Meaning of Delisting Stock
Delisting is the removal of security that is listed on a stock exchange and therefore cannot be traded on the stock exchange for time being; It may be an involuntary decision that is a forced order by the regulators due to non-compliance of rules or norms of listing on stock exchange or a voluntary decision by the company which is when a company ceases its operations, any mergers or bankruptcy exists or company converts itself into a private company.
Explanation
Delisting means the company’s shares are no longer traded in the stock exchange, and it usually happens in the case of a merger or the company has filed for bankruptcy or the company shares are no longer able to trade in the market or the company has decided to take itself private. It can also happen in the case if the company has not met the listing requirements, which are mandatory for listing or keeping the stock traded in the open market.
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For eg:
Source: Delisting (wallstreetmojo.com)
Types of Delisting
There are two types that take place in the market –
#1 – Involuntary Delisting Stock
source: startribune.com
These shares take place when the company does not want to delist itself but have to as per the laws and regulations of the local law prevailing in the country in which the company has its operations. It takes place when the company does not meet its minimum financial standards. Financial standards involve that the company has been making constant losses for three straight years, the company is not able to meet it is minimum share price, financial ratiosFinancial RatiosFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more, or sales level are below the minimum.
#2 – Voluntary Delisting Stock
source: globenewswire.com
These shares take place when the company does not want its shares to be traded in the security exchange. The company wants to be a private company in nature. However, the delisting of shares is generally seen as a tough time for the company, which is operating their business, and it seems that the company does not want its financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more to be public anymore.
Delisting Stock Case Study
According to the listing requirements of NASDAQ, if the company share is trading below $1.00 for 30 consecutive days, then the company needs to delist its shares from the stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more. Company XYZ has been trading below $1.00 for more than 28 days.
Solution – If the company trades below $1.00 in the 31st day, then the stock exchange will send a notice for non-compliance to the company stating that the company needs to delist its shares and after 180 days of the notice to the company if the stock still trades below the discussed amount then the exchange will delist the issue. The exchange suspends trading in that security and notifies the issuer and the Securities and Exchange Commission (SEC) in writing and releases a press release
Every exchange is free to set their own listing norms and is set to set a minimum limit price for the stock exchange to delist the shares.
Advantages
- The company does not have to publish its annual reportsIts Annual ReportsAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more or does not need to reveal its shareholding patterns etc. to the public as the company has become private in nature
- The company does not need to comply with the minimum listing criteria regulation of the security exchange board.
- The listing expenses and the annual trading cost of the company are saved when the company decides to delist itself.
- Delisting of shares from the stock exchange also reduces the risk of the takeover of the company in the capital market, and the promoters can retain their ownership and shareholding
- The company does not have to bear the systematic or the market risk when it delists its shares and is safe from the market speculation also
Disadvantages
- After delisting, the company cannot raise funds from public markets and also need to re-issue the shares if it wants to list the company again.
- The company loses the public trust of the market and may also lose their market share since the customers also lose trust in the company’s product.
- It can also affect the book value of the company.
- If not implemented correctly, the stock of the company might crash, for example, in the case of Suashish Diamonds.
Conclusion
Delisting is not there for all negative reasons. It has its own advantages and disadvantages. The company should look at both the merit and the demerit of it and decide what is good for it in the long run. By doing this company will be able to achieve its long term goals and plans.
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This article has been a guide to what is Delisting Stocks, and it’s meaning. Here we discuss the two types of Delisting shares – Voluntary and Involuntary, along with examples, advantages, and disadvantages. You can learn more about accounting from the following articles –
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