Can an Insolvent Company Be Delisted from the Stock Exchange?

The delisting of a company from a stock exchange refers to the removal of its securities from being traded on that exchange. In the case of an insolvent company, this process becomes more complex, as it depends on the company’s resolution under the Insolvency and Bankruptcy Code (IBC) or its liquidation status. Delisting could occur during insolvency proceedings if the company is unable to recover or if it enters into liquidation.

Can an Insolvent Company Be Delisted from the Stock Exchange?

Delisting Due to Insolvency:

When a company enters insolvency, there are high chances that its shares may be delisted from the stock exchange. This is because the company might be undergoing a Corporate Insolvency Resolution Process (CIRP), and if no successful resolution is achieved or if the company is heading for liquidation, the stock exchange may decide to delist the company.

Stock exchanges have specific rules regarding delisting, and insolvency often triggers the need for delisting under these rules, particularly if the company is unable to meet certain listing requirements, such as financial health, compliance with governance standards, or minimum trading volume.

Regulatory Guidelines for Delisting:

SEBI (Securities and Exchange Board of India) provides the regulatory framework for delisting listed companies. The SEBI (Delisting of Equity Shares) Regulations, 2009 govern the procedure for voluntary and compulsory delisting of securities.

Insolvency proceedings under the IBC may lead to the suspension of trading in the company’s securities by the stock exchange. However, a final delisting is often initiated either when the company goes into liquidation or if the Resolution Professional and Committee of Creditors (CoC) do not arrive at a successful resolution plan.

Insolvency and Stock Exchange Suspension:

As soon as a company enters insolvency, the stock exchange may suspend trading in its shares if it fails to comply with listing norms or if the company becomes unviable as a going concern. The stock exchange has the right to suspend trading of securities of a company that is undergoing CIRP under the IBC.

If the Company Law Board (NCLT) orders liquidation, the company may face delisting if it is no longer considered a viable entity for trading. The listing status can be revoked if the company is unable to formulate a resolution plan or fails to meet the listing obligations.

Delisting Process Under Insolvency:

Once delisting is triggered, the company must follow the delisting process prescribed by the stock exchange. This could involve the company’s voluntary delisting (if it's still in the CIRP process) or a compulsory delisting if it enters liquidation.

The company may be delisted from the stock exchange if the Resolution Professional or liquidator finds that continuing to be listed is no longer in the company’s or its creditors' best interests. The Committee of Creditors (CoC) may also decide to support the delisting as part of the resolution or liquidation strategy.

Delisting Impact in Liquidation:

In case the company is in liquidation, its assets are sold, and the proceeds are used to pay off creditors. The delisting is typically finalized during the liquidation process since the company no longer operates as a going concern.

Once delisted, the company’s shares can no longer be traded on the stock exchange. The company may continue to exist for liquidation purposes but will no longer have any active trading status.

Treatment of Shareholders in Delisting:

Shareholders may face a complete loss of their investments in cases of liquidation. The treatment of shareholders during delisting depends on the final resolution of the company’s debts and whether any assets remain for distribution. If a resolution plan is successful, shareholders may get some value, but in liquidation, they are often the last to receive any payouts.

Example:

Example 1:

A manufacturing company enters insolvency under the IBC and the Resolution Professional fails to develop a successful resolution plan. The company’s assets are sold in liquidation, and the stock exchange delists the company’s shares. The shareholders are left with little to no recovery after the claims of creditors are satisfied.

Example 2:

A real estate company is undergoing Corporate Insolvency Resolution Process (CIRP). The stock exchange suspends the trading of its shares due to non-compliance with listing requirements. The Committee of Creditors (CoC) agrees to delist the company from the exchange, as it is not expected to recover under the resolution process. The company’s securities are eventually delisted as part of the restructuring process.

Conclusion:

Yes, an insolvent company can be delisted from a stock exchange, particularly if it fails to meet the listing requirements during the insolvency proceedings. The stock exchange may suspend or delist the company’s securities either during the Corporate Insolvency Resolution Process (CIRP) or after the company enters liquidation. Delisting is often part of the larger strategy for resolving the company’s financial issues and is subject to the regulations set by SEBI and the respective stock exchange.