Unlisted shares have high potential to deliver supernormal returns carrying the similar risks on downside.
For returns we have witnessed shares such as NSE, Tata Technologies, Chennai super Kings deliver good returns to the investors. On the other hand, we have also witnessed the downfall of stocks such as Nykaa, Zomato, Paytm, Policy Bazaar etc,. that got listed on stock exchange and another company is Pharmeasy, which has shelved off its listing plan on account of fear of poor performance and withdrew its IPO application from SEBI.
Therefore, it is very important to understand the characteristics of the unlisted companies, the risk associated with it before investing any penny in the same.
Unlisted share are the shares of the companies that are private and not listed on any stock exchange. The company allows certain pool of the shares to be traded in the private market.
The private companies can be a startup or an established company.
What to look for in the unlisted companies to invest?
The process is same in the unlisted companies as it is in the listed one.
Understanding the business, industry, promoters, key metrices, burn rate, CAC, LTV, cashflows, Profit & Loss, is critical to decide on investing in the business. An investor needs to track the performance of the company, keep close eyes on the developments, ROC filings in case of Indian company, fund raising, key metrices etc. For an investor who is looking to invest, the information can be obtained from ROC, online articles, company website, market intelligence.
For an investor already invested in the company, annual report is also an important source.
Note: Do not invest in unlisted companies just based on the size of fund raise or the name or sector. The financial data is important to study in details. As it is famously saying that devil lies in detail.
Primarily early investors want an exit from their investments for varied reasons. This route helps them in liquidating their investments.
While few companies who does well discover their value in the private segment before going to list on the stock exchange.
Recently, few startup companies have tried raising funds in the private market.
One can make decent returns on investments in unlisted shares by investing in companies in early stage of the growth.
An investor needs to identify the sector, company available for investments; buy it at right price and sit tight for sometime.
Investors can invest in these unlisted companies or startups through direct approach or investments in AIFs, or rely on the professionals who source these companies for investments.
The unlisted shares carry a potential to deliver high returns as compared to any other assets class. The unlisted company if perform well can multiply your investments in few years. Investors have made 1x to 300x and more returns on their capital.
- Liquidity: It is highly illiquid market. Exit from the investments can be difficult in the short term. If the price starts to go down, the share would not find any buyer.
- Company Shut down: In the early-stage companies, the risk of shutting down the business is high for various reasons.
The shares are being traded over the counter mostly involving a licensed share broker. The seller transfers the shares from its demat account to the buyer’s demat account through a mechanism as provided by their broker. In India, it is typically through a Delivery Instruction Slip (DIS), which contains the fields like the Buyer’s Name, Demat account number, quantity, etc. The seller fills the details and submit it to its broker to execute the transfer of shares to the buyer.
Recently few share brokers have started providing online facility to transfer the shares. Online transfer is very convenient and time saving mode.
The price of the unlisted shares is discovered in the private market by the buyers and sellers completely. It is more of like in the stock markets. Hence, an investor must keep a close eye on the company’s performance to understand the price movements.
There are many intermediaries who help you to find the buyer and sellers of unlisted shares. These intermediaries also invest their own money and hold shares in their demat account to leverage their network generating a decent return on the investments.
There are certain other platforms who does not hold shares in their demat and help you in the transaction at lower cost. You can find them through google.
The unlisted share segment is private and there are multiple fraud events took place in the past. Hence, an investor must take care while going through the brokers or intermediaries or transacting directly.
One must be careful while transferring money or shares to intermediaries or direct party.
The safest way is through the escrow account where both parties enter into a definitive agreement of the performance. Once the seller transfers the shares that is reflected in the buyer’s demat account, the money gets transferred to sellers account by the escrow agent.
Our Opinion
Unlisted shares are an attractive asset class for investors who have high risk appetite, have longer time horizon to stay put, active, finance savvy or open to take right advisors help. A single investment can make you wealth.
Know the game of investing in unlisted shares and invest!
