Listing and Delisting of Securities

Listing is the process of making securities available for public trading on a recognised stock exchange, while delisting involves permanently removing them from the exchange.

The concepts of “listing” and “delisting” hold pivotal significance, profoundly impacting the accessibility and value of securities.

This article delves into the intricate mechanisms and implications of both listing and delisting of securities, shedding light on the profound consequences these actions can have on companies, investors, and the broader financial landscape.

Listing of Securities

Listing refers to the approval of allowing certain financial assets, like stocks or bonds, to be bought and sold on an officially recognised stock market. These assets can belong to various entities, such as public companies, government bodies, financial institutions, or local governments.

The primary reasons for listing are:

• Providing Liquidity: It makes it easier for people to buy and sell these assets, ensuring that they can quickly convert their investments into cash when needed.
• Encouraging Savings: Making these assets available for trading, encourages people to invest their money, which, in turn, supports economic growth.
• Protecting Investors: Listing requirements ensure that companies provide all necessary information, safeguarding the interests of investors by promoting transparency.

When a company wants to list its assets on a stock exchange, it must submit an application to the exchange before releasing its prospectus (a document detailing the investment opportunity) or before conducting an “Offer for Sale” if it’s selling its assets directly.

On the other hand, delisting means permanently removing a company’s assets from a stock exchange. This means those assets won’t be traded on that particular exchange anymore.

Here are the rules and guidelines for listing securities:

Securities Contract (Regulation) Act, 1956: This act deals with listing requirements for public companies.

Securities Contract (Regulation) Rules 1957: Section 19 of this act outlines the requirements and documents needed for listing securities on a recognised stock exchange, which include:

• The company’s Memorandum of Association and Articles of Association, and in the case of debentures, a copy of the trust deed.
• Copies of all prospectuses or similar documents issued by the company.
• Copies of offers for sale and advertisements for securities issued in the past five years.
• Copies of balance sheets and audited accounts for the last five years (or a shorter period for new companies).
• A statement showing dividends and cash bonuses paid during the last ten years (or a shorter period for newer companies), and any outstanding dividends or interest.
• Certified copies of agreements with vendors, promoters, underwriters, brokers, and other relevant parties.
• Certified copies of agreements with managing agents, secretaries, treasurers, selling agents, and company officers.
• Certified copies of any documents referred to in prospectuses or advertisements for securities issued in the past five years.
• Details of important contracts, agreements, concessions, and similar documents.
• A brief history of the company, including changes in its capital structure and debenture borrowings.
• Details of shares and debentures issued for non-cash consideration, at a premium or discount, or pursuant to an option.
• Information about commissions, brokerage, discounts, and special terms granted to any person.
• Copies of consent letters from the Controller of Capital Issues.
• Particulars of forfeited shares.
• A list of the top ten shareholders for each class of securities, along with their holdings.
• Details of shares or debentures for which permission to trade is requested.

Companies Act

A company that wants to list its securities on a stock exchange must first send a formal letter of application to all the stock exchanges where it intends to have its securities listed. This should be done before the company submits its prospectus to the Registrar of Companies.

SEBI Guidelines

When a company offers securities to the public, it must complete the allotment of these securities within 30 days from the date when the subscription list closes. After this, it needs to approach the designated stock exchange for approval of the allocation method. Additionally, the issuer company must finish all the necessary paperwork to enable trading on all the stock exchanges where its securities are listed within 7 working days after finalising the allocation method.

Companies that make public or rights issues must deposit 1% of the issue amount with the designated stock exchange before determining the issue price.

Stock Exchange Guidelines

Each stock exchange has its own specific guidelines for companies seeking to list on it. These guidelines may include requirements for the minimum size of the offering and the market value of the company.

Before being allowed to list on the exchange, a company must enter into a listing agreement. Under this agreement, the company agrees to provide facilities for the quick transfer, registration, sub-division, and consolidation of securities.

It also commits to notifying shareholders of the closure of transfer books and record dates, sending six copies of complete annual reports, balance sheets, and profit and loss accounts, reporting shareholding patterns and financial results quarterly, and promptly informing the exchange of events that could significantly affect the company’s financial performance and stock price. The company also agrees to comply with corporate governance conditions.

Companies are also required to pay a listing fee to the exchange every financial year as determined by the exchange.

Companies that do not meet these requirements may face disciplinary action, including the possibility of having their securities suspended or delisted. If the exchange refuses to permit a company to list its securities, the company cannot proceed with the allocation of shares. However, the company has the option to file an appeal with SEBI under Section 22 of the Securities Contracts (Regulation) Act, 1956.

If a company has been delisted by a stock exchange and wishes to relist on the same exchange, it must initiate a new public offering and adhere to the exchange’s existing guidelines.

Delisting of Securities

Delisting refers to the process of removing a company’s securities from a stock exchange. When a company wishes to list its securities on an exchange, it needs to submit an application to the exchange in the prescribed format before issuing a prospectus for securities or before conducting an “Offer for Sale” through that method. Delisting means the company’s securities are permanently taken off the stock market where they were initially registered, and they can no longer be traded there.

The process of delisting involves several factors, including:

Reasons for Delisting: A company may decide to delist its securities voluntarily or may be compelled to do so if it fails to meet certain requirements outlined in the listing agreement with the stock exchange.

Voluntary Delisting

In voluntary delisting, the company chooses to remove its securities from the stock exchange voluntarily. This means that the company’s equity shares will no longer be available for trading on any authorised stock exchange.

Shareholders who own these shares should be given the opportunity to sell them since they are no longer listed. To initiate voluntary delisting, the company typically seeks approval from its shareholders. This approval is usually obtained through a majority vote of shareholders, often a 2:1 majority, using a postal ballot.

