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Wednesday, October 10, 2012

What happens to the shares of a listed company, when it goes bankrupt?


Today, while I was reading the news, I read the fact that Kingfisher Airlines shares have fallen again today (just like the past few days) and it looks like things may not improve for the debt-ridden Airline. One thing struck me while I was reading that news, What would happen to all the shareholders of Kingfisher Airlines (Which is a publicly listed company in both NSE and BSE in India) if Mr. Vijay Mallya were to give-up hopes on this airline and declare bankruptcy??

Well, the purpose of this article is to find out what exactly happens during such a scenario, when a publicly listed company goes bankrupt.

Occasionally, publicly listed companies go bankrupt. Remember Lehman Brothers? When a company goes bankrupt, its shareholders (Who are considered part owners of the company) may or may not get anything. However, the answer is multi-fold. Read on!!!

The Value of the Stock/Share:

The Share/Stock will become worthless and technically nobody will be willing to buy the shares of a company that is bankrupt, so, you cannot sell them in the Market. So, the value of the stocks you own (Irrespective of the number of shares you own) will be

0


Is there any hope?

Actually speaking yes. When a company declares bankruptcy, it will be required to sell all of its assets and pay off all debts. As part owners of the company, it is safe to assume that the company is in-debt and has to repay us. The usual order of debt repayment will be as follows:

1. The Government
2. Financial institutions
3. Other Creditors (i.e. suppliers and utility companies)
4. Bondholders
5. Preferred Shareholders and
6. Common shareholders

Trivia:
In real life, Common shareholders often receive nothing at all, as there is usually very little left over once a firm has paid its debts. Think of it this way, if the company had enough money to pay all its debts, do you really think it will go bankrupt???

How Much Money will I get?


Let us say, you own 0.5% shares of XYZ Corp that declared bankruptcy. Let us also positively think and assume that Rs. 10 lakhs was left over after XYZ Corp paid off all its debt (in the top 5 categories). So, this 10 lakhs will be shared equally among the shareholders based on the % holding of each shareholder. So, since you own 0.5% you will get Rs. 5,000/-. If I had 3% shares of XYZ Corp, I will get Rs. 30,000/-

Remember - Here, the price at which you purchased the shares is not considered. Only the % holding of shares, as compared to the overall outstanding shares of the defunct organization matters. You could've bought the shares at Rs. 100/- per share and I could've bought them at Rs. 10/-, it does not matter. At the end of the day, whatever money remains - after paying off all other higher ranked debtors, will be shared among the common share holders based on the number of shares they hold.

Some Last Words:

Buying a company's share is a big risk that we are taking. When we buy a share, we assume that the owners will manage the company well, boost revenue, make profits and keep us shareholders happy. Sometimes, it so happens that they fail and make the lives of their shareholders miserable and cause losses to their investors. So, make sure you research the company you buy, thoroughly to avoid unexpected shocks and losses...

Happy Investing!!!





Disclaimer: The Article does not suggest that Kingfisher Airlines is going to declare bankruptcy. Nor is this article a buy or sell advise about the shares of Kingfisher Airlines. While reading a news article on the internet, about the stock's daily price movement, the author got the idea to write about what would happen to the common stock holders if a listed company were to declare bankruptcy and that's all

4 comments:

  1. Do we have a tentative figure of Kingfisher's assets? 7500 Crore debt is a given.

    ReplyDelete
    Replies
    1. Anonymous,
      Based on the balance sheet made public by Kingfisher Airlines, they had Assets worth 7636 Crores and Liabilities/loans worth 6132 crores. Therefore the net assets they had was 1504 crores.

      However, in the recent past their loan commitments have gone up and there is not much clarity on how much assets they have. We have to wait until they release their balance sheet during the year end to see the actual/up to date figures.

      Anand

      Delete
  2. I left my job in 2003 and did not withdrawn the pf. My company is also closed now. Is their any way i can get my pf money and my pf account is also shows inactive account and since company is closed now my employer will not be their to verify the pf form. Please advise what all document and forms i need to fill to get the money. and what is the complete procedure in this case.

    ReplyDelete
    Replies
    1. Consult your regional pf office and request them for the steps to access the funds from your pf acc since your company is closed down. They will guide you on this.

      Do you have any proof that you had a pf account like a PF Statement, employment proof etc?

      Delete

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