I recently discovered that shares of certain companies float around the market even before they go public. Such shares, called unlisted shares, are traded outside the normal exchange route. They are private companies and do not need to disclose their financials publicly (few companies may choose to release annual reports voluntarily). Common investment knowledge dictates that each fund raise round is done to usually increase the valuation of the company. So if the shares of a company are available and bought before the IPO fund raise, it could lead to a decent short term profit. I couldn't have been more wrong. This post aims to prevent other traders from making same abrupt mistakes I made. So lets demystify and understand about unlisted shares.
It is known that each trade involves a buyer, seller and a enabler who matches the buyer with the seller. The buyer could be anyone in this case. Its the seller and the gateway or enabler that we need to understand about.
Seller: Sellers in this case could be any entity who currently owns the shares of the company. It could be an employee who has ESOPs, a promoter of the company or someone who has already purchased the shares of the company before.
Marketplace: Certain entities bring together sellers of a company's shares and list the company on so called grey markets. These grey markets are not as closely regulated as exchanges. They automate transactions of shares from seller to buyer and charge a margin as transaction costs which is analogous to brokerages.
Unlisted shares can be bought from grey market at a premium. There are various platforms like Precize, Stocx, UnlistedZone etc. Note that the prices at each platform varies greatly. You simply open an account in one of these or other marketplaces for unlisted shares, check the availability of the company's shares you want to buy and then pay the price through UPI, NEFT, etc.
I found the prices of Precize quite lower than other marketplaces followed by Stocx and UnlistedZone. I personally purchased a few shares from Precize. If you also want to go with Precize, you can open your account here.
One thing you need to make sure while selecting the marketplace for buying unlisted shares is the customer service they provide. These transactions could go wrong more often than you think and a good customer support team will definitely help you move forward in resolving the issue.
Coming to the main point - Should you buy these shares? Will they provide a short term profit? I'll divide the answer for two types of investors:
For short term investment: The clear answer is no. It looks like the prices will increase at IPO and you will get the listing gains, but it would be foolish to do so. The prices on these portals are the grey market prices. The IPO prices, even cutoff bids would be lower than the grey market prices, if the company is good. For example. Company X's unlisted shares are being traded around Rs. 1000. The share price at last valuation would be Rs. 250. The IPO price band would be around Rs. 450-500. This is the case I have seen the most. You pay Rs. 1000 thinking the IPO price band would be higher but no, their price you are buying at is approximately the listing day price after which, if the prices further drop, you would be in loss. It makes much more sense to apply for the IPO of a company which has strong difference between the IPO cutoff and the Grey Market Premium or GMP (the difference between the cutoff price and the current grey market price). Additionally, you also need to consider the transaction charges (or brokerages) which are huge multiples of brokers of public companies. Best case scenario you might end up evening out or having a low loss. Worst case scenario, the company might not go public and you would be stuck with the shares or in a huge loss.
For long term investment: This is worth considering if you have ample spare capital. Even then you should not employ heavy part of the capital in such investment. Please keep in mind that the price you are buying the shares at is not the one at which the company was valued in the last fund raise or valuation, but current valuation of the company with a possibility of a small added premium. If you find a high growth company and want to make a long term investment with a totally idle capital, you could possibly go for this option.
Personally, I would still suggest investing in open markets as they always provide opportunities to generate your target returns if researched properly.
There's no such thing as a free lunch
As the name suggests, these are grey markets, not white, nor black. They are unregulated. Marketplaces here are not official. It is not illegal to take trades here but if in a issue, market regulators like SEBI won't be able to help retail investors.
Unofficial but not illegal
Unlisted shares are not traded in public market. You can buy them through marketplaces like Precize, Stocx or UnlistedZone. The prices at any given time would differ greatly among these different marketplaces. It is not worth aiming for short term gains by buying shares before IPO aiming for listing gains. This could be considered for long term investment but again, not recommended. When it comes to legality of buying such shares, all that can be said is that it is unofficial and unregulated but not illegal
Disclaimer: At the end I do need to mention that I am not a SEBI registered or authorized person. This blog is just to share my personal experiences