If you’ve been keeping an eye on the Indian unlisted market, you might have observed a peculiar trend – once a company decides to file its Draft Red Herring Prospectus (DRHP), activity in its unlisted shares seems to spike. Prices fluctuate. People start talking. Questions begin to surface.
But what exactly is happening to the unlisted shares that you already own when this official step is taken by the company? Let’s break it down.
What Exactly Is a DRHP?
A DRHP is a legal document that the company is required to submit to the regulator of the securities market. This is a prerequisite for any business which wants to undertake the Initial Public Offering process. The company’s information document is a deep dive into the company. It includes the company’s finances, business model, possible risks, details of the promoters and the reason for funding. It’s like the company is officially raising its hand and saying – “We are going public.”
However, it is important to understand that filing a DRHP does not mean the IPO has been completed; rather, it marks the formal commencement of the IPO process.
What Happens to Your Unlisted Shares After a DRHP Filing?
1. Your Shares Remain Valid and Transferable
The filing of a DRHP has absolutely no bearing on the validity of your existing unlisted shares. Nor does it restrict their transfer. If your shares are held in a demat account, they will continue to remain yours. You can sell or transfer these shares on the unlisted market during this interim period, but your ability to do so is dependent on buyers and prevailing market conditions.
2. Prices in the Unlisted Market Tend to React
The most evident outcome of the DRHP filing is typically a change in the price of the unlisted shares. Prices generally rise during this period, owing to the increased interest from investors who see the potential for an impending IPO.
However, it’s crucial to recognize that prices might also decrease if the valuations revealed in the DRHP appear excessive or if market sentiment towards the IPO appears to be wavering. The unlisted share prices are driven by supply and demand-not on any regulated stock exchange mechanism-and as such can experience sharp movements in either direction.
Investors should note that past price movements in the unlisted market are not indicative of future listing performance.
3. The Lock-In Question
An investor who has bought shares through the unlisted market must know that once the company gets listed on the NSE or BSE, the shares will have a 6-month lock-in period. For the duration, shares cannot be sold in the stock market.
Once the lock-in period is over, the shares can be freely traded on exchange. In the meantime, buying and selling of securities may still take place over the unlisted market conditions.
We suggest that you consult a financial or legal advisor for clarity specific to your category of shares.
4. Conversion From Unlisted to Listed Shares
On listing on a stock exchange, unlisted shares will convert to listed shares in your demat account automatically through the depository mechanism. Your ISIN (International Securities Identification Number) remains the same. The shares will be freely tradable from the date of listing.
This is one of the key reasons why having your unlisted shares in a demat form, instead of a physical format, is highly recommended.
5. What If the IPO Gets Delayed or Withdrawn?
This is perhaps an important point that needs to be acknowledged by all unlisted investors. A DRHP filing is merely a declaration of intent, not a guarantee. The company might withdraw its DRHP for a variety of reasons, face observations from the regulator that requires certain modifications, or simply postpone the listing.
When these events occur, your unlisted shares continue to remain in their original state. However, it’s highly likely that the unlisted market price may fall from its previous highs once the IPO enthusiasm dies down, and secondary market activity for that company may slow down for a period.
While the possibility of such eventualities must be acknowledged, investing in unlisted shares solely on the premise of an upcoming IPO warrants careful consideration; the fundamentals of the business should always serve as the primary basis for any investment decision.
Key Things to Keep in Mind as an Unlisted Shareholder
- Stay informed about the DRHP timeline – Once filed,the regulator typically offers observations regarding the DRHP within a certain timeframe after it has been filed. Track news and updates from reliable financial sources.
- Understand your cost of acquisition- When your shares eventually list, the difference between the acquisition cost of your shares in the unlisted market and the price at which they eventually list will result in either a gain or a loss. Discuss the implications of tax on your gains with a professional CA.
- Do not make decisions based on listing price speculation – Forward forecasts and tips on expected listing prices that are circulated on social media and messaging apps are not reliable and should be viewed with a high degree of skepticism.
- Ensure your shares are in demat form. -Physical shares lead to a more complex process during conversion. If you hold physical shares, initiate the process of dematerialization well in advance.
A Word on Unlisted Share Investing
The unlisted market gives investors an opportunity to grow with a company prior to its public listing. The DRHP is an important milestone, but it is just one step in the journey.
Investors are encouraged to carefully study the company’s financial disclosures as presented in the DRHP, which for the first time provides a verified, regulator-reviewed view of the business.
If you’re keen on exploring unlisted and Pre-IPO shares in India, platforms like WWIPL (wwipl.com) offer you a seamless way to access secondary market transactions with no brokerage fees, a 48-hour delivery system for demats, and the backing of 19+ years of experience in the market.
Disclaimer: This content is published for educational and informational purposes only. WWIPL does not provide investment advice. Please consult a qualified financial advisor before making any investment decision.