What happens to your investment when companies delist, relist, merge or split?

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All the chapters leading up to this one were all very informative, weren’t they? We not only learned all about IPOs, but also focused on other funding mechanisms that a company can adopt during the course of its business. We even got a little philosophical at the end with the entire going concern segment. And now, we’re finally onto the last chapter of this module. 

Here, we’ll focus on the effect a company’s corporate actions will likely have on your investments. A company, during the course of its life, can choose to initiate certain events such as splitting its business into two or merging its business with that of another company’s. These events are pretty major and can have a significant impact on the equity shareholders. That’s exactly what we will be dealing with in this chapter. 

What is delisting?

Company delisting is a process where the shares of a listed company are removed or delisted from the stock exchanges. While it may sound serious and foreboding, company delisting is not always a bad thing since it can also occur voluntarily, on the request of the company. Let’s take a look at two instances where the shares of a company can get delisted from the stock exchanges.   

Voluntary delisting

Here, the company itself makes a formal request for delisting its shares from the stock exchanges. The company may do so for various reasons. For instance, if a company is planning on getting merged with another, the management may formally make an application for delisting of its shares from the exchanges.  

Compulsory delisting

When the delisting of a company’s shares is brought about forcefully by SEBI, the process is known as compulsory delisting. Usually, a company that doesn’t comply with the listing guidelines or the regulatory requirements of the exchange is compulsorily delisted by SEBI. However, there can be other reasons as well, such as insufficient market capitalisation or low stock price. 

What happens to your investment when a company delists?

The state of your investment depends on whether a company delists voluntarily or compulsorily. So, let’s take a look at both scenarios. 

When a company delists voluntarily

When a company announces voluntary delisting, it buys back the shares held by the public through a process known as reverse book building. Through this process, the public shareholders are given the freedom to set the buyback price that they deem fair. And, the price with the maximum number of bids is finalised as the cut off price for the buyback. 

Once the cut off price is determined, the company can either accept it or make a counter offer. If the company chooses to accept the cut off price, the buy back happens. The company delisting is considered successful when the total shareholding of the promoters after purchasing the public’s shares reach 90% of the total share capital of the company. 

So, you can recoup your investments made in a company that goes for voluntary delisting by simply offering up your shares for sale back to the company at the cut-off price. 

Alternatively, if you’ve missed or chosen to not participate in the reverse book building process, you can still hold onto your shares. But since the company has been delisted from the exchanges, you might find it hard to sell your shares. However, if you can somehow find a buyer on the over-the-counter (OTC) market, you can still sell your shares and recover your investment.      

When a company is compulsorily delisted

Even in the event of a compulsory delisting, the promoters of the company are required to buy back the shares from the public. However, the value at which the buyback shall happen is determined by an independent evaluator and not through the reverse book building process. 

Here’s a word of caution. It is a good idea to offload your investments by selling the shares back to the promoters in the case of a company that’s been compulsorily delisted. Because the chances of you finding a buyer on the OTC market for such a company is very slim. And even if you do find a buyer, you may have to sell your shares for a significantly lower price.  

What is relisting?

The opposite of delisting, relisting is the process through which a delisted company lists its shares again on the stock exchange for trading. However, the re-listing process is subject to strict guidelines and oversight from SEBI. The guidelines tend to differ based on the way the company was delisted. Let’s take a look at the details. 

  • Voluntary delisting: A company that’s delisted its shares voluntarily can make a request for relisting only after the expiry of 5 years from the date of delisting.
  • Compulsory delisting: A company that’s been compulsorily delisted can make a request for relisting only after the expiry of 10 years from the date of delisting.   

What happens to your investment when a company relists?

When a company’s shares are relisted on the stock exchanges, they become available to the public for trading. This can prove to be especially useful if you’ve chosen to retain your investment in the equity of a company whose shares were delisted, since it essentially gives you a chance to exit and recover your investment. 

What is a split?

Also known as a split-up or a demerger, the process or the event through which a single company splits into two or more independent companies is commonly known as a company split. Generally, a company with multiple business lines tends to split into two or more companies, with each of them carrying on a single business line. This is primarily done to ensure effective management and maximise efficiency.  

A great example of a split-up is IDFC and IDFC Bank. Back in the year 2013, IDFC, a Non-Banking Financial Corporation (NBFC), applied for and received a banking license from the RBI.  Upon receiving the approval, the company decided to split into two, with IDFC and IDFC Bank becoming two separate entities. It was decided that IDFC would continue with its other lines of businesses, while IDFC Bank would take complete control over the lending and financing business line.        

Similarly, Arvind Limited, a clothing apparel manufacturer, also chose to split-up the company into three entities: Arvind Limited, Arvind Fashions Limited, and Anup Engineering. The parent company Arvind Limited demerged its two business lines - branded apparel and engineering - and created two new companies, Arvind Fashions Limited and Anup Engineering respectively.   

What happens to your investment when a company splits?

When the company that you’ve invested in splits, as an existing shareholder, your investment in the company stays intact. Additionally, you will also be issued shares of the newly formed entity (or entities) from the split. The number of shares issued would be in proportion to your existing shareholding in the parent company. 

