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A comprehensive thread on Pre-IPO!
We will cover the meaning, risks, advantages, taxation, complete cycle of a Pre-IPO deal and a few examples of wealth creators and wealth destructors in the Pre-IPO Market!
Let's start
A comprehensive thread on Pre-IPO!
We will cover the meaning, risks, advantages, taxation, complete cycle of a Pre-IPO deal and a few examples of wealth creators and wealth destructors in the Pre-IPO Market!
Let's start
The word IPO has a lot of emotions attached to it – Excitement, suspense, disappointment, happiness, anger, jealousy (if you friend gets an IPO allotment and you do not) and many more.
These days IPOs are getting so much subscription that the IPO going companies would think for once that why didn’t they sell the whole company! 50-100x oversubscriptions are the new normal!
But that poses a problem to investors at large – You see more the rush, lesser is the probability for an investor to get allotment – With over-subscription running so high, IPO allotments become all about luck and like a lottery.
This becomes a major roadblock as investors cannot get confirm allotment or allotment at a price they deem affordable. These problems amongst a host of other factors have led to the emergence and depth of Pre-IPO or unlisted markets.
What is Pre-IPO?
Pre-IPO investing means buying/selling shares of a company before its IPO i.e. it is still unlisted.
Form of shares - The shares being sold are in the demat form and they reflect in one’s demat account with its ISIN number.
Pre-IPO investing means buying/selling shares of a company before its IPO i.e. it is still unlisted.
Form of shares - The shares being sold are in the demat form and they reflect in one’s demat account with its ISIN number.
Investing in pre-IPO helps one to identify good companies which are going to get listed along with number of shares of their wish at a price they feel comfortable at. One also gets niche/special opportunities which are only available to biggies like PE or VC Firms etc.
And just like the principle of listed market, it can pay off handsomely to identify opportunities before someone else and that is done at looking someplace no one or very few people are looking.
Origination of pre-IPO shares – Employees with ESOPs who have completed their vesting period sell their shares to brokers or dealers and then they get it to the market.
They may sell if they have a need of money or because they think the price at which they are selling is the best price. Also, it should be noted that this is a secondary off market transaction and the Company is NOT involved in any way in the transaction.
Min. Amount - Depending on the shares and dealer, min. amount can be between Rs.50,000-100,000.
Rules - As per SEBI rules, all pre-IPO shares have a lock in of 1 year from the date of listing. Before that, they are freely tradeable via filling a Delivery Instruction slip.
Rules - As per SEBI rules, all pre-IPO shares have a lock in of 1 year from the date of listing. Before that, they are freely tradeable via filling a Delivery Instruction slip.
Risks –
Listing timeline may not be clear and an exit may be much delayed. (HDFC group has always discussed and adhered to its subsidiary listing plans)
Being the pre-IPO market, shares are illiquid and finding a buyer for the unlisted shares can be difficult at times
Listing timeline may not be clear and an exit may be much delayed. (HDFC group has always discussed and adhered to its subsidiary listing plans)
Being the pre-IPO market, shares are illiquid and finding a buyer for the unlisted shares can be difficult at times
If someone is a first time buyer, you need to be careful to check prices everywhere (Various other seller checks) so that you don’t get fooled.
One should do proper valuation to see the true value of the firm and then ascertain if the price being paid is fair.
One should do proper valuation to see the true value of the firm and then ascertain if the price being paid is fair.
Only when a person has a good margin of safety along with good value creation seen ahead, should one proceed with pre-IPO investing.
The dealer in the pre-IPO market must be someone who is recommended and has a clean record. This market works purely on trust.
The dealer in the pre-IPO market must be someone who is recommended and has a clean record. This market works purely on trust.
Besides evaluating the company, please take into account your risk appetite, capital commitment and liquidity issues.
One recent mis-selling that happened was in the unlisted shares of Utkarsh SFB, the holding company’s shares were being sold, so be careful!
One recent mis-selling that happened was in the unlisted shares of Utkarsh SFB, the holding company’s shares were being sold, so be careful!
Taxation of Pre-IPO/Unlisted Shares –
Unlisted Stock is not listed on any recognised stock exchange. Thus, the Company does not pay STT i.e. Securities Transaction Tax on such shares.
Unlisted Stock is not listed on any recognised stock exchange. Thus, the Company does not pay STT i.e. Securities Transaction Tax on such shares.
Long Term Capital Gain (LTCG): If an investor sells an unlisted stock held for more than 24 months, gain or loss on such sale is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL). (Rate - 20% with indexation)
Short Term Capital Gain (STCG): If an investor sells an unlisted stock held for up to 24 months, gain or loss on such sale is a Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL). (Rate - taxed as per slab rates)
Life cycle of a Pre-IPO deal -
Wealth Creators in the unlisted market -
BSE was available at 150-200â‚ą, IPOed at Rs 806, opened at Rs 1085, went till Rs 1200.
Dmart was available up to some extent at 200â‚ą, IPOed at Rs 299, and now trading at Rs 2824.
BSE was available at 150-200â‚ą, IPOed at Rs 806, opened at Rs 1085, went till Rs 1200.
Dmart was available up to some extent at 200â‚ą, IPOed at Rs 299, and now trading at Rs 2824.
Galaxy surfactants was traded at 250-700â‚ą, it IPOed Rs 1470-1480, now at Rs 2022
Wealth destroyers in Unlisted market -
PayTM which traded at Rs 20000 at its peak has since halved from its peak. We still remember people were rushing to buy this at Rs 20000 because they were extremely bullish at any price point.
PayTM which traded at Rs 20000 at its peak has since halved from its peak. We still remember people were rushing to buy this at Rs 20000 because they were extremely bullish at any price point.
Investors should make sure to check fundamentals and the health of the financials before investing in any pre-IPO company, they should not invest just because big investors are investing.
CSB IPO - It IPOed at 195, went on to list at 274, made a high of 314 and then traded at 163, below its IPO price, all within 3 months!
But here is the interesting part, just to get into the listing gains game, a lot of people were buying pre IPO in the range of Rs 200-220,
But here is the interesting part, just to get into the listing gains game, a lot of people were buying pre IPO in the range of Rs 200-220,
because who doesn’t love listing gains? (But note that pre-IPO shares have a lock in of 1 year)
Over here people should make sure that they do not make this mistake of buying pre ipo shares for listing gains as the lock in becomes valid from the IPO listing date.
Over here people should make sure that they do not make this mistake of buying pre ipo shares for listing gains as the lock in becomes valid from the IPO listing date.
Should you invest? – We feel after considering your risk appetite and your capital commitment, you may take a look at this market.
End of thread!
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