Unlisted shares: How to buy them before an IPO? What are the risks?

Kolkata: Unlisted shares have suddenly jumped to the headlines, thanks mainly to the NSE shares and the constant speculation about the timing and price of the NSE IPO. As Sebi statements kept indicating that its objections to the NSE's proposed IPO were being addressed, investor expectations began to rise in tandem. The patience of eager investors began thinning and they wanted to pick up shares of the company even before the IPO. Most of them were bullish about the future of the equity markets in India which, in turn, made them extremely bullish about the business of NSE.

According to reports, well over one lakh investors picked up unlisted shares of the NSE. The interest in unlisted shares of NSE spread like contagion and many investors are now interested in buying shares of reputable companies before they list on the stock exchange. The chance of not getting shares during the IPO of sought after companies is so high that it has further fueled the appetite for unlisted shares in the pre-IPO market.

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Since unlisted shares are not available in the stock exchanges, it is important to know how one can access these shares. The point is these are offered through brokers or online platforms for unlisted shares.

Some brokers deal in unlisted shares of companies and one can contact them. In some instances employees or promoters also sell their stakes before an IPO. Employees can sell ESOPs or employee stock options. One has to check whether the broker is intermediary is registered with market regulator Sebi.

There is another factor that must be kept in mind. A stock exchange functions in a transparent way. The price is there for any buyer or seller to check online at a real-time basis. Since unlisted shares don't have any such mechanism, the price can differ from broker to broker. Therefore, one has to be careful of the price of unlisted shares. Different brokers might offer different prices of the same share at the same time.

There are some points that have to remembered for selling unlisted shares too. According to the rule, if you have bought unlisted shares, you cannot sell them for six months after the IPO. Also, if you want to sell them before the IPO, you cannot sell them readily since the shares are still unlisted. One can sell unlisted shares via the brokers/online platforms from where they were purchased. One can also spot buyers who could be individuals or firms and directly negotiate with them.

But as is evident from this situation unlisted shares can suffer from lack of liquidity. Also there might not be sufficient information on the performance of the company whose shares you want to buy or sell. Another important point is, there is no obligation for a company to float its IPO even if its unlisted shares are available in the market. Therefore, if you think of buying unlisted shares in the hope that prices will rise after the public issue, there is no guarantee when the IPO might take place. Therefore, one must conduct a lot of due diligence before buying unlisted shares of any firm.