Imagine you missed out on a stock that provides a 100% gain at the outset of its listing and initial public offering (IPO). Yes, it hurts. You regret not having purchased the stock before it was released onto the market. This is a common feeling for investors, especially when they see certain shares giving massive returns even after their listing.
But here’s the exciting part: even if you missed the opportunities, you can still benefit from similar rallies.
But the question arises, How? The answer lies in investing in their peers before they go public. For instance, if you missed Zomato, you might consider Swiggy before its IPO, or if you missed BSE, you could think about NSE. The same applies to NSDL if you missed CDSL. All it means is to invest in UNLISTED SHARES.
What are Unlisted Shares?
Unlisted shares refer to securities or financial instruments that are traded on over-the-counter (OTC) markets rather than on formal stock exchanges. These are often known as OTC securities.
How to make Investments in Unlisted Stocks?
It becomes a very puzzled question that how can we invest in unlisted shares. There are several ways but difficult I must say. So it becomes important to understand all the aspects related to unlisted shares.
Investing in Startups
India's startup scene is growing fast, offering great opportunities. You can invest directly in promising startups by putting in a minimum of ?50,000. The shares will be credited directly to your Demat account.
Buying Employee Stock Options (ESOPs)
Many employees of unlisted companies get stock options at a lower price. Some brokers help sell these ESOPs to outside investors, allowing you to invest in unlisted companies indirectly by purchasing these shares.
Acquiring via Promoters
Through private placements, you can purchase shares directly from the promoters if you'd want a bigger ownership position. Some top brokers, Wealth Managers or Investment banks usually handle these types of transactions.
Putting Money Before IPO:
Purchasing shares before IPO is typically the best course of action for the majority of regular investors since it provides exceptional growth potential prior to the company going public.
These companies have strong growth potential and are getting ready to go public. Investing early in these companies can offer substantial returns once they list on the stock market. The shares are credited directly to your Demat account, but it’s essential to work with a reputable intermediary to ensure a safe transaction.
One of the key ways to identify which companies are preparing for an IPO is to regularly check the SEBI website for Draft Red Herring Prospectuses (DRHP). If a company has filed its DRHP, it means they are planning to go public soon, pending SEBI’s approval.
The Dangers Attached
Purchasing unlisted shares offers a number of benefits, but there are drawbacks as well. Before joining the field, it's critical to be aware of these potential disadvantages.
1. Risk of Counterparties
Liquidity presents the biggest concern for unlisted shares.Purchasing unlisted shares could be difficult since it might be difficult to sell them later. That's why it's often recommended to invest in pre-IPO companies, as the IPO helps attract buyers and reduces liquidity issues.
2. Limited Regulation
Unlisted shares are not under the purview of any particular regulatory body, in contrast to listed shares, which are regulated by SEBI.Investors may face more risks and uncertainties as a result of this monitoring deficiency.
3. Price Fluctuation
Compared to public shares, unlisted shares are more volatile in terms of price. For example, OYO's GMP increased as the company was preparing for IPO. However prices fell down when OYO decided to delay the IPO. In the absence of a lower or higher price restriction, large variations are possible. If you find a buyer during a downturn, they might negotiate heavily, impacting your returns.
Final Thoughts: How to Invest Safely
Many platforms offer the opportunity to invest in unlisted shares, but trusting them can be a challenge. That is why I will not name the platforms but if you’re keen to invest, it’s safer to work with established brokers like Motilal Oswal. These brokers can guide you through the process, help you find sellers, and ensure the transaction is completed securely. Always check the company’s financials and shareholding pattern before making a decision, and once you’re sure, follow up on SEBI’s DRHP filings to confirm the IPO plan
