The unlisted space is becoming very popular nowadays as we can see the rally of IPOs happening in the Indian stock market. If you are following the market then you will often hear a term called grey market. What is the grey market? What are unlisted shares? Grey Market vs White Market vs Black Market. Is the grey market illegal?
Listed companies are traded in the stock exchanges like BSE and NSE or we can say that are traded in the white market regulated by SEBI(securities and exchange board of India) like Reliance, HDFC bank, etc. You can buy or sell shares from the white market through your brokers. What is unlisted space? The companies whose IPO has not been done yet or the existing companies who never listed, their shares trade in the unlisted space called grey markets. Grey market premium(GMP) is the term used to estimate the price at which the IPO will be listed. Eg. If there is an IPO with a price of 100 and GMP is 20, then it’s gonna get listed at 120 Rupees.
Kostak Rate – The premium amount at which IPO applications are traded in the grey market. One can buy and sell their full IPO application on Kostak rates outside the market and fix their profit.
There can be two types of unlisted companies, First, take reliance Jio as an example who has a parent company Reliance Industries, or HDB financial services whose parent company is HDFC bank, these companies are backed by parent companies.
Other types are mostly startups, small banks like OYO and PAYTM where the investment strategy is a bit different, the funding happens at various levels starting from seed capital where the founders invest money initially, Once the Idea grows to business, then Angel Investors pitch in with furthermore funding based on the business model and growth potential.
After that Private Equity or Venture Capital funds fund the company in different forms like series A, B, C based on their growth. So Once they establish their business to a good extent they will start to sell a portion of their shares. Initially, these shares will be traded in the grey market before the Initial Public Offering. Grey markets are not regulated or monitored by SEBI and it’s not Illegal as well. There are a lot of intermediaries through which you can buy these shares like unlisted zone, Unlisted Arena, etc. Please do thorough research or consult your investment advisor before putting your hard-earned money on these platforms.
Take a look at some popular unlisted shares as of August 2021.
So from these unlisted platforms, we can find out the premiums and get an idea about the price at which it is going to be listed on the stock market, which is called the grey market.
Let us discuss some of the parameters comparing listed as well as unlisted shares.
Long Term Capital Gain (LTCG)
Long term capital gains for listed shares is 10 Percent i.e if you are holding a share for more than a year and selling it, then the tax you have to pay is 10% of the profit whereas for unlisted shares the holding period for long term capital gains tax is 2 years with 20% tax and advantage here is that you can add indexation ie the inflation cost.
Risk Analysis
In listed companies, the buying and selling of shares are quite simple and it happens in the blink of an eye. Also, SEBI is there to safeguard you from any fraudulent activities. Whereas in unlisted space first, you have to send the money to the provider or broker, and it takes 2-3 days for you to get it into your account. It’s very important here to note that you have to be confident in the broker and choose a trustworthy broker wisely. If the particular company you are buying is not a dematerialized form, then the paperwork can take more time compared to the electronic form and in this case, the broker will have to provide you with a share certificate stating the face value and all necessary parameters of the shares.
Liquidity
Definitely, listed companies are having more liquidity compared to unlisted companies, and although some small-cap listed companies face liquidity issues the possibility of low liquidity is very less in mid, large-cap companies. A basic suggestion is not to invest money for your financial goal to unlisted shares as you won’t be able to sell those in case of an emergency.
Analyst Coverage
Listed stocks are continuously monitored by multiple SEBI registered analysts on a quarter-on-quarter basis so retail investors will be aware of the progressions happening in those businesses. Whereas the analyst coverage is really less in the unlisted space of companies.
So my personal advice here is if you are investing in unlisted stocks thinking of wealth creation or financial goals, then invest in the first type of companies that are backed by giant pockets or the ones in which you see huge upside potential and fewer downside risks. Otherwise, if you want to put in some surplus amount then go for other types of companies.
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