As numerous firms prepare to become public, many investors have been purchasing unlisted shares of pre-IPO companies. Investing in equities in the grey market, also known as the unlisted market for unlisted shares — carries risks, but it can also be profitable, according to market analysts.
If you’ve been planning to invest in unlisted shares, we’ve put together a comprehensive guide that has everything you should know before jumping into this market.
What Are Unlisted Shares
Unlisted shares, often known as over-the-counter (OTC) securities, are any security or financial instrument that is accessible for sale on over-the-counter marketplaces.
Unlisted firms are often not traded on any recognised stock market. This is due to the fact that smaller or younger businesses may not want to or are unable to comply with certain standards such as listing costs, market capitalization, and so on.
The Characteristics of Unlisted Shares
This category has its own market, where buyers and sellers transact through dealers.
1. Dematerialized: Unlisted equities, like listed stocks, are transferred to your Demat account. The status of unlisted shares purchased through a depository participant account, in which they are available at face value, can be checked.
2. Price Mechanism: Unlisted markets are a pure supply and demand game that puts an investor’s judgement to the test. As exchanges are not involved in this method, fair price discovery is constantly scrutinised. The price of a share is determined by mutual agreement between the dealer and the customer.
3. Growth factor: Unlisted markets allow investors to purchase shares in companies that are either technologically or operationally novel. As a result, the cost is significantly lower than the advertised space. If you want to watch how a firm evolves over time, unlisted space is for you.
4. Liquidity concerns: In unlisted marketplaces, liquidity concerns are common. Investors, on the other hand, seldom liquidate their stake in an unlisted market.
The Advantages of Investing in Unlisted Stocks
The unlisted stock has its own set of benefits, which are numerous. The advantages of unlisted stocks are as follows:
The unlisted stock market is unstable, yet this disadvantage may be transformed into an advantage for unlisted stock investors.
Due to the general illiquidity, the stock price either stays undervalued or overpriced for an extended period of time. You should try to invest when the market is undervalued. Then, in the long run, you may make big gains, especially if the stock is eventually listed and the firm anticipates high returns.
No Immediate Concerns
Unlisted equities are not suitable for short-term investing and should not be traded. So there’s no rush to acquire and sell them in order to make a buck. You may just conduct your study, look for the greatest unlisted stock, invest, and wait. There’s no need to clench your teeth every time the market opens or shuts.
You only have to wait until the right moment, when the stock price reaches your target level, and then sell it and get a lump sum amount transferred in your funds.
As investors, we are all aware of the need of diversifying our investment portfolios. Isn’t it true that the more you diversify, the lower the risk of your investing portfolio? Unlisted equities are either non-volatile or only modestly volatile. So, if you have extremely volatile stocks in your portfolio, you may minimise the risks by adding some strong unlisted stocks to it.
Not only would this reduce risk, but it would also enhance the likelihood of better profit margins.
Investment in the Closed Market
Unlisted equities are traded over the counter, abbreviated as OTC. As a result, you have direct interaction with the broker from whom you are purchasing or selling shares.
This, in turn, contributes to the development of trust for future investments. When there is a good chance to invest in unlisted shares or other securities, the intermediary might notify you.
You Can Negotiate
There are an infinite number of buyers and sellers on the stock exchange. However, there aren’t many on the OTC marketplace. So, if you believe a stock will be worth a particular amount and wish to purchase or sell it at that amount, you have the authority to bargain directly with the middleman.
The Risks of Investing in Unlisted Shares
Now that you’ve learned about the benefits of investing in unlisted securities, let’s look at the drawbacks.
There Is No Regulatory Structure
People who buy unlisted shares do not have the same level of security and protection as those who invest in listed equities. There is always a significant counterparty risk. For example, after making the purchase order, you must transfer the funds to the intermediaries’ account. The shares are then transferred within T+3 days.
If the intermediary decides not to transfer the shares, you will simply lose your money. Furthermore, unlisted businesses are not required to follow the strict requirements of the Registrar or other related organisations when selling their shares. Prices can also be heavily influenced by middlemen in the absence of any type of regulating agency.
There Is No Official Trade Market
These shares are traded over the counter, which means they are not traded on a regulated stock exchange. OTC does not exist in the physical world. It is solely between the two parties involved in the transaction.
Investments Are liquid
Unlisted shares are pretty unstable. They are not traded on a stock market with many buyers and sellers.
If you need to purchase or sell something, you must have a specific contact point, which is the middleman. If the middleman declines to purchase, you must seek alternative options. As a result, these shares cannot be exchanged smoothly or readily. It is a time-consuming and labor-intensive technique.
The firm is always in a state of flux since it might fail at any time. In addition, the price of the unlisted shares is unknown. This is due to the fact that the price of these shares is entirely reliant on assumptions.
So, now that you’re aware of the dangers associated with this investment, let’s So, now that you’re aware of the dangers associated with this investment.
Types of Unlisted Shares
Investors might examine the following facts to better evaluate the company’s business prospects:
1. Parent Backed: These firms are controlled by a powerful and well-known parentage that is already listed on stock markets. For example, Reliance Retail is Reliance Industries’ retail arm, HDB Financial Services is a part of the HDFC group, and Tata Technologies is supported by Tata Motors.
