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Start-ups raise funds for establishment and growth. When the company lists on NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) with its equity share capital, it evolves as a publicly traded company. A listed company can freely trade its equity shares with retail and institutional investors. Listed shares come from the companies that are available on a stock exchange. There is another type of share that also includes the equity share capital of a firm, called unlisted equity share. You can take the assistance of one of the best-unlisted share brokers in India to buy unlisted equity shares.
Pre-IPO shares or unlisted shares are not available for public trading on a stock exchange. These unlisted shares become available for trading before the firm lists itself on the stock exchange and becomes public. An investor has to use unconventional ways to buy unlisted shares. So, before investing based on IPO expectations or a rising unlisted share price, here are 11 key things you should check.
1. Start With the Business, Not the IPO Buzz
The first question should not be, “When is the IPO?" Instead, understand what the company actually does and how it makes money. Many investors enter the unlisted market after hearing that a company may launch an IPO. But an IPO should not be the only reason to invest.
Look at the company's products, customers and major revenue segments. Check whether the business is growing because of genuine demand or simply because the sector is currently popular. Also, watch for concentration. If a large part of revenue comes from one product or geography, any disruption there could hurt the business. For example, before investing in an unlisted exchange, AMC or technology company, understand what actually drives its revenue. A good business should make sense even if the IPO gets delayed.
2. See Who Is Running the Company
Management becomes even more important in an unlisted company because public information and market scrutiny may be limited compared with listed companies. Check the background of the founders, promoters and key management personnel. Look at their experience, past businesses and track record. Also check for major governance issues, regulatory actions, auditor resignations or frequent changes in senior management. Numbers tell you how the company has performed. Management gives you an idea of how those numbers may be handled in the future.
3. Check Who Has Invested, But Go One Step Further
The presence of a well-known institutional investor, private equity fund or strategic investor can attract attention. But simply seeing a big name in the shareholding pattern is not enough. Check when they invested, how much they invested and, if available, the valuation at which they entered. An early investor may have bought shares at a very different price from what is available in the unlisted market today. Also see whether major investors are increasing their exposure or looking to sell their stake. The investor's name matters, but their entry and exit behaviour can tell you more.
4. Check Whether Growth Justifies the Share Price
A rising unlisted share price does not automatically mean the business is growing at the same pace. Start with the financials. Check revenue, profit after tax, EBITDA margins, EPS and cash flow for at least the last three to five years. One strong year may come from a one-time gain, so look for consistency. Then compare this growth with the movement in the unlisted share price.
Suppose a company's profit has grown by 15% in a year, but its unlisted share price has increased by 70%. The gap does not automatically make the investment bad, but it does raise an important question: what is the market pricing in? Sometimes the price is rising because of genuine business growth. At other times, IPO expectations or market buzz may be driving it. The share price and business performance should be studied together, not separately.
5. A Good Company Can Still Be Expensive
Finding a strong company is only half the work. The price you pay also matters. Check the company's estimated market capitalisation and valuation ratios such as P/E, P/B or P/S, depending on the nature of the business. Then compare these numbers with listed peers operating in a similar industry.If an unlisted company is already valued much higher than listed competitors, ask what justifies the premium. Is it growing faster? Does it have better margins? Is it a market leader? A popular company bought at an unreasonable valuation can still give poor returns.
6. Look for Real IPO Signals
“IPO expected soon” is one of the most common phrases in the unlisted market. But investors should separate market rumours from actual developments. Look for concrete signals such as the appointment of merchant bankers, board approval for an IPO, shareholder approval, conversion into a public limited company, DRHP filing or regulatory approvals. A company discussing an IPO and a company filing its DRHP are at very different stages. Also remember that IPO plans can be delayed because of market conditions, regulatory issues or changes in the company's strategy. Invest based on the business, not only on an expected listing date.
7. Check Whether There Is Actual Demand for the Share
Unlike listed stocks, unlisted shares do not have an exchange order book showing live buyers and sellers. That makes market demand an important factor. Check whether the share is actively traded in the unlisted market and whether there are regular buyers and sellers. Also compare buy and sell quotes where possible. A large gap between the buying and selling price may indicate lower liquidity. You may find it easy to buy a popular unlisted share, but the real test is whether you can find a buyer when you want to sell.
8. Understand the Share Transfer Process
Before making payment, understand how the shares will be transferred to your demat account. Check the minimum investment quantity, required KYC documents, payment process and expected transfer timeline. Also verify the company name, ISIN and share quantity before completing the transaction. Investors should deal through a platform or intermediary that clearly explains the transaction and transfer process. In the unlisted market, understanding how you are buying the shares is as important as deciding what you are buying.
9. Understand the Lock-in Before Buying
If you are buying unlisted shares with an IPO in mind, understand the lock-in rules before investing. Under current regulations, shares held by most pre-IPO investors are generally subject to a six-month lock-in from the date of allotment in the IPO, although specific rules may differ for promoters and certain shareholders. This means listing does not necessarily give every pre-IPO investor an immediate exit. Check the applicable rules and understand how long your capital may remain invested before you buy.
10. Know How You Plan to Exit
Do not wait until you need money to think about selling your unlisted shares. Before investing, ask yourself: Who is likely to buy these shares from me? Your exit may come through another buyer in the unlisted market, an IPO and eventual sale on the stock exchange, a buyback or another corporate transaction. But none of these should be assumed. If the IPO is delayed by two or three years, are you comfortable holding the investment? If market demand falls, do you still believe in the business? A clear exit plan can prevent you from buying an illiquid investment with short-term expectations.
11. Find the Risk Specific to That Company
Do not stop at generic risks such as “unlisted shares are risky". Find the risk that is specific to the company you are studying. For a stock exchange, it may be a regulatory issue. For a startup, it may be high cash burn. For a manufacturing company, it could be customer concentration or debt. For a financial business, asset quality or regulatory changes may be more important. Read annual reports, credit rating reports, regulatory orders and company announcements wherever available. Every company has a weak point. The important thing is to identify it before investing rather than after the share price falls.
Final Words
Investing in unlisted shares should not start with the question, “When is the IPO?” Start with three simpler questions: Is the business growing? Is the current price reasonable? And can I hold the shares if the IPO or my exit is delayed? If the answer to these questions is clear, you could already be doing more research than simply following unlisted share market buzz.
Hence, we hope the above information and guide will be valuable for you and help you make an informed decision. For more assistance, you can contact the best-unlisted share brokers in India. The best brokers for unlisted shares will help you find promising unlisted companies for you.
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