Should you buy IPO-bound stocks from unlisted market?

New Delhi: Investors are busy buying shares in companies tied to the IPO of the unlisted space in hopes of higher returns. However, this investment route has many pitfalls.

The number of companies in the IPO  is growing rapidly as more companies present their perspectives to the Market Regulator. Even a handful of these players caused quite a stir in the unlisted space.

According to market experts, investors are rushing into the unlisted space as benchmarks hit all-time highs and recent initial public offerings have failed to reward investors with a proper listing.

Amit Jain, the chief strategist at Ashika Group and co-founder of Ashika Wealth Advisory, said investors should buy shares of the unlisted space if they have a long-term investment horizon."Unlisted shares have a mandatory lock-in of six months once the share is listed. So, pre-IPO investors can not make an exit on the listing. The unlisted market is not investors planning a listing-gain exit."

Recently, SEBI reported that it is reducing the mandatory closing period for pre-IPO stocks from one year to six months. The date is calculated from the date of the announcement.

Some of the IPO-related stocks that trade heavily on unlisted spaces include Mobikwik, Paytm, Sterlite Power Transmission, Anand Rathi Wealth Management, Aarohan Financial, Lava International, and Fino Paytech.

Activity at these counters has increased recently, as investors buy these shares at "cheaper" valuations, as these shares will generate better returns when listed. However, this is not always true. In many cases, the price range of an initial public offering is well below the required share price on the unlisted market.

For example, Barbeque Nation, backed by Rakesh Jhunjhunwala, was trading around Rs 900 before the IPO, but the price range is set at Rs 500. The stock was trading around Rs 1,150 on Monday.

Similarly, UTI Asset Management Company was trading at a premium of Rs 1,000 to Rs 1,050 before the initial public offering was announced. But the company sold its shares in the range of Rs 552-554, which now amounts to roughly Rs 1,165.

By contrast, Nazara Technologies, another company backed by Jhunjhunwala, was trading for just Rs 400 before the IPO, but was sold at Rs 1,100-1101. It was available at Rs 1,858 on Monday

Sandeep Ginodia, CEO of Kolkata-based Altius Investech, said that if investors were convinced of the business model, management integrity and fair valuations, it would make sense to buy pre-IPO shares. "If the valuations are exorbitant, then investors should give them permission because there is a mandatory lockdown period," he added.

Ginodia said the element of risk in players associated with the IPO was relatively minor, as they would have to comply with regulatory compliance. "If investors are willing to hold the shares for a longer period, it could be a gamble on wealth creation."

Investors flock to unlisted markets where there is no certainty of obtaining provisions in an IPO. "In markets driven by confidence and liquidity, investors are often afraid of missing out, leading them into the unlisted space," added Jen. "The space is for those who can invest in the long term."

Also Read: Twitter may allow you to receive tips in Bitcoin and Ethereum via Tip Jar