Low liquidity, delayed IPOs and lack of regulations are some of the key risks that investors face when they dabble in the world of unlisted shares, warned Nithin Kamath, the CEO and founder of stockbroking platform Zerodha.
Kamath’s warning comes in the wake of a massive loss that HDB Financial’s pre-IPO investors are sitting on after they bought unlisted shares expecting to make easy money.
“Most investors think they can make easy money by picking these pre-IPO companies, waiting for the IPO, and making big listing gains. But it’s not as easy as it sounds, and there are all sorts of risks,” the entrepreneur said in a social media post on X today.
Rising demand for unlisted stocks
HDB Financial IPO‘s price of ₹740 represents a significant 40% decline from its unlisted market value of ₹1,225, which it was commanding ahead of the price band announcement. From its high of ₹1,550, some pre-IPO investors of HDB Financial are facing a massive 52% devaluation.
Pre-IPO investors of Swiggy also faced a similar fate. According to an ET report, Swiggy shares were changing hands at over ₹500 in the unlisted market just a month before the IPO launched in November. Today, the stock is trading around ₹400.
This is not just the case with HDB Financial; some of the popular stocks like NSE, Chennai Super Kings and Metropolitan Stock Exchange (MSEI) have rallied 87.50%, 12% and 525%, respectively, in the last one year.
The popularity of some of these unlisted companies, like NSE, MSEI, Chennai Super Kings, among retail investors, etc., is crazy, Nithin Kamath said. He also added his own personal experience where a wealth manager approached him recently to buy one of his unlisted companies so that he could sell it at a 50% markup immediately.
Risks of investing in unlisted stocks
Cautioning against the risks of investing in unlisted shares, Kamath said even if an unlisted company IPOs, its price can be below what you paid, resulting in hefty losses, as in the case of the HDB Financial IPO.
Taking the example of NSE, which is awaiting SEBI nod for years for its IPO, Kamath said, “Companies can go a long time without an IPO like NSE, which means you can get stuck without liquidity.”
Furthermore, he said unlisted companies also make fewer disclosures than listed companies, and unlike stock exchanges, there’s no price discovery for unlisted shares. “The markups and commissions are ridiculous. These platforms are also unregulated, so there’s nobody to protect you,” Kamath warned.
He advised investors to steer clear of unlisted stocks in a bid to make quick money and risk burning their hands, and opt for mutual funds instead.
“You are better off investing in mutual funds than trying to pick unlisted companies,” Nithin Kamath added.
