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Forget the gilded frenzy of IPO day, the champagne toasts, and confetti showers. For discerning investors, the real action lies before the spotlight hits – in the hushed, tantalising world of pre-IPO shares. Here, amidst the whispers of potential and the dance of due diligence, a different game unfolds. Gone are the lottery odds of securing shares in hot IPOs, where competition leaves most out in the cold. Pre-IPO access opens the door to a playground where the ground isn’t littered with deflated hopes, but fertile with the promise of early birds catching the worm. Here, seasoned players know that IPO oversubscription isn’t a dead end, but a detour.

The issue of oversubscription presents one of the largest obstacles for investors hoping to take part in the initial public offerings (IPOs) of potential businesses. This indicates that only a small portion of applicants receive an allotment because there is a greater demand than there is supply for the shares. For example, the recent initial public offering (IPO) of Tata Technologies was oversubscribed by 69.43 times, meaning that only one applicant out of 69 received shares. In addition, investors who lose out on the initial public offering (IPO) frequently have to purchase the shares on the secondary market at a premium, which lowers their returns.

Buying pre-IPO shares is one method to get around both of these issues, though. These are the prospective stock exchange-listed private company shares that aren’t currently listed but are anticipated to go public soon. Several astute investors are seizing the chance to purchase pre-IPO shares at a lower cost than the IPO, reaping the advantages of increased profits and assured allocation. This essay will examine the appeal of pre-IPO shares and show how, for astute investors, they can be a profitable playground.

What are Pre-IPO Shares and Why Are They Attractive?

Pre-IPO shares are the shares of a company that is not listed on the stock exchange but are traded in the private market. Pre-IPO shares offer several benefits for investors who are looking for alternative and lucrative investment avenues. Some of the advantages of pre-IPO shares are:

• Higher returns: Pre-IPO shares are usually available at a discount to their expected IPO price, which gives them the potential for higher returns. Forget the blaring trumpets of mainstream IPOs. Discerning investors know the real action lies before the lights are switched on. Pre-IPO shares, traded in the unlisted arena, offer the potential for explosive returns before companies debut on the public stage. For instance, take Anand Rathi whose shares were pitched at a mere ₹250, and now it is soaring at ₹2700! That’s a staggering 1080% return, and it’s only one of the 31 pre-IPO success stories Planify has facilitated.

• Early entry: Pre-IPO shares allow the investors to enter the company at an early stage before it goes public and becomes accessible to the masses. This allows them to capture the value creation and growth potential of the company, which may not be fully reflected in the IPO price.

• Lower volatility: Pre-IPO shares are less affected by market fluctuations and sentiments, as they are traded in a closed and controlled environment. This reduces the volatility and risk of the investment, as compared to the listed shares, which are subject to the market forces of demand and supply.

• Tax benefits: Pre-IPO shares are eligible for long-term capital gains tax benefits, if they are held for more than two years. The long-term capital gains tax rate for unlisted shares is 20% with indexation, which is lower than the 30% tax rate for short-term capital gains. Moreover, if the pre-IPO shares are sold after the listing of the company, the holding period for long-term capital gains tax benefits is reduced to one year, and the tax rate is 10% without indexation.

How to Invest in Pre-IPO Shares?

Investing in pre-IPO shares is not as easy as investing in listed shares, as it involves a different and complex process. The investors who are interested in buying or selling pre-IPO shares have to follow these steps:

• Find a reliable platform: The first step is to find a trustworthy and reputed platform that deals in pre-IPO shares. Few companies offer this service, such as Planify etc. These platforms act as intermediaries between the buyers and sellers of pre-IPO shares, and facilitate the transactions.

• Contact the dealer or platform: The next step is to contact the respective investment banker and express an interest in buying or selling pre-IPO shares. The platform will provide the list of available pre-IPO shares, their prices, and the minimum quantity required for the transaction.

• Agree on the price and quantity: The third step is to negotiate and agree on the price and quantity of the pre-IPO shares with the dealer or platform. The price of pre-IPO shares is determined by the demand and supply in the market and may vary from day to day. The quantity of pre-IPO shares is also subject to availability and may have a minimum threshold for the transaction.

• Transfer the shares or funds: The fourth step is to transfer the shares or funds to the platform, depending on whether the investor is a buyer or a seller. The seller has to transfer the pre-IPO shares to the dealer’s or platform’s demat account, while the buyer has to transfer the funds to the dealer’s or platform’s bank account.

• Receive the shares or funds: The final step is to receive the shares or funds from the dealer or platform, after the verification and completion of the transaction. The buyer will receive the pre-IPO shares in their demat account, while the seller will receive the funds in their bank account.

Conclusion

Pre-IPO shares are an attractive and alternative investment option for savvy and risk-taking investors, who are looking for higher returns and early entry into promising and emerging companies. However, pre-IPO shares are also fraught with challenges and risks, such as overpricing, underperformance, lack of transparency, liquidity, and legal and regulatory hurdles. Therefore, the investors who are interested in pre-IPO shares should do their due diligence, research, and analysis, and consult a reliable and reputed platform, before investing in pre-IPO shares.

The author  is CEO & Co-Founder, Planify. Views are personal.

(Disclaimer: Stocks recommendations by experts or brokerages are their own and not those of the website or its management. Money9.com advises readers to check with certified experts before taking any investment decisions.)