Why have Unlisted shares gained momentum in last few years

Unlisted shares in India have gained significant traction in recent years, fuelled by their potential for high returns, particularly from the country’s vibrant startup ecosystem. Companies like Zerodha, Serum Institute of India, and Zoho have demonstrated how early-stage investments in unlisted firms can yield substantial profits.

The trend of delayed Initial Public Offerings (IPOs) by startups and private companies has also contributed to the demand for unlisted shares, as businesses focus on profitability and scalability before listing publicly. Digital platforms and specialized brokers have simplified access to these shares, making them more appealing to retail investors. Combined with increased awareness about alternative investments and the inspiration drawn from successful companies, unlisted shares are emerging as a lucrative and dynamic investment option for Indian investors.

Historically, this asset class was dominated by the affluent due to high ticket sizes and limited availability of information. However, with the proliferation of online resources and platforms, the affluent class has lost its information advantage, allowing broader participation by a wider audience like retail clienta. This democratization of information has made unlisted shares an increasingly accessible and appealing option for a diverse group of investors.

In recent times, the growing popularity of investing in IPOs has led to a significant increase in the number of investors applying for them. This surge has resulted in a lower hit ratio for many investors, making it harder to secure allotments. To counter this, a rising number of investors are exploring unlisted shares. By investing in unlisted shares, they ensure that even if they fail to get an allotment in the IPO, they already hold the shares in their demat account.

What are unlisted co’s

An unlisted company is a business entity whose shares are not listed or traded on any recognized stock exchange, such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) in India. These companies operate privately, and their shares are typically held by a small group of investors, including:

Founders and promoters
Family members
Private equity firms
Venture capitalists
Institutional investors
Employees through Employee Stock Ownership Plans (ESOPs)

Since unlisted companies are not publicly traded, their shares are generally bought and sold over-the-counter (OTC)through specialized brokers or intermediaries. These transactions are conducted privately, often facilitated by platforms or brokers specializing in unlisted securities.

Factors to be kept in mind before Investing in an unlisted Equity

Not all unlisted companies promise growth, making it essential for investors to conduct thorough research before making a decision. Choosing the right unlisted shares requires evaluating several factors to ensure the investment has strong growth potential. Below are some key considerations:

Company Fundamentals
Assess the company's financial health, revenue growth, profitability, and balance sheet strength. A solid financial foundation is a good indicator of future stability and growth.
Industry and Market Trends
Understand the industry in which the company operates. Is it in a growing sector or a declining one? Analyze market trends and the company’s positioning within the industry.
Management Team
A competent and experienced management team can significantly influence the company's success. Research their track record and ability to navigate challenges.
Growth Potential
Look for signs of scalability, innovation, and a competitive edge. Companies with a unique product or service and a large addressable market often have better growth prospects.
Liquidity and Exit Options
Unlisted shares are typically less liquid than listed ones. Ensure you understand the timeline and mechanisms for selling your shares, especially if you're planning for short- to medium-term gains.
Regulatory and Compliance Risks
Investigate any potential legal or regulatory challenges that could impact the company’s operations or profitability.

By considering these factors, investors can make more informed decisions and increase their chances of achieving attractive returns from their investments in unlisted shares.

Key Risks to Consider When Investing in Unlisted Shares

Investing in unlisted shares carries risks like liquidity issues, as they aren’t traded on stock exchanges, and valuation challenges due to limited financial disclosures. Transparency and regulatory risks arise from minimal reporting standards and oversight, while exit challenges make selling shares time-consuming, relying on strategic buyers or company buybacks.

Once an investor identifies the company they want to invest in, the next crucial step is determining the fair valuation of its share price. Even a great company can turn into a bad investment if purchased at an overpriced valuation. The key is to strike the right balance between quality and cost.

Below are few pointers on how to arrive at a right valuation

Discounted Cash Flow (DCF) Method:
- Description: Values a company by estimating the present value of its future cash flows, discounted by an appropriate rate (such as WACC).
- Best for: Companies with stable cash flows and long-term growth potential.
Comparable Company Analysis (CCA):
- Description: Values a company by comparing it to similar publicly listed companies using valuation multiples like P/E, EV/EBITDA, or P/S.
- Best for: Companies in established industries with available market comparables.
Asset-Based Valuation:
- Description: Calculates the company’s value based on its net assets (total assets minus liabilities).
- Best for: Asset-heavy companies, like those in real estate or manufacturing.
Book Value Method:
- Description: Values a company based on its book value, which is the difference between total assets and total liabilities.
- Best for: Companies with low growth and significant tangible assets, but less focus on future earnings.

Some of the largest names of the co’s which are still not listed

Serum Institute of India (SII)
- Valued at approximately ₹1.92 lakh crore, SII is the world's largest vaccine manufacturer by volume, playing a pivotal role in global immunization efforts.
National Stock Exchange of India (NSE)
- Valued at around ₹2.12 lakh crore, NSE is India's leading stock exchange, facilitating a significant portion of the country's securities trading.
Megha Engineering and Infrastructures Ltd. (MEIL)
- Valued at ₹1.5 lakh crore, MEIL is a prominent infrastructure and engineering company involved in large-scale projects across sectors like energy, water, and transportation.
Zerodha
- A leading stock brokerage firm that has revolutionized retail trading in India with its low-cost model and user-friendly platforms.
Razorpay
- A fintech company specializing in payment solutions, offering a suite of products for businesses to manage online payments, subscriptions, and banking services.
Chennai Super Kings Cricket Limited
- Established as a subsidiary of India Cements, the company owns the highly popular IPL team, Chennai Super Kings.
Cochin International Airport Limited (CIAL)
- Known for being one of the most profitable airports in India, CIAL has a strong financial standing and is a significant gateway for travellers.

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