Voluntary delisting and compulsory delisting

Compulsory delisting is a penalizing step invoked by stock exchanges as a result of noncompliance to listing norms leading to permanent removal of shares of a listed company from stock exchange. In voluntary delisting, a listed company voluntarily removes its securities from a stock exchange because of various reasons like recession, merger & acquisition etc.

Exit Opportunity

What happens to existing shareholders of company which files for delisting? Shareholders are given an exit option at a specific price to tender their shares although tendering of shares is not mandatory. SEBI has stipulated exit guidelines for voluntary and compulsory delisting using which exit price is calculated. Exit price offered in voluntary delisting of securities is decided by the promoter using book building process. There is a floor price of offer equal to average of 26 weeks traded price quoted on the stock exchange. There is no cap on the maximum price offered. Voluntary delisting is beneficial for investors as exit price offered is at premium to market price most of the time.

Compulsory delisting is rarely beneficial for shareholders as most of the time company is in defaulters list and there in no value left in company stocks.

To tender or not to tender

Tendering shares in case of delisting is not mandatory for a shareholder. You will continue to remain a shareholder of the company in case you do not tender your shares. You will be entitled to benefits like dividend and bonus, but it will be difficult for you to sell delisted shares as they are no longer traded.

Conclusion
A lot of investors simply do not tender their shares in the hope of relisting gains, but there is a "cooling period" of five years in case of voluntary delisted company. Since there will be no formal place where you can trade the shares post delisting, it will be difficult to arrive at correct selling price of the share. Keeping above points in mind, it's recommended that small investors should sell shares or tender their share in the offer before the company gets delisted.

About the Author:
The author Bimlesh Singh is a financial advisor. He holds a Bachelor's degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com