Definition
Delisting refers to the removal of a listed security from a stock exchange. The reasons for delisting could range from not meeting minimum financial standards, undergoing bankruptcy, merging with another company, or deciding to go private. After delisting, the security can no longer be bought or sold through that exchange.
Phonetic
The phonetics of the word “Delisting” is: /dɪˈlɪstɪŋ/
Key Takeaways
- Implications for Company: Delisting of a company implies that the public no longer has the ability to buy its shares, and the company loses out on the advantages of listing, such as easy access to capital, better visibility, and credibility.
- Reasons for Delisting: There could be multiple reasons for delisting, from failure to meet the exchange’s compliance requirements, company’s decision for a major restructuring, going private, or bankruptcy. A company can also voluntarily decide to delist in order to reduce regulatory burdens.
- Impact on Shareholders: After delisting, shareholders might either be stuck with shares they cannot sell, or they may sell them over the counter, which often leads to lower selling prices. The company also has an option to offer a buyback of shares to help out their shareholders.
Importance
Delisting is a crucial term in business/finance as it refers to the removal of a publicly traded company’s stock from a stock exchange. This means the company’s shares are no longer available to be bought or sold in the open market. This primarily happens when a company no longer complies with the regulatory, financial, or operational standards set by the exchange. Delisting can be voluntary or involuntary and has significant consequences. It often leads to reduced liquidity of the shares, a decline in share price, and a loss of confidence among shareholders. Thus, it’s important because it can fundamentally affect the value of a company and the willingness of investors to hold or buy its shares — impacting both the company’s reputation and its ability to raise future capital.
Explanation
Delisting refers to the removal of a listed security from a stock exchange. This act signifies the target company ceasing its public trading, preventing investors from actively buying or selling the company’s shares through the exchange it was previously listed on. This can occur for several reasons ranging from company’s decision to become private, bankruptcy, merger or acquisition, failure to meet minimum financial standards, or any violation of the rules set by the stock exchange.The purpose of delisting varies based on why it is triggered. If a company voluntarily decides to delist itself, it could be because the management might seek more privacy to avoid public scrutiny, or they believe that going private would better serve the company’s goals and stakeholders. In cases where delisting is involuntary, such as due to failure in meeting listing requirements, it serves as a risk alert to existing shareholders and potential investors about the company’s financial health. In such cases, delisting can be viewed as a regulatory action that protects unsuspecting investors from investing in potentially high-risk securities.
Examples
1. Rite Aid Corporation delisting: In 2019, the New York Stock Exchange (NYSE) notified Rite Aid Corporation, a U.S. drugstore chain, that it was no longer in compliance with NYSE standards for continued listing. Due to consecutive years of losses and a low average market capitalization, Rite Aid shares were delisted from the NYSE.2. Delisting of Dewan Housing Finance Limited: In 2019, the Mumbai-based company was delisted from the stock exchange after the announcement of insolvency proceedings. Their continuous defaults in meeting payments and alleged fraud cases made them ineligible as per the standards set by the Indian Stock Exchange.3. Luckin Coffee delisting: A China-based coffee chain, Luckin Coffee was delisted from the NASDAQ in 2020 due to fraud allegations. The company allegedly fabricated transactions to inflate sales, a severe violation of NASDAQ rules and regulations. Post the allegations, the stock value dropped significantly leaving NASDAQ with no choice but to delist the company.
Frequently Asked Questions(FAQ)
What is Delisting?
Delisting refers to the removal of a listed security from a stock exchange. This move results in the stock no longer being traded officially on that particular exchange.
What are the reasons for Delisting?
Delisting can occur for several reasons. Companies generally get delisted for failing to comply with the stock exchange regulations, becoming bankrupt, merging with or being acquired by other companies, becoming a private company from a public one, or for engaging in fraudulent practices.
How does Delisting affect shareholders?
When a company is delisted, its stock can no longer be bought or sold in the open market. If the company had become bankrupt, shareholders may lose their entire investment. In other situations, the company may continue to operate and shareholders would still own the shares, but they would have to sell them directly to other investors, which is often more difficult.
Is voluntary Delisting common?
Yes, many businesses undergo voluntary delisting, often for strategic reasons. Companies might consider voluntary delisting if they are undergoing a merger or acquisition, when they want to become private, or to cut costs associated with being listed.
Is it possible for a delisted company to become re-listed?
Yes, it is possible for a delisted company to become re-listed again. It would have to conform to all the compliances laid out by the securities exchange commission, remediate any issues that led to the delisting and re-apply for listing.
What happens to the stock of a delisted company?
After a company is delisted, its shares can continue to trade off-exchange or over-the-counter. However, the liquidity and value of the shares may decrease as they are no longer easily accessible in a public marketplace.
How does voluntary delisting impact investors?
Voluntary delisting can impact investors differently. If the delisting is due to a merger, acquisition, or privatization, shareholders might be bought out at a premium. However, delisting could also result in share prices dropping and becoming less liquid.
Related Finance Terms
- Stock Exchange
- Securities and Exchange Commission (SEC)
- Market Capitalization
- Underperforming Stocks
- Listing Requirements
Sources for More Information
