Investing in pre-IPO companies is increasingly attracting retail investors’ interest in India of late with IPO subscriptions going through the roof. With PE investors, institutional buyers, HNIs already grabbing a bigger pie, a very little portion is left for retail investors to get a chance to own strong businesses and create wealth.
On Money9, we spoke to Abhay Doshi, founder, Unlisted Arena and Avinash Gorakshakar, Director Research at Profitmart Securities to decode the unlisted market for a better understanding of whether this space merits investors’ interest.
Unlike the trading of listed companies that happens on stock exchanges, trading in unlisted shares is an over-the-counter transaction. It is a person-to-person deal and is carried out by brokers.
Most of the unlisted shares exist in form of employee stock ownership plans (ESOPs) that are given to senior employees in the company. The shares are sourced when these employees want to encash their ESOPs and intermediaries negotiate the price with them and launch them in the unlisted market.
“Unlisted market is a fairly new opportunity which has so far largely been tapped by the HNI investors. It is generally not really meant for the retail investors as the ticket size is quite big amounting to Rs 25-30 lakh. A lot of brokers usually do it for large HNI clients but not retail investors really. Some brokers now have a pool of retail customers chipping in to buy say this one deal or one lot,” said Avinash Gorakshakar.
Abhay Doshi on the other hand said, “We have a very small ticket size of about Rs 25-50,000 depending upon the scrip so that more retail investors can take part.”
Both experts, however, believe that there is a huge opportunity for massive wealth creation in this space as here allotment is assured. One does not have to bother about the delivery of shares as everything is legal here and all payments are accepted in cheques. The unique product now is attracting even smaller retail investors.
Is the unlisted market the same as the grey market?
Grey market gets active for a company whose IPO is announced and it gives an indication of the demand for the upcoming issue, the premium it is commanding, etc. The grey market does not have any legal backing.
The unlisted market on the other hand is completely different. In the unlisted market, one can take the delivery of shares even before the company’s listing. These shares can be delivered to your de-mat account. It is completely legal to trade in the unlisted market.
Unlisted shares also attract long-term capital gains (LTCG) and short-term capital gains (STCG) based on the investor’s tax slabs.
What are the risks involved for retail investors?
While more investors are willing to take a risk and sit on the money invested for a longer period of time in the unlisted space, the valuation is something one must study.
Prices in the unlisted market are driven by sentiments; demand and supply have a part to play, parentage, and business of the company. If the valuations are high, unlisted shares will not have much appetite. If investors buy at the wrong valuations then they get stuck at the wrong end. Also if the company does not go public for a long time then liquidity could be a huge problem.
The fact that there is no government or regulatory backing, consumer protection regulation is a huge risk. One only has the consumer courts and no regulators like SEBI, etc. providing a protective shield for investors.
Should you invest in unlisted shares?
“Most educated investors now know and realise that bigger opportunity exists in the pre-IPO space. Companies like NSE are big names in the unlisted market. There is a lot of interest in these IPOs as the issue gets oversubscribed and most retail investors don’t get allotments. Unlisted space gives you an assured allotment and for long term investors it could offer huge opportunities of wealth creation in well-managed companies,” said Gorakshakar.
Watch the entire conversation here
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