This article has been written by Shuchita Sharma, pursuing a Certificate Course in Capital Markets, Security Laws, Insider Trading and SEBI Litigation from LawSikho.

Introduction 

The Securities Exchange Board of India (SEBI) since its establishment had the primary motive to protect the investors and has been regulating the market and imposing penalties on those who have ulterior motives. One of such actions is compulsory delisting of those companies who do not comply with the regulations set down by SEBI or such regulations that are to be complied with for them to be listed in the market. On doing so the shareholders will be put in a vulnerable position where their right to trade in the open market will be taken away.  SEBI will never let the investors get adversely affected by any of its decisions and so it has embodied certain rights of securities holders in case of compulsory delisting of securities. To appreciate such rights, it is important to understand the concept of delisting and its process as laid in the SEBI regulations. 

What is delisting?

Delisting means removing the securities of a company listed on the stock exchanges. It can be understood as the opposite to an IPO process. When a company comes up with an IPO, its shares are listed on the stock exchanges and can be freely traded on the platform on a daily basis. In contrast, when delisting takes place the shares are taken down from the stock exchanges meaning they will no longer be available on the platform for trading.

The goal of many young private firms is to go for an IPO, getting into the pool of trading. So why would a firm want to give up the status of being a public company? The benefits might be endless but there are many reasons why the company may choose to delist their shares, being:

• The shares were undervalued by the market for a long period of time. 
• To use the money raised which could not be invested within the short time in good projects.
• To lower the risk of takeover by any external entities, where the holding of the promoter might be less.
• The burden to please the market with regular dividends and like, so as to have an increase in the price of the share is not required. 
• Promoters find current valuation attractive for increasing their stake beyond the permissible limit.
• The chances of valuation are better when the company is delisted.
• The legal compliance and regulatory costs are reduced.
• There may be an increase in the value of other securities listed like the ADRs or GDRs on delisting of shares.

These are some of the reasons when the companies voluntarily delist themselves i.e. delisting of securities voluntarily by an acquirer or a promoter or any other person except the stock exchanges, a company seeking delisting on its own motion. Chapter III of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 deals with voluntary delisting. But delisting takes place involuntarily as well also known as compulsory delisting where the process takes place on the order of the securities exchanges or the SEBI (Securities and Exchange Board of India).

Compulsory delisting

As the name suggests, compulsory or involuntary delisting is when the company does not really choose to delist from the stock exchanges. It is rather a way of penalizing measures undertaken by the regulatory authorities i.e. the stock exchanges and SEBI that bars the company from accessing the capital markets and the benefits that comes with it. Not complying or omitting any of the regulations set out in the listing agreement can result in the company being delisted as a penal measure. Section 32 of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 says that a recognized stock exchange may, by order, delist any equity shares of a company on any ground prescribed in the rules made under section 21A of the Securities Contracts (Regulation) Act, 1956, which are as below:

• The company has bored losses for consecutive three (3) years and has a negative worth.
• The trading of the company has been suspended for more than 6 months.
• The shares of the company were traded infrequently for the last three (3) years.
• The  company  or  any  of  its  promoters  or  any  of  its  director  has 

been convicted for failure to comply with any of the provisions of the Act or the  Securities  and Exchange Board of  India Act, 1992 or the Depositories Act, 1996 (22 of 1996) or rules, regulations, agreements made thereunder, as the case may be and awarded a penalty  of  not  less  than  rupees  one  crore (1 cr)  or  imprisonment  of  not  less  than  three (3) year.

• The addresses of the company or any of its promoter or any of its directors, are not known  or  false  addresses  have  been  furnished  or  the  company  has  changed  its registered office in contravention of the provisions of the Companies Act, 1956.
• Shareholding  of  the  company  held  by  the  public  has  come  below  the  minimum level applicable to the company as per the listing agreement under the Act and the company  has  failed  to  raise  public  holding  to  the  required  level  within  the  time specified by the recognized stock exchange.

Companies like Kingfisher Airlines, Agro Dutch Industries, Broadcast Initiatives and Lumax Automotive Systems are amongst the few that have been compulsorily delisting from the stock exchanges for violating the regulations aforementioned.

Process of delisting

The process of delisting is laid down in Reg. 32 of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021, the process is in concise of the principles of natural justice, it ensures that there is fair opportunity being given to the management of the company and going by the innate principle of SEBI, investors of the company being delisted are protected.

A recognized stock exchange may be reasoned to order delisting of equity shares under any of the reasons as mentioned above under the Securities Contracts (Regulation) Act, 1956. Now before such an order can be passed, it has to be made sure that the company whose shares are being proposed to be delisted gets a reasonable opportunity of being heard. Owing to this rule NSE recently sent Café Coffee Day a show cause notice asking why the company should not be compulsorily delisted from the public markets after being non-compliant of the disclosure norms since June 2019.

The decision to compulsorily delisted has to be taken by a panel, which will be recognized by the stock exchanges consisting of the following members: 

• 2 directors of the recognized stock exchange one of whom being a public representative.
• 1 representative of an investor association recognized by the Board.
• 1 representative of the Ministry of Corporate Affairs or Registrar of Companies, and.
• The Executive Director or Secretary of the recognized stock change.

