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Buying Delisted Shares – Emerging Investment Opportunity

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A quick word on Unlisted vs Delisted Shares:

Unlisted shares – shares which never got listed on an exchange in the first place. Still it is possible that an active secondary market exists in these shares.

Example – Ratnakar Bank and Bombay Stock Exchange both of which are likely to get listed on a stock exchange soon.

Delisted Shares – Shares which were once listed on a stock exchange and hence had high liquidity. The term delisting of shares or securities refers to the removal of a listed company from a stock exchange. When a company is delisted, the shares of that company are no longer traded on that stock exchange.

Example – Essar Steel and ArchPharma Labs.

Many people get confused between public limited companies and publicly traded companies. All publicly traded companies are public limited but not the other way around. Shares of a public limited company whether listed on a stock exchange or not can always change ownership. Any shareholder can sell his holding in full or part to any other person. The only difference is that when shares get listed on a stock exchange this trade becomes a lot easier. Buyers and sellers don’t come face to face and are able to trade using an exchange platform. Apart from making a company’s stock highly liquid, this serves (at least in theory) as a great price discovery mechanism for the business, where market determines the price of a share.

How Market for Unlisted / Delisted Shares Develops

For unlisted shares, secondary market mainly develops as existing shareholders sell their holding in part or full and hence more shareholders emerge on the scene. Mostly buyers and sellers in this case are large fund houses.

New investors and particularly smaller retail investors stay away from buying these shares since they fear that they may not be able to sell these shares easily in the absence of active trading on a registered stock exchange. For this reason, the price at which these shares change hands is usually far less compared to the actual valuation of the company.

For delisted shares, for one reason or the other, a large number of individual retail investors end up holding these shares after completion of the open offer – mostly because investors forget to tender their shares at the time of the open offer. Later they find it hard to sell these delisted shares as liquidity dries up.

Dealers in such shares regularly advertise their willingness to buy at a premium to the price at which these shares were bought by the company in the open offer. This is because valuation of the company may have run up many times since it got delisted. In case the company lists again, a share will be worth a lot more than the price at which it got delisted.

delisted shares

Here again, there could be active trading in secondary market but the bigger opportunity which dealers of such shares seek is to buy these shares from retail shareholders who did not tender their shares at the time when the company made its open offer.

All this of course depends on a multitude of factors including most importantly, the likelihood of the company getting listed again and soon. Other reasons could be – collecting shares from small retail investors and selling a larger chunk to a bigger investor or may be to the promoters of the company at a substantial premium. This typically happens before the company plans to list again or where it plans to sell its entire shareholding in an acquisition or merger.

In practice, those on the know-how of developments – insiders, investment bankers, company’s auditors and legal counsels are the first ones who start buying delisted shares.

Who Sells Delisted Shares?

Without getting into any theory – anyone who did not tender their shares when the company got delisted. There is of course a multi-crore rupee market for shares not listed on a stock exchange that are sold in the secondary market.

Depending on how well the company has done since the time it got delisted there is a substantial addition to the share price, something not many retail share investors pay attention to. Chances are that a company which is planning to list again would have done well enough to take such a step – of listing again.

Nevertheless, many retail shareholders are often happy to find a buyer for their shares at any price they can get and mostly the price at which those shares got delisted.

Should You Buy Delisted / Unlisted Shares?

Be careful!

Remember that most people who buy and sell such unlisted, delisted, non-traded, lowly traded shares are all betting on a future revival. In many cases these are market operators who are aware of a lot more than others. Unless you are part of a syndicate of people whose business it is to deal in such securities, I would say avoid it. There are better ways of making money. Also keep in mind that there is hardly any regulation governing these types of transactions. That said, if you are absolutely certain that something is afoot with the company then who am I to stop you.

And Yes – dealers buy not only delisted / unlisted shares but also pre-IPO shares and shares that are lowly traded. So if you have a large number of shares of a company which though is listed but the shares of which are thinly traded, you may approach such dealers. Many companies have no active secondary market despite being listed on the stock exchange and not more than a few hundred shares are traded on a daily basis.

LEGAL ISSUES

Circumstances Leading to Delisting of Shares

Not all delisting is bad for the company. At times, the promoters may feel that they no longer need public funds and that the company has far higher value than what the market is willing to pay for it. Under such circumstances, they may want to delist the shares.

Compulsory delisting – Permanent removal of securities of a listed company from a stock exchange as a penalizing measure of the stock exchange for not making submissions/complying with various requirements set out in the listing agreement which the company signed with the stock exchange at the time of its initial listing.

Some of the causes for compulsory delisting:

  1. Non-payment of listing fees
  2. Non-compliance with listing requirements
  3. Absence of trading or negligible trading
  4. Non-redressal of investors’ complaints despite repeated reminders
  5. Unfair trading practices
  6. Reduction in the number of public holders of securities
  7. Non filing of accounts for an unreasonably long period of time
  8. In case public shareholding falls below 25%, the company has to be voluntarily delisted and it must make an open offer to acquire all outstanding shares.

