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SEBI Warns Investors About Risks in Unlisted Shares

Daily Equity - SEBI Warns Investors About Risks in Unlisted Shares

Unlisted shares offer investors a chance to get in early on promising companies, but the lack of regulation makes this market a risky venture. SEBI has flagged these transactions as potential violations of securities laws, urging caution.

Unlisted shares, or securities of companies not traded on recognized stock exchanges, have become popular in India’s financial markets. Companies like Oyo Hotels, Chennai Super Kings, and the National Stock Exchange have captured investor attention through unlisted securities markets. While this can be an exciting avenue for investors, the Securities and Exchange Board of India (SEBI) has raised red flags about the risks associated with these platforms.

What Are Unlisted Shares and How Do They Work?

Unlisted shares typically come from companies that have opted for public limited status but are yet to list on stock exchanges. Early investors, such as employees or venture capitalists, can sell their holdings privately, often facilitated by electronic platforms. These platforms have seen exponential growth, leveraging technology to connect buyers and sellers efficiently.
Transactions here differ significantly from traditional stock exchanges. Sellers transfer their securities to the platform’s account, and buyers transfer funds. The platform matches parties and facilitates the transaction, but during the process, it temporarily holds both securities and funds.
These platforms derive revenue through markups on share prices, meaning prices are not transparent or standardized as they are in traditional exchanges.

SEBI’s Advisory and Legal Concerns

SEBI recently highlighted that these electronic platforms violate the Securities Contract Regulation Act (1956), which limits trading facilitation to recognized stock exchanges. The regulatory body advised investors to avoid transacting through these platforms or sharing sensitive personal information with them.
Since these platforms operate outside SEBI’s oversight, investors lack legal recourse in case of disputes or financial losses. This lack of regulation, coupled with potential risks like platform failure or price manipulation, places the onus entirely on the investor.

Case Studies: Unlisted Market Risks

The risks of investing in unlisted securities became evident through significant market disruptions involving well-known companies like Reliance Retail and Delhivery.
In 2023, Reliance Retail’s unlisted shares, once trading between ₹2,500 and ₹2,700, plummeted overnight to ₹1,362. The catalyst was a corporate decision during a board meeting to cancel all public shares and compensate shareholders at the fixed rate of ₹1,362 per share. This move blindsided retail investors, causing significant losses and frustration. With unlisted securities operating outside the regulatory framework, investors had no legal recourse to challenge the decision, showcasing the perils of this unregulated market.
Similarly, Delhivery’s unlisted shares experienced a sharp correction in 2022, plummeting nearly 35% from ₹750 to ₹487. This drop was triggered by the company’s IPO price band announcement, set between ₹462 and ₹487. For investors who had purchased at higher unlisted prices, this created a stark mismatch between expectations and market reality. The incident underscored how the lack of transparency and regulation in unlisted markets can leave investors vulnerable to unexpected corporate actions or price adjustments tied to market dynamics.
Both cases highlight the broader issues within the unlisted securities market, such as price volatility and the opacity of transactions. Unlike listed stocks, where price discovery occurs through automated and transparent mechanisms on stock exchanges, unlisted shares are traded based on demand-supply dynamics on private platforms. These platforms often include markups as their primary revenue source, further complicating price visibility for investors. Moreover, the platforms themselves pose risks. Transactions are typically facilitated by transferring securities to the platform’s account, which then seeks buyers. Funds and securities are temporarily held by the intermediary, introducing additional layers of risk and reliance on the platform’s integrity. With no regulatory oversight, there is little assurance of fair practices or protection against malpractice.
For retail investors, these examples serve as cautionary tales about the allure of unlisted securities. While such investments may promise early access to high-growth companies, they come with substantial risks, including unpredictable price movements, lack of legal safeguards, and potential for financial loss.

A Growing Yet Unregulated Market

The popularity of unlisted shares has grown amid India’s stock market boom and startup IPO excitement. However, unlike traditional secondary markets, prices on these platforms are driven by supply-demand dynamics and platform markups.
The rise of electronic platforms has amplified activity in this space. Despite SEBI’s warnings, these platforms continue to operate in a legal grey area. They offer lucrative opportunities but come with heightened risks, particularly price volatility and a lack of transparency.
As SEBI’s oversight remains limited to recognized exchanges, investors are left exposed in this burgeoning but unregulated market. While the potential for high returns exists, so do significant risks.

SEBI Warns Investors About Risks in Unlisted Shares

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