Penny stock companies are those whose stock trades at $5 or less. They face delisting if their stock drops below $1, but Nasdaq's rules give them leeway to stay on the exchange for almost two years rather than be delisted, after which they can only be traded in the over-the-counter market.
However, under the new proposal, companies that fail to meet the $1 minimum for 360 consecutive days will be suspended from trading, even if they have appealed the delisting decision.
Delisting is when a company's stock is removed from a stock exchange such as the NYSE or the Nasdaq. A delisting may occur for several different reasons. It could be the result of the company going private, declaring bankruptcy, merging with another company or failing to meet the exchange's listing requirements.
Under the RBB process, the delisting process is considered successful if the post-offer aggregate shareholding of the promoter or the acquirer reaches 90 percent.
Though delisting does not affect your ownership, shares may not hold any value post-delisting. Thus, if any of the stocks that you own get delisted, it is better to sell your shares. You can either exit the market or sell it to the company when it announces buyback.
For example, the Nasdaq requires a security's price not to close below $1.00 for 30 consecutive trading days, at which point the exchange initiates the delisting process. 1 Furthermore, the major exchanges also impose requirements related to market capitalization, minimum shareholders' equity, and revenue outputs.
You don't automatically lose money as an investor, but being delisted carries a stigma and is generally a sign that a company is bankrupt, near-bankrupt, or can't meet the exchange's minimum financial requirements for other reasons. Delisting also tends to prompt institutional investors to not continue to invest.
Trading After Delisting
It is rare that a delisted stock will get itself back on to the more traditional exchanges. To do so, it would have to avoid bankruptcy, solve the issue that forced the delisting, and again become compliant with the exchange's standards.
If you still hold shares after they are delisted, you can sell them—just not on the exchange on which they traded before. Stock exchanges are very advantageous for buying and selling shares. When they delist and trade over the counter (OTC), selling shares and getting a reasonable price for them becomes much harder.
A penny stock is defined in Exchange Act Rule 3a51-1. Like many SEC rules, the penny stock rule begins by including all equity securities and then carves out exemptions (for example, all offers and sales of securities must be registered unless an exemption applies).
Under the NYSE's listing rules the price condition will be deemed cured if the price promptly exceeds $1.00 per share, and the price remains above that level for at least the following 30 trading days.
A company's shares listed on Nasdaq are required to maintain a closing bid price of no less than $1.00 per share (Minimum Bid Price Requirement). If the closing bid price of a company's shares are below $1.00 for 30 consecutive trading days, the company is considered to be in violation of Minimum Bid Price Requirement.
When stocks move against their expectations, they can lose much more than the value in their accounts! These types of riskier trades and some other derivatives can lose traders much more than the initial purchase price of shares as in the case of a buy-and-hold investor. So to recap, stocks can only go to zero.
When a stock is delisted, options trading on that stock typically ceases. This means that options holders are no longer able to buy or sell their options on the open market. However, they still have the right to exercise their options if they choose to do so.
The value of shares doesn't automatically rise or fall with a delisting, but when an involuntary listing takes place, it's often a sign that a company is approaching bankruptcy. In this case, there's a chance investors might lose their investment.
If you own securities, including stocks, and they become totally worthless, you have a capital loss but not a deduction for bad debt. Worthless securities also include securities that you abandon.
What happens when an investor maintains a short position in a company that gets delisted and declares bankruptcy? The answer is simple: The investor never has to pay back anyone because the shares are worthless. Companies sometimes declare bankruptcy with little warning. Other times, there is a slow fade to the end.
If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.
If someone misses applying for the delisting, they can tender the shares offline directly to the company, and the company will buy them back. Shareholders will have a one-year period from the date of unlisting to tender the shares to the company.
If the security cannot be sold in the market, it may be possible to dispose of the worthless security by gifting it to another person who can be related or unrelated to you. If you gift the worthless security to a family member, you will need to ensure that the person is not your spouse or minor child.
If you own delisted shares, you can still sell them on the Over-the-Counter Bulletin Board (OTCBB) or on the Pink Sheets, which have more relaxed regulations and few listing requirements. OTC trading is volatile, and this level of risk is typically not suitable for beginning investors.
When a stock's value falls to zero, or near zero, it typically signals that the company is bankrupt. The stocks are frozen and unless the company restructures, it's likely you will lose your investment.
As explained above, technically and legally you can claim capital loss on delisted shares only on extinguishment of your rights in shares as extinguishment is treated as transfer but there are practical difficulties when your try to fill up your ITR form for claiming such losses.