Voluntary delisting – The company voluntarily decides to permanently remove its securities from a stock exchange.

Some of the causes for voluntary delisting:

  1. The company has either suspended its business or is under closure or has become a sick industrial company
  2. Mergers, demergers, amalgamations, takeovers, etc.
  3. The company no longer needs public funds – remember a listed company has far higher compliance and disclosure obligations.

In case of voluntary delisting, the company must make an open offer to acquire all outstanding shares. For the offer to be successful, the company must increase their holding to 90% of the total shares.

What Happens to Shareholder When Delisting Occurs?

Ownership: it is not mandatory for a shareholders to tender his ownership right i.e. his share. The shareholder can keep holding his share and the company must treat each shareholder with equality with regard to dividends, rights, bonuses and matters related to voting etc. The only thing which changes is that the shareholder will now find it hard to look for buyers in the absence of an actively traded market for his shares.

Decline in Liquidity: liquidity refers to the availability of buyers and sellers in a particular stock. When shares of a company get delisted, they mostly trade in grey market and hence it becomes difficult to match buyers with sellers. In fact, besides helping companies raise funds the other important reason for the very existence of regulated stock markets is to provide liquidity for equity shares thereby helping in valuation and price discovery for the company.

Impact on share price: before shares of a company get delisted, an announcement is made to the market.

  • Voluntary delisting: If a company voluntarily delists its shares, it will make an announcement itself, in such cases the price will zoom up since the company will buy its publicly held shares at a hefty premium. I will save the pricing mechanism in such cases for another day – just know that in all cases of voluntary delisting the price will appreciate, and fast.
  • Compulsory delisting: in such a case where the company violates its listing requirements or is asked to delist for any other reason, the price will fall quickly. This is the worst news that a company can face – being penalized and asked to get off the exchange. A delisted stock post such an event can be hard to sell. For this reason, most investors will start selling their shares after a delisting announcement at whatever price they can. This causes a complete crash! This is particularly true in case of delisting on account of bankruptcy, where there will be no one left holding the stock.

Fun Fact: Back in the old days when demat services were not available, physical share certificates of bankrupt companies were regularly sold as scrap paper (raddi) and would fetch a good price thanks to their quality and thickness.

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Last updated: 5th March, 2015




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About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

Comments

  2. In case of a voluntary delisting of shares of a strong company with a good track record for dividends, do you think it would be worth holding on to the shares for that purpose only?

    Also, for unlisted shares, how would you go about buying these on the secondary market? Would you actually have to know someone who has those shares? For example, how could I get my hands on shares of Ratnakar Bank?

    Reply »

    • Post delisting, a company’s compliance and disclosure obligations come down significantly. In my view – as retail investor (holding only few shares), you should exit before the company delists. Staying invested is good if you are holding a larger stake and the management is likely to take you seriously in decision making.

      Search on Google – you will find hundreds of dealers who are willing to buy and sell such shares. Its big business!

      Reply »

    • NO FUTURE OF IT SELL@18 AND TO SWITCH TO SREE RAYALSEEMA ALKALI@20
      IN THE YEARS TO COME WILL 3 DIGIT STOCK
      RAJKUMAR JAIN

      Reply »

    • Replied to your mail Rajendra. I don’t buy/ sell unlisted shares. Sent you the numbers for a few people who do that.

      Reply »

  7. Hi Rajat, nice article.

    Any idea about the capital gain tax structure difference in holding pre ipo shares? I read somewhere that for it to become a LTCA it takes 3 years, rather than the usual 1 year in normal listed company investments. Also in holding pre ipo shares, investors have a one year lock in period from the date of listing.

    Thanks!

    Reply »

    • Hi Benny

      Yes – Pre-IPO securities will be locked in for 1 year (for non promoters). If however you are named as a promoter then the lock in shall be 3 years for the Minimum Promoter Contribution (I.E. 20% of post issued share capital). For whatever the promoter holds over and above the 20% – the lock in will be 1 year like for any other shareholder. [see Regulation 35 of ICDR Regulations]

      Tax – So long as you sell after 1 year from the date of listing of securities it will surely be treated as long term capital gain.

      Reply »

  8. Is buying buying or selling of delisted shares legal or permissible?

    Is it not the same as dabba trading which is considered illegal? Or is there a difference between the two?

    Please clarify.

    Reply »

    • Of course it is legal. The only difference is that instead of buying on an exchange terminal, in this case you buy off-market, just like you would do it when you buy shares in a private / public company which is not listed on a stock exchange.

      Reply »

      • Thanks for your reply. If you could clarify my doubts reagrding the following two points

        1) Could you explain how it differs from dabba trading which is considered illegal?

        2) Steps to be followed when buying delisted shares or shares which are listed but not traded on stock exhanges.

