What are unlisted shares?
Unlisted shares of pre-IPO companies are simply stocks that aren’t listed on an exchange like the Bombay Stock Exchange. Organizations must perform due diligence and be persuaded by the company before even considering acquiring this type of stock. Unlisted shares are shares that have not been sold to the public yet. Before a company is traded on a stock exchange, they usually have only one class of shareholders, which is typically the CEO and early employees. They can offer unlisted shares at the time of the initial public offering. These shares are typically less volatile than pre-IPO equity and sometimes receive discounts from accruing interest before an IPO. They are different than pre-IPO shares because unlisted shares include all pre-money venture fundings. When an IPO is finally made, these unlisted shares will be traded on exchanges just like any other stock, but they will have significantly more anticipated hype.
Prior to their initial public offering (IPO), these firms are typically private, with a well-established business model and recurring revenues, with the goal of going public to raise more cash or to release current shareholder value. While many investors prefer to wait until a company has gone public before investing in it, there are ways to invest in a company before it makes its initial public offering (IPO)
However, there are advantages and disadvantages to investing in an emerging firm before it goes public. In addition, it’s critical to know how to get started and what to expect along the way. Pre-IPO and unlisted share investments, according to experts, should only be undertaken by investors with a high-risk attitude or profile.
Before a firm is launched on the stock markets, an investor may participate in its development by purchasing pre-IPO shares. There is potential value unlocking and upsides in a solid business when it is listed, and investors have the assurance of getting involved in a firm that may have a strong IPO demand and hence low/no allocation during the IPO process when the firm is listed.
Early investors profit the most before the firm is listed on the stock market from unlisted share investments, which is a high-risk investment with the potential to generate much larger returns. There are many private companies in the new era (such as e-commerce, technology, fintech, etc.), and allocation to them will assist investors to diversify their stock portfolio.
Over-subscriptions make it harder to get an IPO allocation. In contrast to publicly traded corporations, investors get access to high-growth digital startups. And unlisted stock prices are less volatile than listed stock prices.
Before a company becomes public, how can you invest in it?
Individual investors used to have no access to unlisted stock options since they were only available to huge organizations and funds. Now, however, individual investors may participate as well. Shares of unlisted companies may be acquired via the use of intermediaries and platforms that specialize in the acquisition and placement of unlisted stocks and can assist in the trading process. Platforms and intermediaries acquire employee stock options (ESOP), current investors’ shares, and make them available to new investors.
A Demat account may be used to purchase unlisted shares, and the transaction takes place off-market (not on an exchange). As a result, dealing with reputable/trustworthy intermediates is critical to minimizing the danger of dealing with a third party.
When deciding on a firm to invest in, it’s critical to understand the business strategy, leadership team, financial performance, and business update in the annual report. As a result, dealing with intermediates who can provide you with business and market information as well as ensuring stock availability is preferable to using price discovery alone.
When considering an investment in an unlisted company, investors should consider the following factors:
The liquidity of many unlisted firms is significant since they do not have a big number of buyers and sellers.
It’s a good idea to think about the basics while investing in unlisted stocks, just as you would when investing in publicly traded stocks. Brokers, corporate websites, and MCAs all have access to company information.
Firms approaching an IPO often have a higher value for investors, significant liquidity, and the ability to be sold after listing. Post-listing, the capital gains tax is cheaper compared to unlisted corporations that are taxed based on indexation slabs and have three years for LTCG advantages of taxation.
Buying unlisted shares can be an excellent investment opportunity, but there are several things to consider before taking the plunge. Unlisted stocks depend on asymmetric information – stakeholders cannot tell what will happen in the future based on either looking at within company data or analyzing the details of the company. Without transparency, unlisted shares can carry misleading prices. However, it is possible to find unlisted shares that are undervalued, exciting growth/high ROE companies with outstanding management teams.
Buying unlisted shares of pre-IPO companies is a more complicated and risky proposition that is celebrated by the tech sector as innovative and disruptive, but compliance with regulatory requirements necessitate due diligence.
Babli Investment helps young investors understand the pros and cons of unlisted shares of pre- IPO companies and helps them with formalities like opening DEMAT accounts, etc.