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Should you buy IPO shares from an unlisted market?

New Delhi: Investors are busy buying shares in unlisted companies linked to public offerings in hopes of generating higher returns. However, this investment route has several pitfalls.

The number of companies in the IPO pipeline is growing rapidly as more and more companies submit their prospects to the market regulator. A handful of these players have even caused a stir in the unlisted area.

According to market experts, investors are rushing into the unlisted space as benchmark indices are at lifetime highs and recent IPOs don’t reward investors with a decent listing pop.

Amit Jain, Ashika Group’s chief strategist and co-founder of Ashika Wealth Advisory, said investors should buy unlisted stocks if they have a long-term investment horizon. “Unlisted stocks have a mandatory six-month vesting period once the stock is listed. Therefore, investors cannot exit the listing prior to going public. The unlisted market is not for investors planning to exit the listing.”

SEBI recently announced that it will shorten the mandatory blocking period for shares prior to the IPO from one year to six months. The date is calculated from the date of the announcement.

Some IPO-linked stocks that trade heavily in the unlisted space include Mobikwik, Paytm, Sterlite Power and Technologies, Anand Rathi Wealth Management, Aarohan FInancial, Lava International, and Fino Paytech.

Activity on these counters has increased recently as investors buy these stocks at “cheaper” valuations as they would generate better returns on listing. However, this is not always the case. In many cases, the price range for an IPO is well below the share price required in the unlisted market.

For example, the Rakesh Jhunjhunwala-backed Barbeque Nation was trading around Rs 900 before going public, but the price range was set at Rs 500. The scrip traded at Rs 1,150 on Monday.

Similarly, UTI Asset Management Company traded at a premium of 1,000 to 1,050 rupees prior to the IPO announcement. But the company sold its shares in the range of Rs 552-554, which is now around Rs 1,165.

On the contrary, Nazara Technologies, another company backed by Jhunjhunwala, traded for just Rs 400 before going public, but it sold for Rs 1,100-1,101. It was available on Monday for 1,858 rupees.

Sandip Ginodia, CEO of Calcutta-based Altius Investech, said if investors are confident in the business model, management integrity and fair valuations, it makes sense to buy stocks before going public. “When valuations are exorbitant, investors should be careful as there is a mandatory vesting period,” he added.

The risk element for IPO-linked players is comparatively lower, as they have to meet regulatory compliance requirements, said Ginodia. “If investors are willing to hold the stock for an extended period of time, it can be a bet on wealth creation.”

Investors flock to unlisted markets as there is no certainty that an IPO will be awarded. “In sentiment and liquidity-driven markets, investors typically have FOMO (fear of missing out), which leads them into the unlisted space,” added Jain. “The space is for those who can invest long-term.”

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