Shares or securities of a corporation that are not listed on a reputable stock exchange are referred to as unlisted securities, also known as unlisted stocks or unquoted securities. In plain English, these are shares of corporations that are not traded on stock exchanges like India's National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).
Unlisted securities are an important element of the financial landscape in India, especially for early-stage startups, small and medium-sized businesses (SMEs), and privately held businesses. Let's explore the idea of unlisted securities, their traits, and the ramifications they have for investors and businesses.
Characteristics of Unlisted Securities: -
1. Limited Market Accessibility: Organized exchanges do not facilitate trading in unlisted equities. Normally, buyers and sellers conduct their negotiations directly through over the counter (OTC) platforms or through private transactions.
2. Absence of Price Transparency: Unlisted assets lack the same degree of price transparency as listed securities, which offer real-time price updates and discernible bid-ask spreads. Unlisted securities are valued through agreements between buyers and sellers, and these discussions might change depending on the performance of the company, consumer demand, and market conditions.
3. Investment Possibility: Buying unlisted securities gives investors the chance to share in the development potential of private enterprises. To raise money for business expansion or other purposes, startups and privately held companies sometimes offer equity or debt instruments to private investors.
4. Illiquidity: Compared to their listed equivalents, unlisted securities often have lower levels of liquidity. Since there is no established market for unlisted securities, it may be more difficult to buy or sell them rapidly. A longer holding period and fewer choices for selling equities should be expected by investors.
5. Higher Risk and Return Potential: Compared to listed assets, investment in unlisted securities entails greater risk. Privately held businesses and early-stage startups may experience uncertainty and greater business risks. However, if the business is successful and expands over time, there is also a chance for bigger returns on these investments.
Investor Implications of Unlisted Securities: -
1. Due Diligence: Thorough due diligence is necessary before investing in unlisted securities. Investors should carefully consider the business concept, financial health, management team, and development prospects of the company before making investment decisions because some companies might not have access to publicly available financial information or regulatory scrutiny.
2. Time Frame of the Investment: Unlisted assets are typically viewed as long-term investments. Since it might take some time for the company to reach key milestones or for exit chances to materialize, investors should be prepared to hang onto their capital for a considerable amount of time.
3. Risk management: When investing in unlisted securities, diversification is essential. The risk involved with individual investments can be reduced by making investments in a portfolio of various businesses from various industries and stages of development.
4. Exit Strategies: Unlike listed securities, which can be easily sold on the stock exchange, exiting investments in unlisted securities can be more challenging. Investors should consider potential exit strategies, such as secondary market transactions, initial public offerings (IPOs), acquisitions, or buyback offers, to realize their investments.
Implications for Companies:
1. Capital Raising: Without going through an IPO, corporations can raise money directly from individual investors by selling unlisted securities. Startups, SMEs, and other businesses who might not be able to meet the strict listing standards of stock exchanges can benefit especially from this.
2. Investor Relations: Businesses that issue unlisted securities must keep in touch with their investors and be open and honest with them. This entails delivering frequent updates, financial statements, and other pertinent data to keep investors updated on the status of the business and its prospects.
3. Valuation Challenges: Since there is no publicly accessible market price, valuing unlisted stocks can be difficult. To assess the fair value of their securities for fundraising, financial reporting, or other purposes, companies may need to hire professional valuation specialists.
Bangalore's Startup Culture and Unlisted Securities:
India's Silicon Valley, Bangalore, is sometimes referred to as having a vibrant startup ecosystem. Many technological startups, venture capital firms, and angel investors call it home. Unlisted securities are a key factor in Bangalore's startup ecosystem's expansion.
Numerous entrepreneurs in Bangalore raise financing through private equity investors, angel investors, or venture capital organizations through investments in non-publicly traded securities. These investments give startups the money they need to create their products, scale their businesses, and broaden their market.
Bangalore has also seen several successful startups exits through acquisitions or initial public offerings, when early investors holding unlisted securities saw large returns on their investments. Within the Bangalore startup environment, these success stories have increased interest in investing in unlisted equities.
Investing options in businesses that are not listed on reputable stock exchanges are available through unlisted securities, to sum up. With greater risk and perhaps greater reward, these instruments give investors a way to participate in the expansion potential of private enterprises. Companies and investors alike should carefully weigh the benefits and drawbacks of investing in unlisted securities while also considering variables including due diligence, investment horizon, risk management, and potential exit options. Unlisted securities are especially important for startups, SMEs, and privately held businesses in the Indian context, supporting the dynamic entrepreneurial ecosystem, including Bangalore's thriving startup scene.Check out our offer of Unlisted Securities at Unlisted Bull by ICAP FinServ.