Want to invest in NSE’s unlisted shares? Know the procedure, pros and cons

The value of unlisted shares

One of the reasons why investors on the lookout for ‘extra’ returns chase unlisted shares is that they provide an opportunity not available on recognised stock exchanges. “They could be available at discounted valuations. Investing in unlisted stocks is similar to putting your money in listed stocks in the sense that investors want to own good assets available at good prices,” said Vijay Kuppa, CEO, Incred Money.

The key is these investors’ belief in such companies’ growth potential. “Essentially, these investors are betting on growth — that the company will list and its value will surge,” said Rochak Bakshi, founder, True North Finance, a Pune-based financial planning firm.

Also read: Want to own a piece of an unlisted company? Know the pros and cons before investing

Invest through online platforms, wealth management firms

With the advent of a clutch of wealthtech firms and portals that list unlisted stocks, retail investors now have access to online platforms that facilitate such transactions. “You can invest in unlisted stocks through online as well as offline routes. For instance, at InCred Money, we offer an online channel. Then, there are other intermediaries, including smaller players, wealth management firms and their IFA (independent financial advisor) channels,” said Kuppa.

Besides such intermediaries, you could consider approaching employees who may have received shares of the company in question through ESOPs (employee stock ownership plans). “It is also possible to buy shares directly from promoters of startups, though there is usually a minimum investment required,” said Bakshi.

Once you have identified the intermediary, step two is to complete your KYC (know-your-customer) process on the platform. You will need your permanent account number (PAN) and Aadhaar details. “Payments can be made on the platform via a payment gateway, which is more secure and offers certainty around fund transfer. Within a couple of days, the shares are transferred to the investor’s account—it’s a demat-to-demat transfer,” said Kuppa.

Also read: What Sebi’s new clarification means to investors buying unlisted shares

Understand the risks, tread cautiously

Despite the return and growth potential some of these unlisted or pre-IPO companies may offer, you must be aware that the space is not regulated by watchdog SEBI. “This is completely in the grey zone and one needs to go through only trusted intermediaries who can give professional advice,” Bakshi cautioned.

Beware of the firms that offer such stocks at prices that are too good to be true. “In the past, there have been cases of default, where sellers backed down from their commitment to sell as they, in turn, could not purchase the shares at reasonable prices,” Kuppa said.

Bear in mind the risks associated with investing in pre-IPO companies. Liquidity is a key risk, as the exit is not as simple as selling your stock or mutual fund holdings. “You should invest only if you can stay invested for five years, and not just for listing gains. In any case, pre-IPO investors have to be prepared for a six-month lock-in period post listing,” Kuppa pointed out.

Trust your research over hype

Since savvy investors are typically aware of the risks involved in unregulated investments, it is likely that they earmark only a small proportion of their portfolio to buying such stocks. Even if your exposure is low, you ought to treat this exercise like investing in listed stocks and study ratios and other parameters. “If you were to buy because of FOMO (fear of missing out) and social media hype, chances are that you would buy stocks with unreasonable valuations. So even if the share does list later, you could still face large losses,” said  Bakshi.

Kuppa reiterated the need to be cognisant of market risk—losses due to price fluctuations and changes in company fundamentals, as in the case of listed companies.