        Reply »

  9. Here is a list of stocks which I am having but seems like delisted. Please let me know if you can suggest me something on them.
    List of Shares:

    Vision Organics
    Flyup fashions ltd
    Dharnendra Overseas ltd
    Aruna Hotels ltd.
    Consolidaed fibres and chemicals ltd.
    Daewoo motors india ltd.
    Chokhani global express ltd.
    Pace elcot automation ltd.
    Ross murarka finance ltd.
    S and S power switchgears ltd.
    Falcon watch industries ltd.
    Bharat Zinc ltd.
    Pan Asia Industries ltd.
    Madhu refoils and chemical ltd.
    Migweld and machines ltd.
    Bahuma Polytex ltd.
    Vysali pharmaceuticals ltd.
    Redex Protech ltd.
    Timurti Fertilizers ltd.
    Bharani Oils Ltd
    Zillion Pharmachem ltd.
    L.D. textile industries ltd.
    Protech switchgears ltd.
    Information Technologies India Ltd.
    Usha Ispat ltd.
    Cauvery Software Engg Systems Ltd
    Vatsa Corporation Ltd
    Atash Industries ltd.
    BTW industries ltd
    Mardia Steels Ltd
    Hariparvat Merryland and resorts ltd
    Mardia Chemicals Ltd
    Real Value Appliances Ltd.
    D.S. Biotech Ltd
    Golden Forest Ltd.
    Kuber Finance Ltd
    Fine Drugs and Chemicals Ltd.
    Western Fruit & Vegetable Ltd
    Rama Newsprint and Papers Ltd.
    Eastern Mining Ltd.
    Aachal Alloys Ltd.
    Sanghi Polyester Ltd.
    Surya Agroils Ltd
    Oswal Agro Mills Ltd
    Kochar Oil mills Ltd
    Jindal Photo Films Ltd
    Oswal Agro Furane Ltd
    Mayank Hotels Ltd
    Samrat Bicycles Ltd.
    Orkay Industries Ltd.
    Orkay Silk Mills Ltd.
    Compact Disc India Ltd.
    Ispat Alloys Ltd.

    Regards,
    Amit Jain

    Reply »

  10. Dear Sir,

    I am holding shares in Essar Shipping Ltd. and Essar Steels Limited, which are delisted. Can you guide me how to dispose off these shares now?

    Kumar

    Reply »

  11. I am holding 100 shares of Essar Oil which I failed to offer dring delisting. It is said up to one year the company has to buy it at the delisted price from investors. Is it true? pl advise.

    Reply »

    • Yes that is true. You may be able to sell Essar oil in grey market. There are lots of dealers who would buy good unlisted shares in private companies.

      Reply »

    • ESSAR OIL DELISTED OFFER CLOSED ON 17 FEB 2017
      NO BUYBACK ENTERTAIN BY DISCOUNT RATE IF WANT TO SELL
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      Reply »

  12. Hi!

    Very informative article..Thanks for knowledge sharing..

    I hold 500 shares of delisted Reliance Media works and want to sell them.

    Would appreciate if you could help me with this.

    Thanks

    Piyush Banthia

    Reply »

  14. Dear Sir,
    We are offering very attractive price for your shares held in BHARAT NIDHI LIMITED.
    To avail the opportunity, kindly contact us.

    Reply »

  18. Dear Sir,

    If you have Nexus Software, Supreme Telecom and Accurate Export delisted companies please tell i want to buy it

    Reply »

  21. Sir,
    I Registered a private limited company “Rehmus Healthcare Private Limited”. I want to make it India`s largest online portal in healthcare industry which is having customers near about 130 Crore peoples. I know i can do it and i will generate huge profit in it also but i am not having initial capital for that i want to sell shares of my company is it possible to sell shares? Where i can sell shares of my company?? Plese guide me

    Reply »

  22. I want to sell 620 Essar Steel Shares . The shares is delited on NSE & BSE

    Pl. help .

    Also I am not getting any Balance Sheet / communication from Essar Steel, despite of my repeated followup with Essar Steel Customer care.

    Reply »

  23. We enjoyed reading your Post. Very informative. In the Unlisted Markets Spreads ( Difference between Buying / Selling rates ) are much higher when compared to Listed Market. So Unlisted markets are for Long Term Investors.

    Reply »

  26. if i hold onto a delisted share will i be eligible for future dividents if the company do well or get acquired by another company..regarding essar oil shares it is now under rosneft and if the company is doing well will i have benefits

    Reply »

  27. Vatsa corporation ltd delisting is bigger scam than vijay Malays case. This company has collected 10,300 crores of public money in 1996. Now in 21 years calculating the amount to double every 5 years then it would be about 160,000 crores (hundreds sixty thousand crores) Now delisting the company and may be pay 50 percent value would mean a clean profit of over 150,000 crore profit.

    This is how the general public is being looted in our country.

    Will somebody take note and return the money to the investors.

    Reply »

  28. I need to sell the below shares which are not traded on Stock exachange as of now.
    Dhanleela invest and trading – 200
    parsharti investments limited.- 100
    shree astavinayak cine vision – 2400

    What is the processes to sell out these shares .

    Reply »

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