Equity trading has grown leaps and bounces in recent times as retail investors have been rushing to the equity markets to fetch better returns. The craze of generating alpha, or the so-called supernormal returns has lured them to the pre-IPO or the unlisted market, where they are lapping up the unlisted securities, much prior to the IPOs of the companies. What are unlisted shares? An unlisted share is a financial instrument or a share, which is not traded in the formal exchange as the company does not meet the listing criterion. Trading of unlisted shares is done over the counter or OTC, which is done by select brokers or dealers. Unlisted securities are usually issued by smaller or new firms, which do not comply with the listing norms of the exchange. The trade-in of such securities is not very much frequent, thanks to the riskier and illiquid nature of the business. Unlisted markets are not regulated, however, are not illegal and the deals are completely valid. However, the nature of trade is completely different from those of the listed or the formal market. These shares are not registered on any exchange but are transferred through NSDL/CDSL This open market has a lot of potentials. Not just in India, there are various entities across the globe, which are involved and engaged in such transactions, which is adding to the popularity of the industry. Even shares of Facebook were widely traded in the unlisted market, before going public. Why are unlisted shares becoming hot these days? Unlisted shares of high-octane pre-IPO new-age companies are witnessing heavy interest among investors. Trading volumes and premiums have surged as the demand for shares of companies yet to list on bourses surges. Unlisted share markets have gained popularity over the years in recent history. Investors with sound wisdom, strong financial health, and long investment horizon buy stakes in growing companies, even before their IPO, and see the real magic of compounding. The high level of activities in the primary market and value picks at early stages have attracted a heavy number of investors in the pre-IPO markets. An ample number of gems, backed by top-notch parentage, are widely traded in the unlisted market. For example, HDFC Group's HDB Financial Services, Reliance Industries' Reliance Retail, multiple small finance banks, and various start-ups backed by prime players are gathering superior demand from the investors. New Regulatory changes to aid the unlisted market In a recent release from the Securities Exchange Board of India (SEBI), there are some big bang actions taken by the capital market regulator which are likely to be a booster for the industry. Headed by Chairman Ajay Tragi, the board decided to slash the lock-in period for the person, other than promoters (non-promoters) to six months from the date of allotment in the IPO market, instead of existing one year. Prior to this, the Pre-IPO equity or the securities purchased from unlisted market, were under the mandatory lock in of one year from the date of allotment, if the company decides to make a debut on the bourses. However, the shares can be sold in the informal market before the IPO. The period of holding of equity shares for Venture Capital Fund or Alternative Investment Fund (AIF) of category I or Category II or a Foreign Venture Capital Investor shall be reduced to 6 months from the date of their acquisition of such equity shares instead of existing 1 year. The change will likely boost the volume of the markets as the move will eliminate the risk of lock-in for a year and investors can make an early exit. Also, it will attract more investors to the market, who were skeptical over the lock-in period, which is now being halved. How to buy unlisted shares? Buying unlisted shares of a company has become very much easier for investors nowadays. However, the ticket size of investment is usually higher and the price of the share is decided by market demand, future outlook, and buzz of the company. Retail investors, like private equity funds and venture capitalists, can buy shares in the desired quantity. However, investors should always opt for reliable dealers or sellers in the unlisted market. To get the deal done, investors need to simply pay the amount to the trusted dealer from the bank account of the Demat account holder and the shares are transferred by the dealer. One can check the transferred shares in his depository partner account. Buying unlisted shares does not guarantee sure-shot prosperity to the investors. Investors would find more companies in the unlisted space as a wealth creator but that does not mean that you will find a gem all the time. One should not buy copper at the price of gold. Investors should understand that unlisted space requires patience, trust, and a longer time horizon as the company grows over into a successful venture if neutered properly. This market is not for traders or impatient buyers, who dream to become millionaires overnight. Additionally, finding the fair value of shares of unlisted companies is a big challenge, as just annual results and commentary from company management limit the information available for investors. Another big challenge for the industry is a huge mismatch between demand and supply. We can conclude that it is completely safe to buy unlisted shares if the investor has gone through the required process of unlisted shares that require a process of due diligence. Unlisted markets are riskier, but of course, more risk leads to more rewards. If you are willing to invest in the pre-IPO markets, it should be a small part of their portfolio.