stock exchange for not making submissions/comply with various requirements set out in the Listing agreement within the time frames prescribed. In voluntary delisting, a listed company decides on its own to permanently remove its securities from a stock exchange. This happens mainly due to merger or amalgamation of one company with the other or due to the non-performance of the shares on the particular exchange in the market.
In a country like India, wherein lakhs and lakhs of people invest in Primary as well as Secondary Markets, protection of the interests of these investors becomes an inherent job for the Regulators, at all forums. With the same intent in mind, the Securities and Exchange Board of India Act was enacted in the year 1992. The Act established a Board, called Securities and Exchange Board of India (SEBI), to protect the interests of investors in securities and to promote the development of and to regulate the securities market. It acts as a regulator for the development of securities market in the country.
At present, appx. 9,000 Companies are listed on various Exchanges in India, out of which only appx. 3,500 are being actively traded. Trading being taking place only at BSE/ NSE. Others are either not being traded or have become illiquid. The question that arises is what should such investors do, whose investments become illiquid and who had invested in a particular company on the basis of the faith and trust in the system and also on the basis of the contents in the prospectus which mentions that the security would be listed on stock exchanges.
Once he subscribes to the issue, he takes an irreversible decision, as the promises in the prospectus are irreversible. And if the securities of such a company get delisted, his investment will no longer be marketable and tradeable. And then, on top of it, these companies have themselves delisted either themselves or the Exchanges delist them for non compliances or not meeting the criterion. In such circumstances, the shareholders are left in lurch with no option but to tender their shares at whatever price, which may be much lesser than the actual value of the Company.
The fundamental question is: Is delisting of securities a boon or a bane for the shareholders? . Eversince the promulgation of SEBI Delisting Guidelines 2003, many a companies have got themselves voluntarily delisted. They have paid their shareholders according to the higher of the average of the weekly closing highs and lows for 26 weeks or 2 weeks. Recently, a SEBI Committee conducted a study on 29 companies, which have been or are in the process of being delisted from the BSE, and it came to light that in 14 out of the studied 29 companies, the 52-week average was greater than the 26 weeks average.
That is to say, the securities had a much better potential if they would have remained listed on the Exchange and the shareholders would have taken an exit in the ordinary course of trading in the Secondary Market. In cases like above, the shareholders of such companies although are able to get back the market price of their shares (if it’s a frequently traded scrip), but there is always an apprehension that they could have got a better price if they exited through the Secondary Market.
On the other hand, there is another set of Companies, which are defunct or are not being traded or fall under the infrequently traded category at any of the Exchanges. These Companies, by getting delisted, pay off their shareholders on the basis of certain criterion like return on networth, EPS etc, which may be much lesser than the intrinsic value of the share. In cases like above, from the shareholders’ point of view, although might be receiving a lesser value than the actual worth, but he stands to benefit in the sense that his blocked funds get released, which now he can utilise in other scrips.
Also, he is relieved of the tension of carrying the dead stock on his head. There is yet another set of companies, that came out with Public Issues, utilised the shareholders’ funds, stopped making compliances with the Exchanges, the Exchanges suspended them, and as per the Guidelines, finally compulsorily delisted them. In fact, there is a long list of such companies which have been delisted by the Stock Exchanges. From the shareholders’ point of view, this is the gravest situation.
Here, the shareholders of the Companies are left in a lurch, without getting any money back for their investments in such companies. Although, as per the Delisting Guidelines, there was a provision for payment of fair value to the public shareholders, but no control mechanism has ever been deployed to keep a check on such payments. But from the Regulators’ (the Exchanges, SEBI etc. ) point of view, such delistings are important because this cleans up the system and relieves them of the dead woodstock. On a comparision of all the above situations, we will realise all the situations have their pros and cons.
If a situation is beneficial for one, the other stands to lose. In certain situations, delisting becomes imperative to relieve the system of the unwanted trash companies. Thus, a complete ban on delisting is not possible. A judicious mix of listings and delistings has to be there in the system, to make it run smoothly. The salient features of theGuidelines were: 1. Public Shareholders to be given an exit option if the company or its promoters propose to delist its securities from all the stock exchanges on which they were listed.
However, no exit opportunity was required to be given in case the company continues to remain listed at stock exchanges having Nationwide trading terminals. 2. Price discovery by Reverse Book Building process. 3. Eligibility to participate in the book building process was available only to demat shareholders. 4. Option available to the promoters to accept or reject the price determined by the book building process. 5. The exit option to remain open for a period of 6 months after the closure of the offer. The said Guidelines, although, to a great extent covered the issues involved in Delisting of Securities.
However, there were certain areas over which hue and cry was made from various quarters. Various representations and views, from intermediaries, stock exchanges, shareholders’ associations, chambers of commerce etc were given to the Regulators on the operational issues and procedural complications in the guidelines. Based on such representations, it was proposed to look into and suggest changes in the guidelines. IIn the month of April 2004, the initial changes proposing more systemic clarity were put up for public comments.
Comments were received from various quarters and opinions were received on crucial provisions. On the basis of the same, SEBI, in December 2006, circulated the Concept Paper on the proposed SEBI (Delisting of Securities) Regulations, 2006, asking for public comments on the proposed Regulations. SEBI received various comments, opinions and suggestions on the subject. And finally, by its publication dated 10th June 2009 in the Official Gazette, SEBI notified the much awaited SECURITIES AND EXCHANGE BOARD OF INDIA (DELISTING OF EQUITY SHARES) REGULATIONS, 2009.