CSK, Polymatech: How to invest in unlisted shares, start-ups? Nishtha Dhawan of Unlisted Assets explains

In an interaction with Business Today, Nishtha Dhawan, Research Analyst, Unlisted Assets, said that the grey market premium is not a definite indicator of IPO performance. She further shared her view on the overall unlisted market, factors to look into while investing in unlisted shares, and buzzing stocks. Edited excerpts:  

Business Today: Unlisted shares are gaining popularity among retail investors. What exactly are unlisted shares, and what is the process for investing in them?

ND: Shares of a company that is not listed on a recognised stock exchange are called unlisted shares. These shares can be categorised into pre-IPO mature companies, start-ups (be they early, mid, or late stage) and delisted companies. There are brokers and large wealth outfits that help in offline buying and selling such unlisted shares. Early investors, angels, founders, employees, and funds sell unlisted shares to various retail and institutional investors. As the startup ecosystem is evolving and IPOs are taking time, unlisted buy-and-sell transactions are increasing as existing shareholders need liquidity.

BT: What are the inherent risks associated with unlisted shares, and what factors should one consider when contemplating an investment in this asset class?

ND: Unlisted shares have inherent risks of liquidity, price discovery, regulatory, and public information. However, investors can undertake due diligence and keep a longer-term horizon while investing in unlisted shares, as it ensures considerable value creation before an IPO from growth companies. Investors should look at the credibility of promoters and valuations and compare them with listed and unlisted peers, the last rounds of fundraising, financial statements and their strengths and weaknesses, the business model and growth potential, and the probability of value unlocking through an IPO while investing in unlisted shares.

BT: How many retail investors have utilised your platform for investments in unlisted shares to date? Additionally, what is the minimum investment amount required for purchasing unlisted shares?

ND: Since its inception the platform has over 30,000 users have been on-boarded on the platform. There is no minimum ticket size for investing in unlisted shares through the retail platform, and a user can buy as little as 1 share. The institutional window has onboarded over 100 institutions and helps large funds, wealth outfits, and family offices buy and sell secondary, unlisted shares.

BT: What role do unlisted assets play in the realm of stock trading and employee stock ownership plans (ESOPs)?

ND: Unlisted assets essentially provide easy accessibility to investors who participate in the growth stories of new-age and pre-IPO companies and create value for themselves. The platform is helping with much-needed liquidity for ESOP holders who can convert their vested options to shares and ensure liquidity for paying taxes and ensuring personal needs. This is a global, evolving problem as the startup ecosystem is increasing and more employees are getting Esops. Providing liquidity to ESOP holders ensures that the employees get rewarded rather than just having documentation of options that do not have liquidity or, in many cases, lapse.

BT: Technology has a significant impact on the listed market. How is technology shaping and benefiting the unlisted space?

ND: Technology is helping unlisted spaces by providing scale, transparency, trust, and liquidity. There are many holders of unlisted shares, and on the other side, many investors want to invest in such unlisted shares. Technology also helps in providing company-related information, KYC, online payment, escrow, data room, e-agreements, etc. to help with an efficient conclusion of transactions. In the USA, there are companies like ForgeGlobal and ATS guidelines that govern the space. India should also follow suit to ensure a similar opportunity for the unlisted space.

BT: Can you explain the mechanism of price discovery in the unlisted market?

ND: Price is a factor of demand and supply, IPO timelines, potential valuations at the IPO, valuations at recent fund raise rounds, valuations of listed and unlisted peers, and the growth potential of the company. Companies with liquidity are better priced than illiquid companies.

BT: In what ways does the unlisted market facilitate fundraising for startups?

ND: Unlisted markets provide access to new-age and pre-IPO high-growth companies for institutional and retail investors. Valuations in the secondary markets help with price determination for some companies as they plan to raise IPOs. Startups that are not able to give buybacks or liquidity against Esops can reach institutions and retail investors through unlisted markets to ensure liquidity for employees.

BT: Which unlisted stocks are currently generating significant interest on your platform, and what factors are driving this trend?

ND: Polymatech: The company is engaged in the business of manufacturing semiconductor chips. It is also getting huge government support, and the business has great potential, making it popular among investors. The company has recently filed the DRHP and thus has more traction.

Chennai Super Kings: The company has a significant franchise value and a follower base that wants to associate with the company by investing in their shares.

Factors like how much attractiveness there is in the sector, how unique the business model is, how attractive the valuations are, how near the IPO is, etc. play a role in generating investor interest.

BT: What strategies can an investor employ to select suitable shares from the unlisted market?

ND: A couple of strategies, which include an analysis of the company's business and understanding the management's long-term vision and objectives for the business. Analysis of the company’s revenue sources, revenue mix, cash flows, and evaluation of the company’s profit margins and growth proposition are among the other factors. One should also find out what the company’s value proposition is, determine the company's competitive advantage compared to its industry counterparts, and determine what makes its products and services sellable. The company's valuation, the future potential of the company, and market trends are among the other factors. Many new and unique business models with high potential for growth are sometimes available in unlisted markets. Investors should evaluate the market trends of such businesses individually while investing.

BT: Many retail investors now gauge the appeal of an IPO by observing its grey market premium. Is this a reliable approach when considering IPO investments?

ND: This is unrelated to the unlisted or private markets and is an informal gauge of demand and supply for an upcoming IPO. It is not a definite indicator of IPO performance.

 

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