SEBI

What is meant by “Voluntary Delisting” and what happens on failure of “Voluntary Delisting”?

Share delisting means the removal of a listed stock from a stock exchange therefore, it won’t be traded on the bourse. Delisting refers to the permanent removal of stock from the stock exchange. This delisting can either be voluntary or involuntary. In this article, we shall discuss about voluntary delisting and the effect of its failure.

Meaning of Voluntary Delisting

It is a strategic move where a promoter of a listed company and the listed company wish to delist the shares from the stock exchange in India. It is governed by the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009^[1] as amended.

In case a company wishes to voluntarily delist, a premium to the regular price of the shares is offered to the shareholders. When the investor sells the delisted shares, the transaction is taken off the exchange. Therefore any profit that is made is judged as capital gain.

What is Involuntary Delisting?

It is a scenario where a company is delisted forcefully by National Stock Exchange or Bombay Stock Exchange for reasons such as bankruptcy, mergers/takeovers, failure to maintain the minimum requirement prescribed by the exchange, etc.  In such cases, the company and its whole-time directors, promoters, and subsidiaries may be barred from getting involved in stock market for 10 years.

What is the significance of Voluntary Delisting?

The uncertain business environment and market volatility due to the Covid-19 pandemic and the continued cost and effort of regulatory compliances have facilitated this form of delisting as an option for some promoters. However, there may be many other reasons for such delisting.

There may be advantages such as desiring to buy shares at an attractive value to enhance investment or preventing any future takeover bids. Maintaining the listing status includes various ongoing compliance costs that a company has to incur as per the listing regulations under the SEBI and the stock exchanges, including those relating to financial reporting requirements and the increased demands on the management to build a good relationship among analysts and investors.

Delisting may also help companies with financial freedom to undertake restructuring to tackle the present business environment and ensure quick decision-making.

Conditions for initiating Voluntary Delisting Process

A company is required to meet certain conditions in order to initiate the process of delisting. The conditions are discussed below.

• Such delisting should not be pursuant to buyback of equity shares by the company or should not be pursuant to a preferential allotment made by the company;
• A three year period should have elapsed after the listing of the class of equity shares on any stock exchange;
• That no instruments issued by a company that are convertible into the same class of equity shares that are to be delisted, are outstanding;
•  A promoter or a promoter group cannot propose delisting of equity shares, if any company belonging to the promoter or such group has sold equity shares of the company during the six month period before the meeting date of the board of directors where the delisting proposal is sought to be approved; and
• Further, a company cannot apply for delisting of convertible securities, and no recognized stock exchange can permit the same.

In case where a company fails to meet these conditions, neither the company nor the relevant stock exchange approve the delisting of equity shares.

Case study of Voluntary Delisting by Vedanta Limited and what caused its failure

In the past, there have been numerous companies that have been through the delisting process from the National Stock Exchange and Bombay Stock Exchange. It is a crucial process that causes monumental changes to the ownership of the company. In this segment, we have discussed about the case of delisting by Vedanta Limited.

Vedanta Limited is a subsidiary of Vedanta Resources Limited, which deals in natural resources and handles the entire value chain from exploration of primary metals to their refining and conversion into value-added products.

Vedanta Limited sought for Voluntary Delisting as going private helped in better focus of management on optimizing returns, faster decision making, etc. One of the reasons, as stated by Moody’s, was its complex structure and negative ratings. The potential delisting would have also provided direct access to cash on Hindustan Zinc Limited books. It would have ceased a potential dividend leakage.

However, in the end, Vedanta Limited was not able to delist as it could get offers for only 125.47 crore shares as against the limit of 134 crore shares that were needed for a successful process of delisting.

Effect of failure of Voluntary Delisting

Due to the failure of the process of delisting, Vedanta could not acquire any shares from shareholders. It was a negative point for Vedanta as the promoter didn’t make a counteroffer. The shares of this company is listed on Bombay Stock Exchange Limited as well as on the National Stock Exchange. The shares of the company fell 21% after its failed attempt at delisting.

A failed attempt at delisting may encourage the company to again for second round of buybacks even at an improved price than before. 

It may be noted that the effect of failure of a delisting offer is that-

• The equity shares tendered by the Public shareholders at the time of reverse book building process would be returned or released within 10 days from the end of bidding;
• There shall be no final application made to the SE for delisting;
• The escrow account of the promoter for delisting offer shall be closed; and
• The company will continue to be on stock exchanges.

Conclusion

Voluntary delisting can turn out to be a strategic move where a promoter of a listed company wished to delist shares from a stock exchange in India. However, there may be instances where such delisting may fail and may have a negative impact therefore ensure to abide by the conditions.

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