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

Sebi has also reminded investors that if they choose to transact on these platforms, the investor protection framework administered by Sebi would not be applicable for such sales and purchases. The development assumes significance as currently thousands of investors are picking up unlisted companies in expectation of Alpha returns.

What unlisted shares are being bought by investors and from where?

Currently, several specialised brokers who are not registered with Sebi are offering such shares. They are largely small establishments with no known connections to any well-established market intermediaries. Generally, shares on offer include those companies which have announced or have plans to list.

Investors want to get into these stocks ahead of the IPO to make steeper gains. For instance, prior to Swiggy IPO, several investors had bought the shares through unlisted platforms. Even shares of Oravel Travels, which runs the portal Oyo, and Imagine Marketing India, which owns the brand Boat, are seeing popular demand currently, websites of various unlisted share brokers showed. The trend is not confined to tech stocks. Even large traditional companies are seeing good demand. Investors have been buying NSE shares in anticipation of an IPO.

Shares of unlisted companies, such as NSE, Chennai Super Kings(CSK) and HDFC Bank-promoted HDB Financial Services, and scores of startups planning an initial share sale are being sold to investors by certain brokers.

Is it illegal to transact in unlisted shares?

For an individual, it is not illegal to either buy or sell securities of companies which are unlisted. The illegality largely stems from the side of the broker which is matching the buy and sell orders. Such order-matching is construed to be acting as a platform. Only stock exchanges are allowed to do so in India.

“Section 19 of the SCRA prohibits stock exchanges, except the recognised ones, from doing so. The scope and definition of the term Stock Exchange is wide enough to capture the activities of these platforms. There are also other provisions in SCRA which prohibits acting as a dealer in securities, except by a recognised stock exchange,” said Jayesh H, co-founder, Juris Corp Advocates and Solicitors.

What are the regulatory risks for investors?

The brokers who offer such services are not Sebi-registered intermediaries and the transactions don’t happen under the purview of a stock exchange . Hence, in case of any loss/theft of shares or issues in receiving payment proceeds, there is no recourse for the investors through the Sebi and stock exchange route. Also, stock exchanges compensate investors for share and broker- related frauds through investor protection funds. Such protection will also be not available on unregistered platforms. “Investors should be mindful of insisting on DVP (Delivery versus Payment) and not take settlement risk,” Jayesh added.

What are the regulatory risks for brokers offering such securities?

Sebi’s clarification makes it amply clear that offering such securities is in violation of rules. In the past, Sebi had issued similar clarifications on virtual trading platforms and certain other platforms which were selling unregulated options contracts. Legal experts say Sebi has even powers to take action against such platforms. “Sebi, being the primary regulator for the securities markets, can impose penalties and restrictions on such platforms operating outside its regulatory framework,” said Manendra Singh, partner, Economic Laws Practice. He added that investors should conduct a due diligence through the websites of stock exchanges and public records to check if a company is listed or proposed to be listed.