Investments in unlisted companies can be extremely lucrative, but it is imperative that the investor pays close attention to price, says a wealth report by Karvy.
Spurred by reports of huge profits earned by equity investors, promoters and shareholders through initial public offers (IPOs), there has been a new interest in unlisted firms in the last two years. The total wealth held by individuals in unlisted companies is around Rs 7.25 lakh crore, Karvy’s India 2017 Wealth Report revealed.
However, investors should observe caution while investing in these firms as valuations can be arbitrary due to the lack of proper price discovery in a formal market. Without a regulatory oversight, transactions can be subjected to fraudulent activities like intermediaries collecting money from investors but not delivering the shares. Also, investors may find it difficult to exit before the IPO as the market lacks liquidity. In cases where the companies do not get listed, investor’s money gets locked.
“Prior to investing in an unlisted company, one should do proper due diligence and go through the financials and future prospects. Picking the right company is important as getting out would otherwise be a challenge. Secondly, one should get a trustworthy dealer,” said Varun Saxena, head of marketing and alternate channels at Karvy Private Wealth.
Investors buy these unlisted stocks from dealers or from employees who own stock options and are looking to exit. The report said people invest in these companies to get shares at a lower valuation than the issue price, get confirmed allotment of shares and make significant gains when the company hits the market with an IPO.
“People should have a long-term horizon in mind before investing in these companies if they want to make money. Usually people invest in delisted firms, those which are due to hit the markets or those which are due to come up with an IPO in the next 2-3 years. As per market norms, stocks acquired in IPOs have a lock-in period of a year to save taxes. Hence, the minimum holding term will automatically be 2 years. Those looking for short term gains should not invest in these firms,” he added.
With the boom in the IPO segment, a number of companies would look to go public to unlock the potential of investors and raise funds. In such a scenario, unlisted firms are set to generate more interest from investors.