Sometimes a stock you have invested in gets suspended from the stock exchange. You get a mail from the depository or exchange or your broker for the same. There are several reasons for the suspended stock of a company. This article illustrates what happens if a stock gets suspended by the exchange from an investor’s perspective.Article Content
- Stock Exchange
- Stock delisting from exchange
- Suspended stock of a company
- Does stock suspension mean the valuation has become zero?
- What happens after the stock suspension?
- Is your money really gone as a common equity holder?
- Do I have any chance to liquidate my suspended stocks?
Stock market affects the economy of a country in various ways. It affects the cash availability in the market as well as the goods and services availability of the companies. It also provides several better saving option than the conventional ones. Thus the importance of stock market cannot be ignored in a country’s development.
The stock market is regulated by Securities and Exchange Board of India (SEBI). SEBI’s objective is to protect the main entities of the market viz.
- Corporate Companies
- Financial intermediaries
The 20 departments of SEBI help to regulate the market and introduce various bye-laws as per the requirements. All the entities of stock market including financial intermediaries are bounded to abide by the bye-laws of SEBI.
The stock market is a cash-driven ecosystem. The main organism of this eco-system is the stock exchange. Firstly, a stock exchange is a hub for companies to gather funds from the public by releasing some amount of stocks in the primary market. Secondly, it is a hub for the traders/investors as an earning opportunity in the secondary market. The stock exchange is a private entity thus profit making is their main objective. Read how NSE earns money.
Currently there are 6 active stock exchanges in India, viz.
- BSE Ltd.
- Calcutta Stock Exchange Ltd.
- India International Exchange (India INX)
- Metropolitan Stock Exchange of India Ltd.
- National Stock Exchange of India Ltd.
- NSE IFSC Ltd.
Currently, there are more than 5000 companies listed on BSE making it the biggest exchange in the context of listed companies. It is also the oldest exchange in Asia and fastest exchange in the world. You can read BSE faq for more interesting facts about BSE.
NSE is a new entrant established after the Harshad Mehta scam surfaced on BSE. Introducing NSE was an initiative to provide an option for BSE to the investors. Currently, there are around 1500 companies listed on NSE but it has revolutionized the Indian stock market after its inception. In fact, NSE has become more popular than BSE.
Both BSE and NSE categorize their listed companies differently. It’s sometimes difficult to decode them. On FundsBase you can read BSE groups and NSE series to learn more about the scrip categorization thought process.
As stated, the stock market is a money-driven ecosystem, thus scams and various frauds are natural to occur. Although SEBI was established, however some scammers managed to find the loopholes in the system and executed the biggest scams in Indian stock market. As a consequence of these scams ultimately it is the investor who is at the loss.
There are several security and eligibility measures that a company has to fulfil to get enlisted on a SEBI registered stock exchange. Both leading stock exchanges NSE and BSE have some criteria for a company to get listed. Read NSE listing criteria and BSE listing criteria for your reference.
After the stocks are available in the secondary market, the frequent buy-sell process starts. This is the place where traders/investors earn-lose money.
This article details one of the reasons for losing money in stock market. This loss is attributed to an action by the exchange called suspension of a company’s stock.
Stock delisting from exchange
There are mainly three reasons that a stock gets de-listed from an exchange. Main intent of this article is to focus on the suspension but you need to know the two other ones as well.
- Suspended Stock
When a listed company is merged into another listed company then the former’s stocks are not available on the exchange. Instead, the investor gets the stock of the latter in his/her demat account. The number of latter stocks is calculated based on the money invested in the former (taking into account the former’s stock value) and the latter stock value.
If a company wants to increase its percentage in the promoter’s share it buys back the stock from the market. This is usually at a premium to the market price. You can tender your stock to get it bought-back by the company.
Now let’s see why a company gets suspended from the stock exchange.
A company gets suspended from the stock exchange mainly due to the non-compliance with the stock exchange rules and regulations. The stock exchange gives some time to the company to revise itself in the timeframe otherwise its stock will be suspended. If the company still doesn’t do the necessary then the stocks are suspended by the exchange.
In such condition, the stocks remain available in your demat account but the company doesn’t show on the trading platform thus no buy-sell is possible through the broker platform.
Suspended stock of a company
Let’s understand about the consequences of suspended stocks of a company
Does suspension mean the stock value has become zero?
No. The stock value has not become zero, but the stocks are just delisted for trading on the exchange. These stocks are still available in your demat account. In case the company has gone bankrupt and closed then yes, the stock value has become zero.
What happens after the stock suspension?
If a company has gone bankrupt then its asset is first liquidated and the money is returned to the investors. But money is returned in a hierarchical format. Below is the image of this hierarchy.
So, in this hierarchy, the investors of the common equity are paid last. Yes, this is the riskiest mode in the stock market.
Is your money really gone if you are a common equity holder?
No, not exactly but yes in most cases. If the company has not closed and abides by the exchange regulations there is a chance (just a chance) that the suspension will be revoked and the stock will again get enlisted on the exchange.
Do I have any chance to liquidate my suspended stocks?
Apart from the one mentioned above, there is one more chance that you will able to liquidate your stocks. There are some companies which do research on the suspended stocks and if they find in their research that sometime in future the suspension can get revoked and company can become profitable they like to buy the suspended stocks. The buy price is decided by the buyer and is usually below the price at the suspension.
Suspension of a company is usually because of the non-compliance with the exchange regulations. If the company has not gone bankrupt and closed there is a chance that in future the company will get enlisted in the exchange after abiding the exchange regulations. You can wait for that time. There are also some companies which buy suspended stocks based on their research. You can also sell your suspended stock to these companies.