The panel is constituted for fair and equal representation of all the parties to reach an amicable decision.

For the process to be fair, it has to be made sure that all the relevant parties are being communicated that includes the public. Thus, before any delisting decision is been taken the recognized stock exchange is required to give a notice in at least 1 English newspaper having a wide circulation, 1 Hindi (national) newspaper again with a wide circulation within India and also in 1 vernacular newspaper in the area where the stock exchange where the shares are proposed to be delisted is located. Giving not less than 15 working days from the date of notice mentioned above, within with representations if any may be made by an aggrieved person to the stock exchange, this notice shall also be displayed on the stock exchange’s trading system and website. The stock exchange has to consider the representations against the notice in accordance with the guidelines mentioned in the regulation.

Later, when the stock exchange passes an order of delisting it has to publish the similar three newspapers as was required before. The notice should consist of the decision of delisting, the name of the company along with its address, the fair value of the delisted equity shares and the name along with the address of the promoters. Stock exchange needs to inform all the other stock exchanges where the equity shares are listed about the delisting and also upload a copy of the order on their website.

Rights of public shareholders in case of a compulsory delisting

Reg. 33 of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 lays down certain rights that the public shareholders have in case of compulsory delisting, mentioned as below:

• When the equity shares are being delisted by a recognized stock exchange under compulsory delisting, the stock exchange shall appoint an independent valuer who shall determine the fair value of the delisted equity shares.
• The stock exchange will form a Panel of expert valuers and from that panel the values for the above purpose shall be appointed.
• The value of the delisted equity shares shall be determined by the valuer having regard to the Reg.8 of the SEBI (Substantial Acquisition of Shares and takeovers Takeover) Regulations, 2011.
• The promoters of the company will have to acquire the delisted equity shares from the public shareholders by paying them the value that is determined by the valuers, within 3 months of the date of delisting from the stock exchange, provided that the public shareholders want to sell their shares, they do have an option to retain their shares.
• The promoter shall have to pay an interest of 10% per annum to all the shareholders who offered their shares in the compulsory delisting, if the price is not paid as determined by the valuers within the 3 months’ time period mentioned above.

Provided that in case the delay was not attributable to any act or omission of the acquirer or was caused due to the circumstances beyond the control of the acquirer, the Board may grant waiver from the payment of such interest.

The shareholders do have a right to appeal to Securities Appellate Tribunal (SAT) if they feel aggrieved from the decision of the stock exchange to delist the shares. Sec.21A (2) of the Securities Contracts (Regulation) Act, 1956 says that an aggrieved person may file an appeal before the SAT against the delisting within 15 days from the date of the decision.

Shareholder’s trading options after the delisting 

Reg. 40 of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 says no application for listing shall be made in request of equity shares that have been delisted under the compulsory delisting provisions of the regulation for a period of 10 years from delisting. There is a possibility that the shareholder might wish to sell their shares before that period. Once a stock is delisted, the company’s shares cannot be traded on the stock exchange platform but there is another way of trading, through a process known as “over-the-counter” (OTC). OTC is a decentralized market in which market participants trade stocks, commodities, currencies, or other instruments directly between two parties and without a central exchange or broker, thus giving a chance for the shareholders to trade the delisted shares. 

Conclusion

In cases of compulsory delisting shareholders do not take part in the decision process and thus may be affected in a negative way, but SEBI fulfilling its primary duty has set up a way to protect the investors. The rights enshrined in the regulations give a fair chance to the public shareholders to get their net worth invested in the equity back if not more. For those who might be greatly affected by the compulsory delisting of shares always have a chance to appeal to SAT and for others who chose to keep the shares have the option to sell their securities through OTC. In conclusion, the public shareholders have the right to make representations with the stock exchange against the compulsory delisting, get fair value of their shares as determined by the appointed valuer, appeal to SAT against the stock exchange if aggrieved and lastly get an option to sell their retained shares through OTC method thus having various ways to protect their investment.

References 

1. Securities Exchange Board of India (Delisting of Equity Shares) Regulations, 2021
2. Securities Contracts (Regulations) Act, 1956
3. Securities Contracts (Regulations) Rules, 1957
4. SEBI (Substantial Acquisition of Shares and takeovers Takeover) Regulations, 2011
5. Team Grow, What Happens When a Company Gets Delisted, and You Still Own the Shares?”, (Jun 8 2020) https://groww.in/blog/what-happens-when-a-stock-is-delisted/
6. Pavan Burugula, “NSE sends show cause to Coffee Day asking for compulsory delisting”, (Mar 19, 2021, 01:05 PM IST ) https://economictimes.indiatimes.com/markets/stocks/news/nse-sends-show-cause-to-coffee-day-asking-for-compulsory-delisting/articleshow/81584903.cms
7. IANS, “Kingfisher Airlines among 18 firms to be delisted from NSE” (May 21, 2018 18:25 IST)https://www.business-standard.com/article/news-ians/kingfisher-airlines-among-18-firms-to-be-delisted-from-nse-118052100982_1.html

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