Should delisting of stocks be allowed?

While forcing companies to continue to list may have some advantages, a complete ban on delisting could give rise to several anomalies in the market.

For one, not weeding out paper could lead to the exchanges being overloaded with worthless paper that is of no value or interest to anyone. For instance, in the past decade, thousands of companies came into the market.

But not many were able to survive the gut-wrenching business cycles over the years. If the exchanges are to be laden with the stocks of such companies, clearly no value can be added to the economy. Keeping these listings alive will only lead to waste of resources and efforts.

Taking the argument further, keeping worthless paper on the list will lead to doubts on the worth of our markets. Investors will start questioning the market's credibility if thousands of worthless stocks are indeed listed beyond their "expiry date". And it's unlikely that global investors who currently flock to Indian markets in search of value will continue to do so.

If stock markets are to behave as "perfect markets", the regime of "the survival of the fittest" has to be adopted. In fact, by continuing to be listed, a company should give investors the confidence that it is in the business to stay.

A plethora of junk stocks will also make it difficult to physically analyse and track companies. Brokerages will keep away from analysing such stocks and so will serious asset managers. Therefore, such stocks will lack reference, which is so important to investors.

In fact, even today, few research houses and fund managers track and analyse the "Z" category of listed stocks. The real danger in not allowing delisting is that it allows the possibility of vested interests who could try and market junk stocks to financially illiterate investors "" and succeed merely because the stocks are listed. Even today, we find a trace of such a trend emerging. Every time the markets go through a bull phase, all kinds of penny and junk stocks are used to take innocent investors for a ride.

Stock exchanges the world over attempt to attract stocks that have a distinguished listing record. In doing so, they create an image for themselves as providers of opportunities that are substantial, fair and transparent.

This trend is emerging in India, too. In classifying stocks into different classes, the Indian stock exchanges also take a view on the trade-ability of a stock. One must support any such movement that creates greater transparency in a market.

Then there are issues related to shareholders' right to list or delist their company as they see fit. Shareholders, the principal beneficiaries in any corporate structure, must be permitted to carry on their business in a manner they find most competitive and profitable. Some of the issues that they would face are:

Listing, in many instances, would mean having to publish sensitive, competitive information about the company on a regular basis. This may not be always in the interest of the company.

Transnational corporations are becoming increasingly aware of the need to earn profits for their principal shareholders in the countries of origin and delisting from smaller markets around the world.

It is also easier for many of them to subject themselves to the regulatory compliance of any one large market than in many smaller ones.

Having argued against banning delisting, it is important to consider some caveats "" or circumstances under which delisting must be reviewed with seriousness by all the stakeholders before such a decision is taken.

The interest of the minority shareholders must be protected. Individually, these are very small investors; it is up to the regulator and the exchanges to see that the non-promoter groups are paid a fair price should they face delisting action by a corporation.

Also, vanishing companies are a reality in several India stock exchanges. And while an admirable effort has been made by the concerned regulators in this respect, there are still safeguards that the market mechanism must provide against such companies. Delisting has proved to be the undoing of many small investors in such cases.

(Views expressed by the author are personal and need not necessarily represent that of his company)

GAGAN BANGA
National sales & marketing head,
Indiabulls Securities Ltd

Delisting follows either the exercise of a personal choice or the force of law. In the first case, voluntary delisting of securities means that the company after following the prescribed procedure has exercised the option to delist the securities from a particular stock exchange.

In the other case, "non-compliance with the provisions of the listing agreement" force the exchanges to forcibly delist the company. Mostly, this happens due to the non-payment of the listing fee (the annual payment a company makes to stock exchanges for giving its shares a trading platform) or non-submission of financial results. In May 2004, for instance, the Bombay Stock Exchange (BSE) had proposed to delist 637 companies for non-compliance.

Delisting typically results in a stock losing all its value and becoming worthless the moment the delisting process gets completed. This being the case, how come now the regulator is allowing promoters to delist their wares to suit their own as well as the regulator's convenience?

It was believed at one time that the more the listings, the greater the liquidity on the exchanges. It goes unsaid that in the investment check-list, liquidity is one of the most important points considered by the investors.

At the time of public issue, the promoters may apply for listing with more than one stock exchange and accordingly, securities are traded on all such stock exchanges. At a later stage, the management may realise that the volumes of trading of securities is very low or is negligible at a particular exchange and, therefore, it is expensive to continue listing on such stock exchanges since it involves more secretarial work (compliance of various clauses of listing agreement) without any much benefit to the shareholders or the company.

Also, the management may feel that it makes business sense to concentrate on fewer exchanges that enhance volumes and increase the depth of the stock, in turn, attracting larger institutions and funds to the stock.

In the case of forcible delisting, the exchanges, on their part, are justified in hauling up these companies. After all, they are providing these companies a commercial service, for which they deserve to be compensated.

They are also within their rights to ask these companies to conform to regulations that are meant to promote good investing practices. They even give companies a grace period "" up to one year before suspension and three years before delisting "" to fall in line.

But most companies that are forcibly delisted don't care, not for their stock, certainly not for their investors. Any such list of offenders reads like a local yellow pages directory, since it mostly comprises little-known names.

It illustrates everything that can go wrong with the concept of public limited companies. It will have companies that folded up many years ago, companies whose promoters disappeared once they got the public issue proceeds.

Thus, it is not oversight on the part of companies that leads to their getting suspended or delisted. It's a complete disregard for investor rights and business ethics. For instance, most violations relate to non-payment of annual listing fee.

For companies with a share capital of up to Rs 5 crore "" which is what most of these offenders have "" the annual listing fee is not more than Rs 10,000. That is a small change for any listed company and promoter, but they simply don't care.

The other type of delisting is a resultant of a conscious decision of the management of the company that decides that it does not want its stock to be traded on exchanges and, thus, approaches the regulator for approval of a buyback.

The regulator typically approves such buybacks and the company completes the process according to the prescribed methodology of the regulator. This kind of delisting is normally viewed as a lesser evil compared to forced delisting, since it gives an opportunity to the investor to get out and derive some value for his stock.

If the menace of delisting has to be really avoided, basic caution needs to be applied at the time of investment by the prospective shareholder. If fundamentally good companies, focused on enhancing the shareholder's wealth, are invested in, not only is the chance of delisting minimal, but there is also higher probability of real returns accruing to the shareholder over a period of time.

Corporate governance in India is slowly gaining ground; investors should actively look at making investments in organisations with good corporate governance norms.

In conclusion, it can be safely said that though delisting is required for the overall health and sustenance of the stock markets, shareholders ought to take a more proactive role and decide which company they want to be associated with.