"Is it safe to buy unlisted shares?": The biggest question among the investors who think of buying Pre-IPO equity from the unlisted market, but take a step back when the deal is about to be done.
Recently the curiosity has grown manifold among the investors to buy unlisted shares. The astronomical returns of the pre-IPO equity have dwarfed the performance on broader markets, which now have limited pockets of valuation comfort. However, the huge demand in the unlisted market has turned unlisted shares expensive too.
The success story of unlisted markets is not very new. The industry is more than a decade old, but multiple players have mushroomed in multiple cities, attracting novice investors. However, the industry is not regulated and completely works on the trust factor.
In the unlisted markets, investors can find shares of the usual sectors like chemical or financial companies and some of the unique players like unicorn stocks and IPL teams. The best part of unlisted markets is that they bring the Pre-IPO equity to the hands of the retail investors, who can actually make good money, the step in at the right time.
Shares of unlisted companies especially the new-age companies in financial services, e-commerce, non-bank finance companies (NBFC) are on the watchlist.
Some of the shares of unlisted companies that are traded include HDFC Securities, HDB Financial, Hero Fincorp, Chennai Super Kings, Anand Rathi Wealth Management, B9 Beverages (Bira Beers), Mohan Meakin (Old Monk), One97 Communications (Paytm), along with more than 160 other players.
Before investing in the private equity market, investors should understand what an unlisted market is and evaluate whether it is safe to buy unlisted shares or not. Let us have a look at how investing in an unlisted market is different from main market transactions.
Off Market vs Market Transactions
Any exchange of shares is done when there is a buyer and a seller of shares of a particular company. The main market transactions are carried out via exchange which indeed is a market, where buyer meets seller. However, the things are kept anonymous as one can not find out who sold or bought shares from whom.
In the private equity markets, the transactions over the counter (OTC) in nature are accepted by the depository system in India. They are called 'off market' transactions as the deal can be done any time during the day and shares can be transferred from one account to another.
In such cases, investors know who is the seller of the counter and the selling person or entity is aware of the buyers' identity as well. One should note that deals in unlisted markets are legitimate and the transfer of ownership is done in Demat account only.
How do you 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.
Why do we need an unlisted market?
Unlisted markets give liquidity to existing shareholders. More often than not, companies offer shares to eligible employees under the stock option plans, also known as ESOPs. Such employees look for a market to exit their position at a good valuation. Thus private equity markets come into the picture as their savior.
On the flip side of the coin, investors are also willing to invest in companies at a nascent stage, when they are growing rapidly and their business is flourishing. However, the companies in their initial years are very much risky. But they also demand a market, to test waters for themselves.
Is it safe to buy unlisted shares?
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.
Various Alternative investment funds (AIFs) have entered the space, with big-ticket size, offering the shares to wealthy investors. This scarce the availability of shares for the smaller investors, who dreams to make it big someday.
Another problem for investors appears when they wish to liquidate their position. Here is when the integrity of the deal comes into the picture. If you have good dealers in your connect, they will give you justified prices for your position in the company. UnlisedZone.com is a name, which has set new benchmarks for the industry, turning into a pioneer within few years.
In the financial markets, one man’s trash is another man’s treasure. If an investor is badly stuck with investments and is in need of money, then there is a chance that he/she would not mind exiting even at a 20% discount to the fair value.
Taxation on shares of companies that are not traded on recognized stock exchanges has higher rates of taxation. Also, holding these shares in a Demat account has its own cost.
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.
If you’re vigilant, patient, and have the money to spare there could be a fortune. But there’s no guarantee that you’ll make it here.