Pre-IPO trading: With retail frenzy rising, it’s time to regulate

KS Badri Narayanan Chennai | Updated on October 23, 2021

Exchanges may be allowed to offer these stocks on their platform

As the primary market is thriving on the back of a strong secondary market, some market players are trying to attract retail investors to prospective IPO companies. A lot of retail investors too have been showing immense interest in the pre-IPO market to generate higher returns, wanting a piece of the action before some of these stocks list at a strong premium.

Investors have been receiving calls and messages from these platforms to invest in pre-IPO stocks. Investors’ difficulty in getting allotments in IPOs is also leading them to explore this route to own IPO shares.

How to invest

Market participants offering such shares say that it’s not that difficult to invest in pre-IPO unlisted shares. If the stock is available with depositories — CDSL and NSDL, the stock can be transferred to one’s own demat account by submitting a Delivery Instruction Slip and OTP authentication (from depositories), if both agree on pricing. Investors can check the availability of the company’s ISIN details on the depositories' web site. However, these shares will have a lock-in period of one year.

According to a web site that offers pre-IPO stocks, MobiKwik shares are currently being offered at ₹1,350-1,375 with a market lot of 25 shares; Fino Pay Tech is being offered at ₹435-440 with a minimum lot of 50 shares; and Paytm (One97 Communications) is being offered at ₹3.575-3,600 with a minimum market lot of 10 shares. Shares of over a dozen pre-IPO companies are being offered.

“The rates of the stock mentioned in our Tweets, Blogs, WhatsApp Messages, Facebook Posts and /or in all kind of communication, are indicative rates. Kindly check by WhatsApp or Call with us before making any investment through us. Rates may differ/vary based on the quantity required and time of execution, market conditions, sentiments and situation,” said one such site.

Highlighting risks

Some of the websites that offer these stocks come out with a clear risk warning for retail investors.

According to one of them, “This segment of investing carries high risk as this is investment into Equity stocks of the companies which are not listed on any stock exchanges like BSE or NSE; these stocks generally will have very low liquidity as there are very few players who are buying and selling the shares; all Pre-IPO/unlisted stocks comes with one-year lock-in from the date of listing of the stock on the exchanges”.

“Various companies require a lot of paperwork to allot shares and despite completion of documentation, allotment of shares is not guaranteed,” warns another. “Unlisted shares requite a lot of homework. The risk associated with their shares is more and hence one needs to understand the business model and growth opportunities offered by the company,” it cautioned.

Consultation needed

With trading in pre-IPO stocks getting mainstreamed, the time has come for the market watchdog SEBI to look into the matter seriously. Though it is not clear whether such trades come under its ambit, consultations are needed on whether to allow such transactions or not.

If SEBI decides in its favour, then trades can be allowed through normal exchanges such as BSE, NSE and MSEI, which will ensure some control and enhance transparency on transactions. SEBI should act before the trend of pre-IPO investing becomes widely prevalent and too many investors burn their fingers.

Published on October 22, 2021

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