In the past decade, many Indians have embraced the equity culture and started investing in stocks and equity mutual funds. Some analysts feel that retail investors should put money in unlisted shares if they want outsized returns. Other financial advisers say retail investors should not dabble in unlisted shares for the simple reason that the risk they entail is not worth the rewards they offer.
ET Online
Investors in Tata Technologies were overjoyed when the stock got listed in November 2023. At Rs.1,314, the closing price on listing day was more than 160% above the issue price of Rs.500. Not all investors made a killing though. A few weeks before the IPO opened on 22 November, Tata Technologies shares were trading at around Rs.860 apiece in the unlisted market. The investors who bought these shares at that price saw their investment go up by only 53%.
Even 53% was not theirs for the picking, thanks to a rule that disallows pre-IPO investors from selling their holdings till six months after a stock is listed. The lockin period for Tata Technologies ended last week on 30 May, but the share price is now Rs.1,030, which means the gains are now pared further to less than 20%.
Here’s some cold comfort for the early bird investors in Tata Technologies. They are luckier than those who bought Paytm shares at Rs.3,200-3,400 in September 2021, 6-8 weeks before the company launched its IPO. The first shock for Paytm shareholders came when the company announced the IPO price band, which was lower at Rs.2,080-2,150. Then the stock plunged 27% on listing day, and pre-IPO investors could do nothing but watch in dismay. By the time the six-month lock-in period ended on 18 May 2022, the share price had fallen to Rs.535, almost 85% below the price in the unlisted market, in October 2021.
Welcome to the volatile, uncertain and opaque world of unlisted shares. Though low on transparency and fraught with high risks, this segment of the capital market is humming with activity. Last month, the Primex 40 index, which tracks the performance of 40 top unlisted companies, hit an all-time high. Much of this is thanks to the ease of investment provided by online investment platforms. Anyone with Rs.5,000-10,000 and a demat account can now invest in unlisted stocks.
There are several reasons why unlisted shares are getting so much attention. Many IPOs that came out in the past 2-3 years have given enormous returns to investors. However, due to the huge rush of investors, IPO allotment is only a fraction of the number of shares applied for. To get around this problem, investors want to buy stocks ahead of the IPO.
Interestingly, the IPO market itself has been a mixed bag in the past few years. While the hits (Tata Technologies, IREDA, Utkarsh SFB, Cyient DLM) have stayed in the memory of investors, the lemons (Paytm, LIC and Delhivery) have been quickly forgotten. Should you invest? In the past decade, many Indians have embraced the equity culture and started investing in stocks and equity mutual funds. Some analysts feel that retail investors should put money in unlisted shares if they want outsized returns. “Every retail investor should have at least 5% of his equity portfolio allocated to unlisted shares. So, if your equity portfolio is Rs.10 lakh, at least Rs.50,000 should be in risky assets,” says Rahul Ghose, CEO of Hedged.in. “Given that this allocation is only 5% of the equity portfolio, the risk is negligible, but the opportunity is huge because Rs.50,000 has the potential to become Rs.5-6 lakh,” he adds.
Unfortunately, data does not support this argument. In the past three years, the Primex 40 has beaten the benchmark Nifty 50 and matched the returns of the broadbased Nifty 500, but its returns are nowhere near that of the Nifty Midcap 100 and the Nifty Smallcap 250 indices (see chart). True, some unlisted stocks have performed well in the past year, but many others have declined (see tables).
Unlisted shares created wealth … The biggest winners in the past year.
but investors also lost money These shares were the biggest losers in the past year.
The other problem is that Primex 40 has witnessed far higher volatility than the other indices. After Covid started showing signs of receding and the IPO market revved up in mid-2021, the index shot up 70% within six months. However, it fell in 2022 and remained in the doldrums for nearly 18 months, before moving up again in early 2024. In contrast, the Nifty indices have been more stable and demonstrated lower volatility.