Compulsory Delisting

In compulsory delisting, the stock exchange removes a company’s securities because the company has failed to meet the requirements set out in the listing agreement. The exchange can do this based on specified justifications outlined in regulations created under Section 21A of the Securities Contracts (Regulation) Act of 1956.

To carry out delisting, a company typically follows these steps:

• Board of Directors Meeting: The company’s Board of Directors calls a meeting after issuing a notice, usually in writing, to all directors of the company.
• Resolution for Delisting: During the meeting, the board passed a resolution proposing the delisting of the company’s shares.
• General Meeting: The company then calls a General Meeting to seek approval from its members through a special resolution. The date, time, place, and agenda for the meeting are specified in advance. This agenda can be included in the Annual General Meeting if applicable.

Delisting by a Stock Exchange

Delisting by a stock exchange involves several important aspects and notifications:

Notice of Delisting: When a company’s equity shares are delisted by a stock exchange, the company is required to publish a notice in a newspaper where the stock exchange is located. This notice informs shareholders and the public about the delisting and the circumstances leading to it.

Reasons for Delisting: Delisting typically occurs due to noncompliance with the Listing Agreement for a minimum period of six months. This noncompliance can result from factors such as failure to maintain the minimum trading level of shares on the exchange, issues related to the track record of promoters and directors, incorrect share pricing, or unfair market practices.

Responsibility of Promoters: When a company’s securities are delisted under these circumstances, the company’s promoters are usually responsible for compensating the company’s security holders and paying them the fair value of the securities they hold. Shareholders may not have an exit option, and trading in the securities may not be allowed for a minimum period of one year after delisting.

Voluntary Delisting: Companies may also choose to get voluntarily delisted from a stock exchange by following delisting guidelines. In such cases, prior approval of the securities holders is required through a special resolution at a General Meeting of the company. This process provides an exit opportunity to shareholders as facilitated by the promoters.

Exit Opportunity: In some cases, stock exchanges allow for the delisting of companies without providing an exit opportunity if the company’s assets are still listed on a stock exchange with countrywide trading terminals.

SEBI (Delisting of Securities) Guidelines

The Securities and Exchange Board of India (SEBI) issued guidelines in 2003 to regulate the delisting of securities. These guidelines outline the procedures for both voluntary and compulsory delisting. In the case of voluntary delisting, the decision is made by investors through a special resolution and a panel formed by the exchange, consisting of directors and officers of the exchange, a representative of investors, a representative from the Central government or the regional director or Registrar of Companies, and the Executive Director and Secretary of the Exchange.

Notice and Announcement: SEBI guidelines require the company to provide notice of delisting and make an announcement to the company itself and to other stock exchanges where the company’s securities are listed when the Listing Agreement is terminated. A public announcement with all relevant information is also mandatory.

Case Law (1) – Cadbury

In 2003, the chocolate maker Cadbury offered Rs 500 to its shareholders in an attempt to buy back their shares. To successfully delist a company, at least 90% of the shares need to be acquired. Cadbury managed to purchase over 90% of the shares, but a small group of 8,149 shareholders, who held 2.4% of the stock, rejected the initial offer and took legal action.

In September 2009, Cadbury increased the offer price to Rs. 1,340 per share, but this was also rejected by the shareholders. Subsequently, in May 2010, the Bombay High Court appointed Ernst & Young (E&Y) to determine a fair share price, and they arrived at a figure of Rs. 1,743 per share.

In January 2011, Cadbury revised its offer price to Rs. 1,900 per share, but the dissenting shareholders demanded a valuation based on the discounted cash flow method. In July 2011, E&Y valued the shares at Rs. 2,014 per share, which was still lower than the Rs. 2,500 demanded by the dissenting shareholders.

During a meeting, only 12,784 out of the 7,51,120 non-controller shares voted against the recommendation, indicating that the majority of non-controlling shareholders favored capital reduction. Given these circumstances and the fact that the dissenting shareholders could not successfully challenge the valuation, the court approved the capital reduction for a price of Rs. 2,014.50, based on the revised E&Y report.

Case Law (2) – Vedanta Ltd

Vedanta Ltd initiated a Reverse Book Building process in October 2020, with a floor price of INR 87.25. According to delisting regulations, Vedanta’s promoters were required to obtain an offer for 134 crore shares of the company. However, they could only secure 125 crore shares. This fell short of the 90% threshold required for a successful delisting.

Despite having received proposals for over 137 crore shares in the past, Vedanta could not reach that number during the final delisting attempt, which was set at 134 crores.

The process of determining the final exit offer price is conducted through a method called Reverse Book Building (RBB). Initially, the promoters propose an Indicative Offer Price, in this case, the floor price of INR 87.25, along with the letter of offer. Shareholders are then given the option to bid at or above this price. The final exit price is the price at which the promoters can acquire 90% of the equity shares from the public shareholders. The promoters can either accept or reject this final exit price once it is discovered. In Vedanta’s case, they couldn’t even reach the final exit price, resulting in the failure of the delisting process during the bidding phase.

Conclusion

Listing of securities refers to the process of allowing them to be traded on a recognised stock exchange, making them available for public buying and selling. This provides liquidity, raises capital, and ensures transparency by requiring companies to disclose essential information.

Delisting of securities, on the other hand, involves permanently removing them from a stock exchange. This can happen voluntarily, when a company chooses to withdraw its shares, or compulsorily, due to non-compliance with exchange rules. Delisting ends public trading of the securities on that exchange, impacting shareholders and often requiring a fair valuation or buyback process. Both listing and delisting of securities are important processes.