For instance, assume that you hold 2,000 shares in the parent company. And that it is decided to issue equity shares of the newly formed entity in a 1:2 ratio to the existing shareholders. Therefore, you would get 1 share of the newly formed entity for every two shares held by you in the parent company, which comes up to 1,000 shares.   

In the event of the IDFC and IDFC Bank demerger, the existing shareholders of IDFC received shares of IDFC Bank in a 1:1 ratio. This meant that for every 1 share of IDFC held by its shareholders, they got 1 share of IDFC Bank. 

What is a merger?

A company merger is a process through which two or more independent and separate entities are united (merged) into one single entity. A company merger can happen in one of two ways:

  • Where two or more companies come together to form a new entity and the older entities cease to exist after the merger. 
  • Or, where one company merges with the others by absorbing them. 

A great example of a company merger is the one that happened with Vodafone and Idea, two of the leading telecom network service providers. Both Vodafone India and Idea cellular merged together to create a new entity ‘Vodafone Idea.’ Similarly, IDFC Bank and Capital First, an NBFC, merged together to form an entity named IDFC First Bank.  

What happens to your investment when a company merges?

Again, as with a demerger, your investment in a company that merges with another stays intact. And, if you’re a shareholder in a company that is being absorbed by another as a result of the merger, you will automatically be eligible to receive shares of the merged entity. The shares of the merged entity are issued in a proportion to the number of shares held by you in the older entity. 

With respect to the Vodafone Idea merger, the existing shareholders of Idea Cellular received shares of Vodafone Idea in a 1:1 ratio. This meant that for every 1 share of Idea Cellular held by its shareholders, they got 1 share of Vodafone Idea.

In the case of IDFC Bank and Capital First merger, the existing shareholders of Capital First received shares of IDFC First Bank in a 1:10 ratio. This meant that for every 10 shares of Capital First held by its shareholders, they got 1 share of IDFC First Bank.    

What happens to your investment when a company goes public, then private, and then public again?

We know what you’re thinking. Can such a thing actually happen? Well, yes. There have been instances where a privately held company issues its shares to the public, and then becomes a privately held company once again by buying back the shares from the public. And yet then again, it goes public by issuing its shares.

A perfect example of this unique situation is the U.S. firm ‘Dell Technologies.’ The company went public in the year 1988, became private by buying back the shares from the public in the year 2013, and then again went public in the year 2018. 

To answer the question at the start of this segment, when a publicly traded company intends to go private, the shares you hold in the company will be bought back by the promoters of the company, similar to what happens when a company voluntarily delists. 

The price is arrived at either through a reverse book building process or is fixed by the company itself. The privatisation of the company is said to be complete once the company possesses at least around 90% of the total share capital after the buyback. Once this process is complete, you will get back your investment provided you sell the shares back to the company. 

As we’ve discussed earlier, you could also choose to not sell the shares of the company back and keep holding it instead. In such a case, you can either sell these shares in the OTC market or offload your investment when the company goes public and starts trading in the stock exchanges once again. 

Wrapping up  

So then, that’s about it for this chapter - and this module. All through this module, we’ve focused extensively on almost every single aspect of a company that can have an effect on you, as an investor. In the forthcoming chapters and modules, we’ll be shifting our focus to technical analysis and how you can benefit from this technique. 

A quick recap

  • Company delisting is a process where the shares of a listed company are removed or delisted from the stock exchanges. 
  • The shares of a company can get delisted from the stock exchanges either voluntarily or compulsorily. 
  • Under voluntary delisting, the company itself makes a formal request for delisting its shares from the stock exchanges.
  • When the delisting of a company’s shares is brought about forcefully by SEBI, the process is known as compulsory delisting.     
  • When a company announces voluntary delisting, it buys back the shares held by the public through a process known as reverse book building.
  • In the reverse book building process, the public shareholders are given the freedom to set the buyback price that they deem fair. And, the price with the maximum number of bids is finalised as the cut off price for the buyback.
  • Even in the event of a compulsory delisting, the promoters of the company are required to buy back the shares from the public. 
  • However, the value at which the buyback shall happen is determined by an independent evaluator and not through the reverse book building process.
  • Relisting is the process through which a delisted company lists its shares again on the stock exchange for trading.
  • A company that’s delisted its shares voluntarily can make a request for relisting only after the expiry of 5 years from the date of delisting.
  • A company that’s been compulsorily delisted can make a request for relisting only after the expiry of 10 years from the date of delisting.   
  • When a company’s shares are relisted on the stock exchanges, they become available to the public for trading.
  • Also known as a split-up or a demerger, the process or the event through which a single company splits into two or more independent companies is commonly known as a company split.
  • When the company that you’ve invested in splits, as an existing shareholder, you will also be issued shares of the newly formed entity (or entities) from the split.
  • The number of shares issued would be in proportion to your existing shareholding in the parent company.
  • A company merger is a process through which two or more independent and separate entities are united (merged) into one single entity.
  • A company merger can happen in one of two ways:
    1. Where two or more companies come together to form a new entity and the older entities cease to exist after the merger. 
    2. Or, where one company merges with the others by absorbing them.
  • If you’re a shareholder in a company that is being absorbed by another as a result of the merger, you will automatically be eligible to receive shares of the merged entity.
  • The shares of the merged entity are issued in a proportion to the number of shares held by you in the older entity.
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