All You Need to Know About Voluntary and Compulsory Delisting of Shares
The delisting of equity shares is a significant event in the life cycle of a publicly traded company. In India, the Securities and Exchange Board of India (SEBI) regulates the delisting process to ensure fairness and transparency. SEBI’s framework, primarily outlined in the SEBI (Delisting of Equity Shares) Regulations, 2021, provides comprehensive guidelines for companies planning to go private. Let’s dive deeper into the key aspects of these regulations.
What is Delisting?
Delisting refers to the removal of a company’s shares from a recognized stock exchange, making them no longer publicly traded. Companies may opt for delisting for various reasons, such as restructuring, mergers, poor performance, or a strategic decision to go private.
Types of Delisting
SEBI categorizes delisting into two types:
- Voluntary Delisting
Definition:
This occurs when a company or its promoters voluntarily decide to remove the company’s shares from stock exchanges.
Reasons for Voluntary Delisting:
- To consolidate ownership and reduce public scrutiny.
- To achieve cost efficiency by reducing compliance and regulatory expenses.
- As part of a strategic move, such as restructuring, mergers, or acquisitions.
- To exit from stock exchanges where trading volumes are minimal (i.e., listing in a different country or stock exchange instead).
Process:
- Approval from the Board of Directors is required.
- A special resolution is passed, needing at least two-thirds majority approval from public shareholders.
- The Reverse Book Building (RBB) mechanism is used to determine an exit price acceptable to shareholders.
- Delisting proceeds if the promoters acquire at least 90% of the equity.
Key Considerations:
Voluntary delisting ensures public shareholders are compensated fairly and given an orderly exit from their investments.
- Compulsory Delisting
Definition:
Compulsory delisting occurs when stock exchanges or regulatory authorities initiate the removal of a company’s shares due to non-compliance or violations of listing norms.
Reasons for Compulsory Delisting:
- Persistent non-compliance with regulatory requirements (e.g., failure to meet reporting obligations).
- Fraudulent activities or misrepresentation by the company.
- Prolonged suspension from trading due to non-adherence to stock exchange norms.
- Severe corporate governance lapses or financial insolvency.
Process:
- Stock exchanges issue warnings and provide adequate time for companies to comply.
- In cases of continued default, delisting proceedings begin.
- Shareholders are compensated based on a fair valuation determined by an independent valuer.
Key Implications:
Promoters are barred from accessing securities markets for a specific period after compulsory delisting. Shareholders are often at a disadvantage as they may receive less than the market price.
Key Distinctions Between Voluntary and Compulsory Delisting
| Aspect | Voluntary Delisting | Compulsory Delisting |
| Initiator | Company or its promoters | Stock exchange or regulatory authority |
| Reason | Strategic decisions by the company | Regulatory violations or non-compliance |
| Process | Requires shareholder and regulatory approval | Enforced after due warnings |
| Exit Price | Determined via RBB mechanism | Determined through fair valuation |
| Promoter Penalty | None | Barred from securities market for a period |
Key Provisions Under SEBI (Delisting of Equity Shares) Regulations, 2021
The 2021 regulations enhance clarity and investor protection in the delisting process. Below are some essential highlights:
- Approval Requirements
- The decision to delist must be approved by the company’s Board of Directors and shareholders.
- A special resolution requires the consent of at least two-thirds of the shareholders, excluding promoter and promoter group entities.
- Reverse Book Building (RBB) Process
For voluntary delisting, SEBI mandates the use of the RBB mechanism. Here’s how it works:
- Shareholders bid their shares at a price they find acceptable for delisting.
- The discovered price, often higher than the floor price, becomes the exit price if sufficient shares are tendered.
- Minimum Public Shareholding Compliance
Delisting is successful only when the company ensures that promoter shareholding increases to at least 90% of the total equity after the process, reducing the public float.
- Exit Opportunity for Shareholders
To protect minority shareholders, companies must provide an exit opportunity at the determined price to all public shareholders who did not participate during the delisting process. This window remains open for one year.
- Exemption Cases
Certain delisting scenarios, such as mergers, schemes of arrangement, or cases involving small companies, may be exempt from the reverse book-building requirement.
Compulsory Delisting
In cases of non-compliance or prolonged suspension, exchanges may delist a company. Here’s what SEBI mandates for such scenarios:
- Shareholders must be compensated based on a fair value determined by an independent valuer.
- Promoters are barred from accessing securities markets for a specific period.
Investor Safeguards and Implications
SEBI’s delisting regulations prioritize investor rights by ensuring fair compensation and an orderly exit. However, investors must remain vigilant about companies initiating delisting, as it affects liquidity and access to investments.
Conclusion
SEBI’s framework for delisting equity shares aims to balance corporate strategy with shareholder interests. While it allows companies flexibility to restructure, it ensures that transparency, fairness, and investor protection remain paramount.
Investors should carefully monitor corporate announcements and understand the delisting process to make informed decisions. As SEBI continues refining its regulatory framework, the integrity of the Indian capital market is expected to grow stronger.
Note:- The information provided on this blog is for educational and informational purposes only, does not constitute a suggestion to invest, ask your financial advisor or do your own research before investing in any instrument. Because there is risk involved in the market.