Overvalued Risk of Unlisted

With 16cr demat holders the Indian equity market is changing day by day where the equity participation is increasing day by day. The maturity of the Indian investors is already playing a pivotal role in F/O segment. Derivatives' turnover grew 23-fold over the last 5 years to reach ₹79,927 trillion at the end of March, NSE data show. As per market data, reflected that the investment in mutual funds almost trebled to Rs 1.79 lakh crore in 2022-23 in three years from Rs 64,084 crore in 2020-21. The household investment in shares and debentures almost doubled to Rs 2.06 lakh crore in 2022-23 from Rs 1.07 lakh crore in three years from 2020-21. Further the total number of unique individual traders increasing by over 500 per cent from 7.1 lakh in FY19.

It sounds like the unlisted shares market is experiencing a significant bull run, characterized by high price fluctuations and disconnected valuations from reality. This situation seems to be driven by a surge in demand, especially notable on the NSE (National Stock Exchange).

Investors are facing varying requirements when it comes to payment for shares, with some cases demanding full payment upfront (100%) and others requiring only 50%. This disparity can add to the risk and volatility in the market.

Several companies have seen dramatic increases in their share prices over short periods, such as Tata Capital, which rose from Rs 900 to Rs 1100 within just one week. Despite potential reasons given for these price increases, the correlation between valuation and price appears to be negative or minimal.

Over the past six months, there have been notable gains in stocks like Indian Potash, Waaree Energy, Tata Capital, Nayara Energy, SBI Funds Management, Axles India, Orbis Financial Services, Manjushree Technopack, and Utkarsh Core Invest. Additionally, the Primex 40 index, tracking top 40 unlisted companies, has shown a substantial return of 49%, outperforming broader indices like the Nifty 500 Multicap 50:25:25, which recorded a 20% gain during the same period.

This scenario suggests a speculative environment where investors are potentially chasing high returns driven by market momentum rather than fundamental valuations. Such conditions can be precarious as they may not be sustainable in the long term, posing risks of sudden corrections or market downturns.

 In the last 1 year the price of many unlisted shares has been going into haywire price movement where logics and valuations could not justify the price at which the clients purchased. The IPO market is booming and this CY 2024 around 38 IPOs have already come raising around Rs 34000cr. In the CY – 2023, 58 IPOs came up mopping almost RS.50000 cr. This loudly means that in the remaining CY 2024 we will cross that mark. If we include the,  both mainboard and SME platform, follow-on public issues and preferential allotment cases in FY 2024-25, we find the amount to be Rs 84,866 crore.

 The new age investors who are diehard fan of Equities are the ones who are crazy about the IPO market and the short-term listing gains. Most of the investors are investing based on word of mouth both in IPO and unlisted space.  Valuations are based on word of mouth with extensive focus on short term gains. The unlisted space is no longer restricted for UNHNI and HNI but now the same is at the retail level. In our recent experience we have witnessed clients looking for unlisted shares of buying 100 or 200 shares just like grocery shop items without having knowledge of what they are buying. Influenced by short term gains have become the norm of dealing in securities.

What investors should know before buying unlisted shares is should consider business fundamentals, industry dynamics, management quality, and valuation before applying for an IPO and not get carried away with the recent strong performance of the IPO market. But unfortunately, all these things have gone for toss. The tie 2 and 3 cities are catching up fast in terms of equity market participation. Well that is the place from where the jump from 15.4 cr Demat account holders in April 2024 went upto 16cr in June 2024. The risk is increasing for this class of investors who are being sold unlisted shares.

NSE shares have been in very much high demand post declaration of dividend and bonus. NSE shares sales rate are quite interesting to watch out the pattern. Well economists like us speak on patterns since that’s what we all understand. These shares of NSE have two categories 1) Single SPA and 2) Double SPA.  In both the cases the shares will be available to the buyer for around 2 months of 4 months. Now the variation comes when some brokers ask 100% funds whereas few ask for 25% to 50% in the 1st round. It has said its shareholder base has increased from 2,607 in March 2022 to nearly 15,000 at the end of May 31, 2024. Every broker has different prices. In fact the number of dealers in between the same has increased so much that the prime broker himself is confused in terms of the cut which he has to give to several person down the line leading to the client’s house.  Now the biggest risk is that even after paying whatever percentage of funds will the client get the shares of NSE and incase he does not get how long will it take to get back the refund?  Who will felicitate the refund since there are multiple people in between the buyer and seller?

Did any of the investor thought about the same?  Doubt in my heart. The unlisted market trading volume is also growing day by day. There is no regulation on these trades and the bid-ask spread can be wide. Its not restricted to NSE or NSDL shares. The whole unlisted space is witnessing huge price movement beyond the secondary market movement of indices.

Further all traders of Unlisted shares should be SEBI registered and they should have some NISM type of examination.  All traders and middlemen should be SEBI registered and should file income to the regulator for the earnings made through unlisted shares. Truly speaking no law can safeguard investors unless investors themselves become careful.  It’s high time that SEBI gets into regulation mode for the industry as an whole where they could control all the malpractices of unjustified price and margin hikes in unlisted trade.  Further all unlisted shareholders Demat should be pulled out and investor awareness program specific for those clients should be conducted.  From the day the secondary market goes for toss the unlisted will go for more wild swing making every investor helpless.

Investors should exercise caution and conduct thorough research before participating in such volatile markets, considering both the potential gains and the heightened risks involved. Greedy Financial advisors are the main culprits for whom the high margin revenue from unlisted shares force them to push their client behind the enemy lines.