A flawed suggestion
The government’s draft delisting rules which, inter alia, require stock exchanges to compulsorily delist companies that have made losses for three consecutive years and whose net worth has turned negative are flawed. Delisting of companies should be the last penal measure as it denies the ordinary shareholders an exit option.
The proposed guidelines seem to tar every offence with the same brush and prescribes one blanket solution: delisting. Why should a company be forcibly delisted if it has effected an unauthorised change in registered office as one of the rules suggest? Should the law not penalise the managers/promoters responsible for this violation?
Even in the case of loss-making companies, compulsory delisting seems to suggest a company that has turned in losses for three years is beyond redemption. By that logic, Sail, one of the top-performing stocks over the past few years, should have been delisted long ago. Periodic losses do not mean the underlying shares have lost all value or that the company cannot bounce back.
Similarly, infrequent trading cannot be a trigger for delisting either. If the company happens to comply with the listing regulations why should it be penalised if its shares are not in demand? This would only encourage infrequently-traded companies to instigate trading in their stock with serious manipulation risks.
Yes, there is a case for flagging such companies by housing them in a separate category, as is already the case with those not complying with listing requirements, so that investors are forewarned.
These guidelines would encourage unscrupulous promoters to deliberately violate provisions so that their companies are forcibly delisted, making them virtually private companies. The government should, instead, severely punish individuals for violations and force such violators to delist their companies through the route provided.
To the extent that the guidelines provide a delisting framework through shareholder approval, they are welcome. These issues are, however, best left to Sebi, which has adequate domain knowledge to reconcile various conflicting interests.
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