One of the popular terms in the stock market in recent history has been unlisted securities. The year 2021 has been a blockbuster year for those who invested in unlisted securities in the unlisted share space.
As a stock market participant, you might know that unlisted shares are traded differently than listed ones in the listed stock market.
Let us elaborate more on unlisted shares or stocks, how to buy or sell them, and the factors one should know to analyze these stocks for investing.
What are Unlisted Stocks?
Unlisted stocks are the shares of either publicly limited companies which are not listed or privately held companies or startups (ranging from seed stage to mature companies).
The initial stages of funding are as follows which many unlisted companies go through –
- Seed Capital
- Angel Investors
- Venture Capital
- Private Equity
- Pre IPO/Unlisted stage
Stocks of an unlisted public corporation are not traded on a formal stock exchange like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).
Instead, these stocks are traded in the OTC (over-the-counter) market. OTC market makers or dealers facilitate stock trading in the OTC market. Sometimes they are also called secondary deals.
- Just like dematerialized listed stocks, the status of unlisted stocks can be checked via your demat account with your Demat holder ( Generally a Stockbroker).
- Liquidity is no more concern in unlisted securities as there are multiple market makers, HNIs, Funds ready to trade in Unlisted Securities.
- Unlisted markets enable investors to invest in reasonably priced stocks of unlisted companies. They can negotiate with the intermediary for the stakes of a new business model that has high growth potential.
- The investment risk is high when dealing in unlisted space as some established companies may have highly risky business plans. Other risks associated with unlisted stocks may be liquidity risk and counterparty risk. However, the underlying thumb rule is clear – Higher the risk – Higher is the returns
- Fair pricing is always under scrutiny for unlisted stocks as unlisted shares are not freely traded on official stock exchanges, and there is no formal market. Unlisted stock pricing is purely a function of demand and supply. Investors and promoters agree on the mutual fair value of these shares as there is no exchange price mechanism. Price negotiation is possible positively. However, the trader do fundamental analysis and comes to the conclusion that the X company should be traded at Y valuations.
Types of Unlisted Stocks
In general, there are two types of unlisted stocks in the unlisted space:
1. Subsidiary of large companies
These are the stock of companies owned by a renowned parent company already listed on the stock exchange. For example, Hero MotoCorp is the parent company, and Hero FinCorp is its subsidiary.
2. New-age stocks
The main advantage of unlisted stock investing is that you can access new-age companies high on innovation. These are startups focused on niche segments like e-commerce, fintech, gaming, etc. For example, Ola, OYO, Mobikwik. Some of these companies are based on a business model or a product model innovation.
Comparative Analysis Listed vs. Unlisted Stocks
You should be able to differentiate listed stocks from Unlisted stocks while investing. Here are few points that will help you to distinguish them:
| Listed Stock | Unlisted Stock | |
| Companies | Stocks of well-established companies that have gone through IPO and regulatory filings | Stocks of companies that are in the early stages without the IPO process. |
| Financials | Financials are transparent for investors. | No transparency in financials. |
| Dematerialization | Listed securities are available in electronic form only. | Unlisted securities are available in both paper form as well as electronic format. |
| Liquidity | Higher Liquidity | Lower Liquidity |
| Stock Valuation | Based on the market price | Based on negotiations |
| Risk Involved | Lower risk comparatively | Higher risk comparatively |
| Price | Fluctuating | Stable |
How are unlisted companies valued?
- The market price of unlisted shares is not present as they are not traded on any stock exchanges. The most common method to estimate the value of such stocks is comparable company analysis, Replacement cost, Price to Earning, Net Asset Value, etc. Following the analysis method, promoters look for Publicly listed companies most similar to private companies in a similar industry with similar established years, capitalization, and growth rates.
- They can use the pricing metrics also for stock valuations, i.e., price-to-earnings, price-to-book, etc. An EBITDA multiple aids the target company to determine the trading stock value.
- The investors further determine the fair value before finalizing the trade transaction. The trading of unlisted stocks starts when employees sell their stocks or promoters go to private placements.
Illustration
For example here is the data for comparable company analysis of six companies:
Comparable Company Analysis Example
| Company | EV/Sales | EV/EBITDA | P/E | P/BV | P/CF |
| A B C D E F |
1.45 1.34 6.54 1.38 6.90 6.27 |
4.31 4.47 8.09 7.87 3.48 8.83 |
4.01 3.78 7.09 8.11 3.93 9.13 |
0.69 0.45 1.21 3.30 1.06 5.55 |
0.94 2.14 3.86 5.65 1.72 7.79 |
| Mean Min Max |
3.98 1.34 6.90 |
6.17 3.48 8.83 |
6.01 3.78 9.13 |
2.04 0.45 5.55 |
3.68 0.94 7.79 |
1. Enterprise value-to-sales (EV/sales) to compare the total value of the company to its sales: 3.98
Based on this data, the six companies averages are defined as follows:
- Companies C, E, and F are above average.
- Companies A, B, and D are below average.
2. Enterprise value (EV) to the earnings before interest, taxes, depreciation, and amortization (EBITDA) for fair market value: 6.17
- Companies C, D, and F are above average.
- Companies A, B, and E are below average.
3. Price-to-Earning (P/E) to determine the market value of a stock as compared to the company’s earnings: 6.01
- Companies C, D, and F are above average.
- Companies A, B, and E are below average.
4. Price-to-Book (P/B ratio) to compare a company’s market capitalization to its book value: 2.04
- Companies D and F are above average
- Companies A, B, C, and E are below average.
5. Price-to-cashflow to compare a firm’s market value to its cash flow: 3.68
- Companies C, D, and F are above average.
- Companies A, B, and E are below average.
What are the ways to invest in unlisted stocks?
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Pre-IPOs
One way is to procure shares of a pre-IPO company that is unlisted at present but is planning to go public in the near future. The trade settlement mechanism is generally through NSDL/CDSL and the trade gets settled within a few minutes.
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Startups
You can also invest in startups that are not so popular right now but have massive growth potential in the future. You need your demat account to invest in these start-ups and receive the shares in your demat account.
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Promoters
Private placement is a way to make direct investment in companies. You can approach a trusted intermediary like Rurash Financials to connect and invest in such companies
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PMS and AIFs
You can consider portfolio management services (PMS) and alternative investment funds (AIF) that invest in unlisted shares.
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Being an angel investor
You can fund promising small businesses in exchange for stake ownership or royalties. It can be done as angel investors (an individual investor or through equity crowdfunding platforms) where a group of investors fund the business.
These are some of the factors you need to consider while analyzing these hidden multibagger gems in the unlisted space. You can access the unlisted domain if you want significant returns and are ready to take high risks involved in new ideas and at different phases of their growth trajectory.
You may need an investment management firm with strong ethics to build an investment portfolio with opportunities. This is where Rurash Financials steps in.
We at Rurash Financials have access to a number of established companies, startups, and networks along with PMS to help you gain access to profitable unlisted shares. Rurash leads the industry in wealth management with a team of investment managers having over 200 years of combined industry experience.
Connect with relationship manager now or visit: Our Brochure.
Also Read: Your Ultimate Guide to Company Fixed Deposit in India