Introduction to Unlisted Shares
There exist two primary kinds of investment options: listed shares and unlisted shares. The former is those that are quoted on the stock exchange. They thus lie open to easy transactions over buying and selling. In the case of the latter, there is no such privilege. Its market trading is conducted through an over-the-counter method. This implies that the buying or selling will primarily take place directly between buyers and sellers with the assistance of brokers in most of the cases.
This article is to investigate the nature of unlisted shares, risks encountered, and smart ways to invest in the business world.
What Are Unlisted Shares?
Unlisted shares are those in companies that are not on the public stock exchange. These stocks can either belong to companies that have never gone public via an initial public offering (IPO) or privately owned companies, which for one or the other reason have concluded that going public is not the right course of action. These shares can be accessed through private deals or through particular platforms set especially for trading unlisted securities.
The Process of Buying Unlisted Shares
There are several stages while purchasing unlisted shares. Unlike those listed shares where the trades are executed in a stock exchange like NSE or BSE, unlisted shares follow a different approach.
- Identifying a Target Company: The investor searches for such opportunities in companies like Swiggy or Lenskart that are preparing for an IPO.
The investor sends an order to investment banks or websites specifically offering unlisted stocks. Options include Stockify or InCred Money. Once a platform is selected, the investor places an order to buy shares. All details about the transaction are sent to a depository such as NSDL or CDSL, which updates the demat account of the investor. - Clearing and Settlement: The clearing corporation ensures the transaction settles incident-free, transferring ownership of shares and the corresponding funds to be debited from the investor’s account.
Nature of Unlisted Securities
Unlisted stocks are often difficult and require a good sense of the market. They tend to be associated with startups or smaller companies that have not met the criteria for listing on big exchanges. Some of the key characteristics include:
- No Open Market: Unlike listed shares, unlisted stocks do not have a centralized trading platform.
- Less Regulation: There is less regulation of these shares by bodies such as the Securities and Exchange Board of India (SEBI) leading to lesser regulation.
- Higher Risk: Since there is less transparency and liquidity, unlisted shares are more risky than those who are listed.
How to Buy Unlisted Shares
The purchase of unlisted shares could be done through several different methods. Here’s a step-by-step guide.
Direct Purchase from Companies
Investors can approach the companies directly if their plan is to purchase shares prior to an IPO. For the most part, this is done by contacting the investment banker of the concerned company.
Through Intermediaries
Investors can go through brokers or platforms that specialize in unlisted shares. Some platforms include Stockify, InCred Money, and SharesCart. Each has his or her size of minimum investment, pricing, and even seems quite different from one another.
Buying from Employees or Promoters
One can also buy unlisted shares through buying ESOPs directly from the employee or shares from company promoters. Now this really requires a network and some really good relations of trust.
Investing through AIFs and PMS
In addition to the above, AIFs and PMS can be a means to invest in unlisted shares. Each type of fund has professional managers in place to manage the investments and provides diversification.
Risk Awareness
Investing in non-listed shares exposes an investor to a host of risks. Non-listed companies are not perceived to be under strict regulation by the Securities and Exchange Board of India (SEBI). More frauds and market manipulation occur as an offshoot of this lack of regulation.
Generally, unlisted shares are illiquid, hence hard to sell when you want money. Lack of an open pricing mechanism also makes it quite difficult to discern the true value of such shares.
Risks Involved in This Investment
The following are the primary risks involved when investing in unlisted shares:
- Illiquidity: The selling of unlisted shares as compared to the listed shares is not easy, therefore investment cannot be liquidated easily.
- Uncertainty of Liquidity: Such companies do not offer much information about themselves as the companies that are listed, hence there is much uncertainty regarding the financial health of such companies.
- Loss of Capital: Incase the company performs worse or it fails to list the investors risk losing the amount fully invested.
- Lock-in Periods: Once the firm declares its intention for going for an IPO, it could impose lock-in periods when you are restricted from selling your shares.
Price Volatility and Unclear Prices
The second problem in these unlisted shares is differential pricing. The same shares available on the different platforms are priced differently, and therefore, the investors get confused and uncertain with the various prices they see. For example, if a share is sold to an investment banker at ₹3345, then that is the same share probably lying between ₹389 and ₹515 on the other platforms. In this case, there will be a risk of investing without proper information.
ALSO READ: Hyundai Motor India Limited IPO Introduction, Review Complete Details 2024
Most of the time, this lack of transparency leads to wrong investment decisions. Investors should be more cautious and make some sharp research prior to purchase to avoid such poor investment decisions.
Lock-in Periods and Implications
Lock-in periods are what you should first learn about if you would be investing in unlisted shares. Once an IPO is declared by a company, a shareholder who buys shares before the IPO is usually captive for six months from the date of the IPO. He or she is not allowed to sell any shares during that time. It may become a pain if the market goes up and comes down again.
The venture capital investors face six months of lock-in time since the date of acquisition of the shares and not from the date of the IPO; for alternative funds, there is no lock-in period at all. It is hence important to understand such nuances and work toward making an effective investment management strategy.
Liquidity Concerns
Liquidity is yet another major issue with investors in unlisted shares. These cannot be sold on a public stock exchange; hence a buyer cannot be easily found. This can lead to situations where an investor is unable to sell his shares at the time they want, which sometimes lead to potential loss.
Moreover, most over-the-counter platforms facilitating the buying and selling of unlisted shares usually have a low degree of liquidity. This means that to quit an investment might prove even stiffer. Therefore, the liquidity needs of investors should be carefully scrutinized before venturing into unlisted stocks.
Do You Need to Invest in Unlisted Stocks?
Considering all risks and factors associated with unlisted shares, an investor cannot go without a careful consideration of whether or not it is prudent to invest in such securities. Although investments can be high, especially when companies are ready to come out to the public, the risk levels are substantial. There is little regulation, price may fluctuate considerably, and liquidity concerns are at a peak level while considering investments in unlisted shares.
Investors must obtain thorough knowledge and be apprised of market conditions as well as be aware of their individual risk thresholds before investing in unlisted securities.
Conclusion
Investment in unlisted shares is an attractive proposition for all who are willing to traverse the intricacies of the market. Before making any decision, one needs to understand the risks involved, procedural nuances, and the dynamics of the market. Be it Swiggy’s shares or those of Lenskart; the onus lies on choosing the best and getting well-prepared for the unique challenges posed by unlisted investments.