A private company that has not yet gone public, can still hold access to investors to buy its unlisted shares. It means you can invest in the company before its initial public offering (IPO). Investors can buy promising unlisted shares with the hope of future gains. Companies sell these shares at a discounted price to entice the buyers to invest a huge amount in their unlisted shares. Once the IPO comes to the market, if the price of shares rises, it can bring a huge profit to the investors.
Before you buy the pre-IPO shares, check the details and legality of the company in which you are going to invest. This includes checking the registration status of the company, the nature of business, the market presence, the financial performance and so on. Unlisted companies which are highly appreciated and accepted in the market are the ones who are likely to be evaluated most. For instance, if ever there is a pre-IPO of Serum Institute of India offered, it can generate an unprecedented response among investors. There is a possibility that if you buy Pre IPO shares of such companies, you are going to get a handsome return in a short time. This outlook of Pre IPO attracts investors towards it.
After all the positive speculation, it is necessary to make you aware of the fact that as these companies are yet to go public, means they are still not as intensely scrutinized as listed companies. Comparatively less information regarding these companies and their operations is available in the market. The prospectus issued by the company may be one of the few sources you may get. Therefore, search the internet, ask any market expert or your advisor, and read this FAQ, before you invest.
Pre IPOs are buying and selling of shares, on a large scale, of a company before its Initial Public Offer (IPO), i.e., before they are listed on the Stock Exchange.
Unlisted stock means the shares which are yet to be listed on any Stock exchanges and are available in the secondary market for buying and selling.
Types of unlisted stocks are:
The present shareholders of the company are the sellers in Pre IPO. They sell their existing shares of the company to the investors who show interest in owning a stake in the company
You have to invest in Pre IPO and unlisted stocks from the promoters through private placement or the employees of the organizations through their Employees Stock Ownership Plan (ESOPs). You can also invest in Portfolio Management systems, where the risk is less as the portfolio manager adds or removes stocks based on their performances. You can also buy the unlisted stocks online through intermediaries and start-ups. These shares are not yet listed and therefore the extent of regulation may be less.
Due to certain formalities, most Pre IPO shares and unlisted shares take 2 to 4 years to get listed. The formalities involved are approval of the shareholders, making internal proceedings in order, hiring merchant bankers, filing the DRHP, getting approvals from SEBI and carrying out the listing-related activities.
The minimum amount to invest in Pre IPO and unlisted shares will depend upon the share price offered and the minimum number of shares you need to buy. But most pre-IPO purchases are in bulk quantity and the amount transacted can be huge.
According to SEBI rules, all Pre IPOs and unlisted shares have a lock-in period of six months from the date of allotment in the IPO
The company is not involved in selling shares in Pre IPO, as these are secondary off-market transactions that may also involve brokers.
Like listed shares, pre-IPO shares, too, are sold in the Demat form
The companies that have more than 100 shareholders can pass a board resolution and get their shares dematerialised with CDSL/NSDL. Thus, the shares are made available in the Demat form
Shares are bought and sold in Pre IPO in the following way:
Investors buy in Pre IPO because:
There are some basic risks found while investing in Pre IPO
It is still advisable to consult your tax expert.
Your stocks or Pre IPOs will be held in your CSDL or NSDL Demat accounts.
The returns that you can expect depend on the company and the execution of the management capabilities of the company. You donʼt have any kind of guaranteed returns, unlike in debt instruments.
NRIs can also purchase unlisted shares which are non-repatriable in nature.
Unlisted companies are at high risk, so are their stocks because: