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What is Delisting?
Delisting, whether voluntary or involuntary, refers to the removal of security from a stock exchange. When security that was formerly listed on a stock exchange is removed and cannot be traded for a period of time, such a security has been delisted. There are many situations that can lead to a security being delisted (removed) from a stock exchange. Voluntary delisting can occur when a company undergoes a merger and acquisition or becomes a private company. Involuntary delisting, on the other hand, occurs due to the inability of a company to meet the specific requirements needed to be listed on an exchange.
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How Does Delisting Work?
There are major situations that cause a security to be delisted (removed) from a stock exchange, these are;
- When a company becomes delinquent or insolvent.
- When a company folds up or goes bankrupt
- Merger and acquisition
- Failure of a company to meet the listing requirements (standards) of an exchange.
- When a company becomes private.
In any of the above situations, delisting can occur. However, in cases where a company undergoes restructuring or is being privatized, a voluntary delisting occurs. This is when the company requests that its securities are listed from the exchange so that they can no longer be traded. In mergers and acquisitions, companies can also request voluntary delisting.
Involuntary Delisting of a Company
Involuntary delisting often occurs when a company fails the listing standards for its securities to be listed on an exchange. Violation of listing standards can also lead to involuntary delisting. There are regulatory bodies for stock exchanges, they formulate standards that securities must meet before they are listing, listing standards might vary from one exchange to another but there are some basic requirements for all exchanges. Another reason for involuntary delisting is when a company has poor financial status and is unable to meet certain obligations. For instance, when a company goes bankrupt or folds up, involuntary delisting is inevitable.