How the unlisted share market works

An unlisted share is a share in a company that is not traded on a stock exchange. The company may be a household name with thousands of shareholders, or a start-up a few years old. What they have in common is that there is no exchange order book: shares change hands privately, between a seller and a buyer, and settle by transfer from one demat account to another.

“Pre-IPO” describes unlisted companies expected to go public. Some have filed a draft offer document with SEBI; most have not. A delisted share is also untraded, but for the opposite reason: it once had a market and lost it.

Supply in the unlisted market comes from a handful of sources, and knowing which one you are buying from helps explain the price.

• Employees with ESOPs who have exercised options and want cash for a house, a move or diversification.
• Early investors such as angels and funds nearing the end of their life who need to return capital.
• Founders and their families selling small portions, often around a fund raise.
• Earlier secondary buyers taking profit or cutting a position.

A company's own share issues (a fund raise, a rights issue) are primary transactions and are usually not open to retail buyers. What you buy here is almost always an existing share, from an existing holder.

With no exchange, there is no single price. What you see on a company page is an indicative price: our estimate of where the share could change hands, built from recent dealer quotes and completed transactions, and dated so you can see how fresh it is.

Three things push the price you actually pay away from that figure:

• The spread. The fewer people quoting a name, the wider the gap between what buyers bid and sellers ask.
• Quantity. A large block can need a discount to find a seller, or a premium to persuade one.
• News. A DRHP filing, a fund raise at a new valuation or a weak set of results can move quotes sharply in days, after weeks of no change.

That is why our desk confirms a firm price before you pay, and why the price is held only for a short window. How we record prices explains the method in full.

1. You raise an enquiry for a company and quantity. Nothing is reserved and no money moves.
2. The desk confirms availability, then a firm price. You decide whether to go ahead.
3. You pay from your own registered bank account.
4. The seller instructs their depository participant to transfer the shares off-market to your demat account. Stamp duty of 0.015% is collected through the depository.
5. The shares appear in your demat holdings and the transaction closes in your account.

KYC (PAN, address proof, bank proof and your client master list) has to be complete before anything settles. The full sequence, with timings, is on how buying works.

Most buyers of pre-IPO shares are watching for a listing. The steps, and what each one does and does not tell you:

Filter companies by stage on the share list, or see those with a DRHP or RHP on file.

Unlisted companies publish less than listed ones, so what is on the company page is often most of what is publicly known. Work through it in this order:

• The business. What it sells, to whom, and how it makes money. If you cannot say it in a sentence, stop here.
• Revenue and profit over several years. Look at the trend, not one year, and check whether the latest year is audited or provisional.
• Valuation. Compare P/E, P/B or EV/EBITDA with listed peers. A large premium to listed companies needs a reason you can state.
• Shareholding. Who owns the company, and whether a big investor may need to sell.
• Price freshness. When the indicative price was last updated, and how many quotes stood behind it.
• Risks and documents. Read the risk tags, and the DRHP if there is one: its risk-factors section is the most candid thing a company will publish about itself.

The screener filters every company on these fundamentals, and compare sets up to five side by side.

• Illiquidity. You may not find a buyer when you want to sell, at any price. This is the defining risk of the market.
• Listing may never come. IPOs are delayed or abandoned, even after a DRHP is filed.
• Listing below your price. Shares can list, and stay, below the price they changed hands at privately.
• Lock-in. After listing you normally cannot sell for six months from allotment, whatever the share price does.
• Thin disclosure. Annual filings arrive months after year-end, and there are no quarterly results.
• Counterparty risk. In a private sale, settlement depends on the other side performing. Deal only where KYC and payment run through traceable accounts.

Size any holding so that you could live with it being impossible to sell for several years. Read the full risk disclosure before you buy.