Investing in an Initial public offer (IPO)has the lure of gains, especially if the company that plans to go into an IPO is an innovative, famous digital firm. Everyone scrambles for a piece of these IPO shares,but not all investors get an opportunity to invest in these companies. If the IPO shares get over-subscribed, not all the investors get allotted the shares. Most likely, investors turn out disappointed that they missed out on a company they were waiting for.
To avoid this disappointment, some investors purchase IPO shares ahead of the IPO.Investors might purchase shares of the company that are in the initial stage of preparation of IPO from unlisted markets. Like there are grey markets for consumer goods, luxury cars, and high-end apparel, there is an unlisted market for pre-IPO shares. The pre-IPO shares in the unlisted market do not have a market price.
The demand for these shares in the unlisted market determines the price of the shares.While the stock market is controlled by regulatory bodies like the securities exchange board of India, the unlisted market does not have a regulatory body. The market is unofficial but not illegal. The market has no rules or regulations. It is run by a small group of people based on mutual trust and understanding.
Investors look at the unlisted market to understand the demand for a pre-IPO share before it is listed on the stock market. The demand will help determine the price when the share is listed on its IPO. The price in which the share trades at this market is called the grey market price. The deal is binding but cannot be settled until the official begins.
You need to consult a registered and reputed stockbroker before investing in pre-IPO shares. Stock market has the option of investing in current IPOs and provides a list of future IPOs.You can view, among other details, an analysis of the top-performing IPOs and those that are closed.
Benefits of buying shares in the unlisted market
There is a broader range of companies to invest in the unlisted market. Small-sized firms or new firms cannot comply with all the requirements laid down by the regulatory bodies of the stock exchange. Or they might find the listing process too expensive because of all the extra fees.They might not be able to list themselves on the stock exchange and hence not earn capital from different investors. The unlisted markets provide a wide range of choices to investors for companies to choose from.
You can put your money in start-ups with multi-fold growth but do not have the money to list themselves. These companies have opportunities to make profits and grow later but do not have enough recognition for attracting capital from investors. The unlisted market helps them gain that recognition.
Unlisted companies can only issue their shares/securities in dematerialized form. It is the responsibility of the company to facilitate the dematerialization of all its existing shares/securities.Once you purchase an unlisted share, the purchase is reflected in your demat account once the transaction is successful.
There are many ways to buy stocks in the unlisted market. You can also buy stocks from employees and promoters of companies. Brokers, wealth managers, or a trusted investment bank will be able to guide you towards these employees and promoters. These transactions are called private placements.
Pitfalls of buying stock in the unlisted market
Shares that are bought in the unlisted market have a mandatory lock-in period of 6 months. That meant that if you buy shares of a pre-IPO company in the unlisted market, you cannot sell it for six months from when it is listed on the exchange.Only investors who have a long-term investment horizon of 6 months should buy from the unlisted market.
As the lock-in period is six months, an investor who has bought shares in the unlisted market cannot make listing gains on the day of the IPO.
The gain that is made on the sale of shares bought in the IPO market is taxable. Though the mandatory lock-in period is six months, if you sell your shares within one year, the gains made are a short-term gain. Short term gains made are taxed as per your income-tax slab.
If you sell these shares after a year of buying them, the gains you make are long-term capital gains, and these gains are taxed at a rate of 20% after indexation.
Unlisted shares are also volatile. You might not be able to sell these shares in a hurry if you want to.Investing all your money in these unlisted shares might be a considerable risk if you cannot sell the shares and make money out of them.
Shares on the stock exchange are constantly monitored and regulated, while shares in the unlisted market do not have a regulatory body. Lesser regulations might lead to more risks.
Most of the companies in the unlisted market are in the early stages of growth. Complete due diligence might not be followed. Due to the lack of regulation, the companies in the pre-IPO market may not divulge all their financial information. They might not perform up to expectation later, and these shares might not even yield dividends for you to benefit from. They might even suffer complete losses and face the risk of dilution.
Conclusion:
Investing in unlisted shares comes with its own set of risks.Before investing in them, you need to make your decisions wisely by consultingan experienced and trustworthy wealth manager or reputed broker.
Disclaimer:
ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 2288 2460, 022 – 2288 2470.Please note, IPO related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products.
All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purposes.
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