UNLISTED SHARES ...FEW DISTRIBUTORS GREED SPOILS THE MARKET

 

Do you know in the last 2 years the unlisted market has become a boom for the distribution market and for the investors? Falling revenues in MF and TPP, the unlisted share selling market has become a boon for the distribution industry.  Further due to discount broking packages the revenues of the stockbrokers have fallen significantly. The revenues and compliance cost both have made the distribution industry suffer significantly from 2018 onwards. The low-cost model of distribution has made the industry suffer significantly.  

Frankly speaking, every product cannot be low cost and every product cannot be offered in a lavish manner at free of cost.   The Indian markets for financial products have undergone sea changes in the last couple of years. Low cost is the mantra and discount broking and new packaged-based platforms have changed the profitability matrix of the broking companies.

Within this time the unlisted space came as a boon where investors were sold and their community also became aware of unlisted.  The story of unlisted getting popularity came from 2018 only and scaled up in 2019 with Chennai Super kings unlisted shares. The correction of 2020 gave unlisted mouth-watering valuations.   The Chennai super king stock used to trade between Rs 72 to 78 suddenly came down to Rs 35. In this fashion 2020 opened the gates of unlisted shares.

In 2018 there were limited platforms or suppliers of the unlisted shares but in 2020 there was a flood of suppliers with different levels of prices. All distribution houses jumped into providing the unlisted shares to their clients and this is the very place of the abnormal profits being made by the distribution companies.

The lack of awareness and lack of price information but herd mentality within the clients gave an opportunity for many distribution houses to sell unlisted with marks up of 20% to 30% or even 100% in few cases. Yes, don’t be shocked. Unlisted shares made annual targets for the distribution companies easily achievable.  They made a stupendous profit and also made profits for the clients supported by the BULL Market of 2020. Few distributors have created a mess for the ones who played well with not much greed while dealing in unlisted shares. The greed of a few distributors has created an immense threat for the others to play and survive in this unlisted space.

Millions were invested, transacted with significant margins being added up and clients also made a profit. You will not be surprised to know that by the 15^th of every month the targets of the month and even for the quarter used to be achieved by selling unlisted shares where 20% or even 50% have been added to the prices.

The bull market supported every tom dick and harry and hence clients also made profit. Now the biggest pain has come once the bull market has disappeared and pre -covid markets have come up the unlisted space has faced a significant downfall. Most of the unlisted shares are down by 20% to 50% followed by a mark up of another 20% making the cumulative number to the tune of 40% to 70% down in the stock prices.

The irony of the story is that SEBI, the Ministry of Finance both are ignorant of the trades being executed in an irregular manner creating a problem for the ones who play properly in the system.  Most clients follow a herd mentality and hence they buy stocks based on word of mouth heard from near ones. The same story happened in unlisted shares.

Lack of price regulation and margins add up created a windfall opportunity for these distribution houses to exploit and make a nuisance for the good players in this market. Now many of the distribution houses are not contacting those clients who have faced a significant fall in unlisted share price. They are under the hope that prices will come back to the buy price and they will make significant profits as they have made historically.  The way unlisted shares have been sold is just like the CDO and synthetic CDOs offered during the Pre Global Financial Crisis where a baseless valuation model drives the prices of mortgage products.

The story does not end here. Many investors don’t know and even the distributors don’t know many details about the unlisted shares which have been sold just by word of mouth. Unlisted shares have been open to mass destruction products left unregulated and unwatched by the regulator. They don’t have the transparency in terms of their valuations and reporting and this acts as a scapegoat for the so-called sellers of this product. Due diligence of the quality of the promoters and the financials of the firm have been zero. In many cases, these buyers will find that promoters gave inadequate information about a company’s fundamentals to raise money from gullible investors.

This quarter most of the distributors have managed to achieve the targets but going ahead in the next financial year this duping strategy will not work with investors.

The quantum of unlisted shares which have been sold by the distributors has left no space for the industry to revive in the near term rather than it is now a pain in the neck. Liquidity of the unlisted space is not so easy and rather it’s like the CDOs and the synthetic CDOs which were sold during the pre-Global Financial Crisis.  In simple words, the mortgage products are based on irrational valuations and hidden facts and figures about the products.

In the coming financial year, the distribution industry will face significant pain as well as the client will hardly find any space to cry. The way the margins and valuations have been added up in unlisted space long-term recovery in prices seems to be the only way.