Other financial advisers say retail investors should not dabble in unlisted shares for the simple reason that the risk they entail is not worth the rewards they offer. “The universe of listed stocks provides retail investors enough opportunities to earn stable returns. Why allocate money to under-researched and obscure stocks when they can’t promise outsized returns?” asks Deepti Goel, Associate Partner, Alpha Capital. Beware of under-researched and overhyped scrips The six-month lock-in period may be the least of the problems associated with unlisted stocks. Bigger risks are posed by the paucity of research and lack of transparency in pricing of the shares. Unlike bluechip listed stocks, which are tracked by dozens of analysts, unlisted stocks are not covered by brokerages and equity research firms. Platforms like World Wisdom India provide information on the unlisted companies, but stay away from recommending stocks.
In the absence of coverage by experts, investors have to do the research themselves or depend on tips from finfluencers. It is here that investors can get misled by hype. Just two years ago, Edtech giant Byju’s was valued at $22 billion (Rs.1.8 lakh crore). However, controversies have eroded its value. Earlier this year, BlackRock valued it at $1 billion (Rs.8,300 crore), down 95% from its peak.
Grab the early bird advantage... Investors in these unlisted stocks made gains on listing.
but don’t buy into the hype These stocks were trading at high prices before the IPOs.
Readers will note that the unlisted market is very small, so the price discovery mechanism is not very efficient. Even seasoned investors can get it horribly wrong. When Thyrocare Founder Arokiaswamy Velumani sold his venture to PharmEasy for Rs.4,500 crore in 2021, he reinvested Rs.1,500 crore in shares of API Holdings (parent company of PharmEasy) in the hope of growing his wealth further. However, the valuation of API Holdings has plummeted 92%, from Rs.77,000 crore in 2021 to Rs.6,142 crore now. Shares of the unlisted company, which were trading at Rs.135 at the time of the deal in November 2021, are now priced below Rs.10.
Low on liquidity, transparency Close to half of the 600-odd unlisted shares are not traded regularly. In some cases, there are no buyers (or sellers) for months on end. This means investors can’t enter or exit these counters at a price they want to. “Liquidity is limited to nil in unlisted shares,” warns Rahul Bhutoria, Co-Founder & Director, Valtrust.
The other problem is the lack of transparency. Listed companies are required to inform stock exchanges about any development that can have an impact on the share price. This includes new orders, acquisitions, or the exit or induction of key personnel. They are also required to announce quarterly results. There are no such mandatory requirements for unlisted companies. Audited financial statements can be filed even 12-15 months after the end of the financial year.
In some cases, where investors have invested through an organised platform, angel fund, etc., they could insist on specified disclosures at periodic intervals. “These are only contractual obligations. Practically speaking, if the company does not adhere to these, taking action against the same is difficult,” says Samir Sheth, Partner & Head, Deal Advisory Services, BDO India. Mind the costs, and the tax Investors should also be careful about various costs, including the brokerage fee and transaction charges. The brokerage rate for unlisted stocks varies across players, and there is little transparency around it. “Most brokers sell unlisted shares after adding their margin to the share price,” warns Krishna Patwari, Founder & Managing Director, Wealth Wisdom India.
“What investors should be especially mindful of is the difference in the tax rules. Listed stocks and equity funds have several tax advantages over unlisted stocks,” says Chartered Accountant Nishant Khemani. Firstly, unlisted shares have to be held for at least two years for gains to be treated as long-term capital gains. For listed stocks and equity-oriented funds, the minimum holding period is one year. Secondly, long-term capital gains are taxed at 20% after indexation, compared to 10% for listed stocks. They are also not eligible for the Rs.1 lakh exemption enjoyed by listed stocks and equity funds.
Short-term gains are added to your income and taxed at the slab rate. Somebody with a taxable income of more than Rs.10 lakh will have to cough up 30% tax or more on such gains. Short-term gains from listed stocks are taxed at a lower rate of 15%.
Welcome to the volatile, uncertain and opaque world of unlisted shares. Though low on transparency and fraught with high risks, this segment of the capital market is humming with activity. Last month, the Primex 40 index, which tracks the performance of 40 top unlisted companies, hit an all-time high. Much of this is thanks to the ease of investment provided by online investment platforms. Anyone with Rs.5,000-10,000 and a demat account can now invest in unlisted stocks.
