Compulsory delisting
The permanent removal of a company's shares from a stock exchange, imposed for non-compliance with listing rules — as opposed to a voluntary delisting the company itself chooses.
In plain language
Delisting means a company's shares stop trading on the exchange for good. It can happen two ways.
A company can choose to delist itself and go private, which is voluntary. Or the exchange can force it off for breaking the rules, which is compulsory. The two carry very different consequences for how long the shares stay off the market.
How it works
The workbook: "In a compulsory delisting, the shares are delisted on account of non-compliance to regulations and the clauses of the listing agreement by the company." A voluntary delisting, by contrast, requires the promoter group to invite shareholders to sell through a reverse book building process, and can only proceed if promoter holding crosses 90%, with at least 25% of public shareholders participating.
The consequence that follows differs sharply by type. Under SEBI (Delisting of Equity Shares) Regulations, 2009, a company can apply for relisting five years after a voluntary delisting, but only ten years after a compulsory one. Either way, if shares remain with the public after delisting, those shareholders retain the right to sell to the promoters, who must offer to buy at the exit price within one year.
A worked example
Illustrative, following the workbook's relisting timeline. XYZ Ltd is compulsorily delisted from an exchange in 2020 after repeated non-compliance with listing disclosure norms. Its public shareholders retain the right to sell their holdings to the promoters at the exit price within one year of delisting. Because the delisting was compulsory, XYZ Ltd cannot apply for relisting until 2030 — ten years later.
Contrast ABC Ltd, which voluntarily delisted the same year after its promoter group's holding crossed the 90% threshold through a reverse book building process. ABC Ltd can apply for relisting from 2025 — five years later, half the wait.
Why NISM asks about it
Chapter 9.12 (Delisting and relisting of Shares) sets out both routes and their relisting timelines. Expect a direct question on the 5-year versus 10-year gap, and on which triggers apply to which route — 90% promoter holding and 25% public participation belong to voluntary delisting only.
Common exam traps
- Voluntary delisting allows relisting after 5 years; compulsory delisting after 10 years. The longer wait attaches to the more serious, forced route — a common trap is swapping the two figures.
- The 90% promoter holding threshold and 25% public participation requirement apply to voluntary delisting, via reverse book building — they are not part of the compulsory delisting process, which is imposed by the exchange for non-compliance.
Check yourself
1.After how long may a company apply for relisting following a voluntary delisting and following a compulsory delisting respectively?
- a)Three years and five years
- b)Five years and ten years
- c)Ten years and five years
- d)Five years in both cases
Show the answer
Answer: (b) Five years and ten years
As per SEBI (Delisting of Equity Shares) Regulation of 2009, a company can apply for relisting (i) five years after delisting in the case of voluntary delisting and (ii) ten years after delisting in the case of compulsory delisting.
Option C reverses the two, which is the trap. The asymmetry is deliberate — a company that was delisted on account of non-compliance to regulations and the clauses of the listing agreement waits twice as long as one that chose to get the shares delisted and go private.
The motives for going private voluntarily are given as regulatory reporting complexities and compliance, due to mergers and acquisitions, and sometimes to have freedom to execute a changed strategy.
And the conditions for doing so: the promoter must provide an exit opportunity to all shareholders through reverse book building, must reach more than 90% holding, and needs at least 25% of public shareholders to participate.
A delisting never extinguishes a minority shareholder's rights: no minority shareholder can be forced to exit, and after delisting promoters offer to buy those shares at the exit price within one year.
2.For a voluntary delisting to succeed, the promoter holding must cross what level, and what minimum public participation is required in the reverse book building?
- a)75% and 10%
- b)90% and 25%
- c)95% and 50%
- d)90% and 10%
Show the answer
Answer: (b) 90% and 25%
Voluntary delisting can go through only if the promoter holding in the entity cross 90%. If that is not possible, then the company cannot delist. Further, at least 25% of public shareholders should participate in the reverse book building.
How the process runs: SEBI regulation, among other things, require that the promoter group provide an exit opportunity to all shareholders. The promoter or promoter group should invite bid to acquire the shares through a reverse book building process. Under this system, the promoter needs to specify the floor price. Shareholder's then specify the price at which they are willing to sell the shares.
And the promoter's three responses: the promoters can accept the bid price, reject the bid price (cancel the delisting plan) or provide a counteroffer to the public.
Protection for those who stay: if a company is delisted with some shares still held by the public, then such shareholder should have the right to sell their shares to the promoters. Promoters offer to buy those shares at the exit price within one year.
And the absolute rule: no minority shareholder can be forced to exit at the time of delisting of shares from the stock exchanges.
Delisting comes in two forms: in a compulsory delisting, the shares are delisted on account of non-compliance to regulations and the clauses of the listing agreement. In a voluntary delisting, the company chooses to get the shares delisted and go private.
Where this is taught
Free preparation for NISM Series XVRelated terms
- BuybackA company purchasing its own shares out of reserves and extinguishing them, reducing share capital and raising earnings per share for the shareholders who remain.
- ConsolidationA corporate action that reduces a company's outstanding shares by raising their face value in a fixed ratio — the exact reverse of a stock split, done to lift a low share price.
- Stock splitA corporate action that cuts the face value of a share in a defined ratio and multiplies the number of shares to match — more shares, a lower price, and not one rupee of new value.
- Financial creditorUnder the Insolvency and Bankruptcy Code, a creditor who receives consideration against the time value of money — in other words, one who earns interest on the amount outstanding.