The US SEC on 29/7/22 (Friday) added Alibaba (BABA) to a list of Chinese companies at risk of being delisted from the US exchanges if their auditors can’t be inspected before spring 2024.
The move comes days after Alibaba said it would apply for a primary listing in Hong Kong, where it obtained a secondary listing in 2019. Securing a primary listing in the Asian financial hub would allow BABA’s shares to continue to be traded even if it is booted from the American bourse.
BABA is among more than 270 Chinese companies listed in New York identified as being at risk of delisting under the Holding Foreign Companies Accountable Act (HFCAA), intended to address a long-running dispute over the auditing compliance of US-listed Chinese firms. US regulators have been demanding complete access to audit working papers of New York-listed Chinese companies, which are stored in China.
US listed shares of BABA fell 11.12% on 29/7, & have lost 55% of their value over the past 12 months. HK listed shares of BABA fell6.1% on 29/7.
🤔💭 What Does It Mean When a Stock is Delisted?
📝 To be delisted means the stock is no longer traded on that specific stock exchange. A company can elect to delist its stock (voluntary delisting), pursuing a strategic goal, or it can be forced off the exchange because it no longer satisfies its minimum requirements (involuntary delisting). These requirements may have to do with maintaining minimal stock prices, minimal market capitalization requirements, or required document filings.
➡️ Under the HFCAA of 2020—which took effect in 2021—the US can ban the trading of securities can of companies whose auditors can’t be inspected by the American audit watchdog for 3 consecutive years.
🤔💭 What Happens to Shares When a Stock is Delisted?
📝 (1) If a stock is delisted, shares may continue to trade over-the-counter (OTC) on the OTC bulletin board. Shareholders can still trade the stock, though it is likely that the market will be less liquid.
(2) If the stock ceases to be publicly traded, shareholders may be either bought out or have their shares restructured to participate in the private equity holding of the company.
(3) Sometimes, shareholders are offered warrants, bonds, & preferred shares when a company moves from the public to private status.
➡️ The Bottom Line: A delisting does not directly affect shareholders' rights or claims on the delisted company. It will, however, often depress the share price & make holdings harder to sell, even as thousands of securities trade OTC.
🤔💭 What Should I Do When a Stock I Own Faces Delisting Risks?
⚠️ Delistings can represent either positive or negative developments for stocks. Investors should be aware of the company's financial situation in order to determine what course of action to take following a delisting.
⚠️ Shareholders should carefully evaluate delisted stocks, as moving off an exchange may mean that the company is in financial trouble & may be facing bankruptcy soon.
Source websites: Wall street journal, seekingalpha, reuters & investopedia.
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