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Tread cautiously while investing in unlisted firms

Author: Rajyashree Guha/Monday, December 18, 2017/Categories: Stocks

Tread cautiously while investing in unlisted firms

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.

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The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

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