2. New Age Companies: These are internet-based businesses, often known as startups. These firms specialise in specialised markets such as e-commerce, gambling, and finance. OLA, Paytm, Nykaa, and Mobikwik are prime instances of this.
3. Independent Businesses: This category comprises firms with traditional business methods but no parentage. They are independent commercial entities that are not subsidiaries of any other listed firm. Examples include B9 Beverages, Bazaar India, Cochin International Airport, and Hicks Thermometers.
How To Invest In Unlisted Shares
You may invest in stocks of some of India’s best unlisted firms in a variety of methods. Among the most prevalent ways are:
Investing In New Businesses & Intermediaries
A pre-IPO firm is currently unlisted but plans to go public in the future. You may invest in pre-IPO businesses since the shares are sent straight to your Demat account, even if the transaction is off-the-record and the exchange is not involved. The main thing to look for when selecting a reliable intermediary is someone who can effectively assist you conclude the deal while avoiding any counterparty risks.
Alternatively, you might invest in unlisted start-ups with the potential for multi-fold development in the future. These firms may be off the radar right now, but they have the potential to deliver earnings and development in the future. The minimal investment amount in most start-ups is about Rs 50,000 to get the equities deposited into your Demat account.
Purchasing ESOPs From Workers
Some brokers link you with workers of businesses who sell their shares at a fixed price after a specific length of time. This is one method of purchasing shares in India’s top unlisted companies.
Purchasing Stocks From Promoters
To invest a large interest in a firm, contact a reputable investment bank, wealth manager, or broker who can teach you how to calculate the share price of an unlisted company. Furthermore, they will assist you in directly connecting with the company’s promoters and will introduce you to a list of unlisted firms in India in 2021 and 2020. Private placements are the term for such deals.
Invest In PMS and AIF
Portfolio Management Systems, often known as PMS, are professionally managed investment portfolios. In this case, the portfolio manager modifies the weight and composition of the portfolio based on market developments in order to optimise the investors’ net returns. You can profit from investing in unlisted shares in India through PMS plans that include unlisted equities in their investment strategy. This is far more secure than direct purchasing because:
You can spread the risk among the portfolio’s components.
Based on the performance of the stocks, the portfolio manager dynamically removes and adds them.
Who Is Eligible To Invest In Unlisted Shares?
Previously, only a few individuals could purchase pre-IPO stock interests, but the stage is now open to everybody. However, nothing is that simple for smaller investors with low cash because an investment, even today, goes through many rounds of fundraising and retail players can only participate once a specific threshold is reached.
So, when a firm seeks money in its early stages, it goes through seed capital funds, where worldwide funds support the company while endorsing its business plan. There are several forms of seed investment, such as series A, B, C, D, and so on. Seed investment investors include Ant Financial, Softbank, and Alibaba.
Following this, angel investors and venture capital firms acquire a stake in the company, which is only focused on profit. Then there’s private equity, which allows regular investors to engage. When compared to early-stage investors in seed fundraising rounds, they purchase interests at a higher valuation.
As a result, just because you are purchasing shares in an unlisted market does not guarantee that your purchase cost will be particularly low. Though it is very likely that you will find companies at very low values, prudent pricing is not a certainty. Following private equity, firms often aim for primary markets, where the share is available to everybody.
Investing in Unlisted Shares: Best Practices
Here are some of the most important rules to follow as an investor:
- You must establish whether or not the company in which you are investing is registered with the Register of Companies. You can do so by contacting the Registrar of Companies.
- The firm must also be well-known. There are hundreds of similar corporations that have been registered. However, a few of them are well-known.
- If someone is giving you a far too large return, think about it carefully. Do not fall for it since it is generally not worth it if it appears to be too good to be true.
- Investigate the company’s basics. Check to see if the firm is consistently profitable or, at the very least, not losing money. Check to see how long the firm has been in operation.
- Before investing in its unlisted shares, inquire about its management. You must delve further to learn about the management’s performance, business decision-making, and other aspects.
- If the firm has previously released a prospectus, get and study it before making an investment.
- Investigate the company’s intentions and how they may influence the company’s growth .
Frequently Asked Questions About Unlisted Shares
Q. What exactly is diversification?
Diversification entails holding a variety of investments with varying risk and return characteristics in your portfolio.
These investment vehicles must have no or little co-relationship. For example, when the stock market falls, the price of gold rises. This is due to the fact that they are unrelated.
Q. Should I invest in unlisted shares just because they appear to be highly promising?
If an unlisted share appears to be highly promising, you may conduct research to determine whether it has solid fundamentals and then only invest in it.
Q. Do I just trust an intermediary and invest in an unlisted stock?
This is not recommended. When investing in unlisted stock, first pick a stock after conducting extensive study, then negotiate with the middleman and finally invest.
Q. What are the principles of a business?
A balance sheet, profit and loss statement, trading account statement, cash flow statement, management choices, corporate measurements, and many other factors are all part of a company’s basics.
Q. Who is the Company’s Registrar?
According to the Companies Act of 1956, the Registrar of Companies is the official entity that registers each company in India.
Investing in unlisted shares is risky, no question, but the rewards are enormous.
So, if you carefully investigate the firm and ensure that the fundamentals are strong enough to propel the company to success, you may make your move and buy in unlisted shares. Contact our experts at Unlisted Deal to learn more about your options and for guidance that can provide you with promising returns.