As HNIs, institutions enter grey market to catch ‘em young, unlisted market loses its soul

NEW DELHI: The grey market, or the unofficial market for unlisted shares, used to be a platform that some used to pick up shares of top-notch companies at early stages, while others looked at it to pick up the first cues on IPOs before investing in them.

Since expert hands operate here, the valuations given to the stocks used to be true reflection of the businesses.

That space has ceased to be so, thanks to the influx of a host of HNIs and a few institutional investors, trying to catch companies young. As shares are in short supply, this rising demand has inflated prices, which do not hold after the company goes public and that leaves some investors trapped.

What’s more, market watchers point out that a few financial intermediaries are going around selling unlisted stocks to unsuspecting and inexperienced small investors, thereby leaving in a sure shot trap.

They can easily figure out the number of shares available in the off-market from annual reports and trigger the price. This leads to malpractices in the business. Such tactics trap retail investors, who enter at astronomical and far-fetched valuations.

In recent times, many of the newly listed stocks have failed to live up to the expectations they had built in the grey market, leaving investors disappointed.

Dealers in the unlisted markets attribute this to herd behaviour among investor, valuation bubble, fragile fundamentals of the businesses and also lack of opportunities in a liquidity-flooded market.

“There is a wide gap between demand and supply (in the grey market). Supply of shares is limited, whereas the demand is unlimited,” said Dinesh Gupta, Co-founder, UnlistedZone. "Earlier, shares used to trade at a decent discount, but the spike in demand over the years has evaporated all those discounts. Now, unlisted shares are demanding hefty premia."

Shares of Suryoday Small Finance Bank were trading at Rs 320 prior to its IPO. However, the stock now trades below Rs 240 two months after its listing. UTI AMC was trading at Rs 900-950 before the IPO. The company raised primary capital at Rs 554. The stock now trades at Rs 775 six months after listing.

The recently relisted shares of Coffee Day Enterprises are available at just Rs 25, half the price they used to command in the unofficial market prior to listing. Another relisted candidate, SMC Global, had surged to Rs 95, but now one can buy it at Rs 70 post listing.

"The unlisted market used to be a pure play of value buying, which has lost its charm. It is not plain vanilla. Very much like secondary market, the market is left with limited number of promising players,” said Sandip Ginodia, CEO of Kolkata-based Altius Investech

"Now valuations have shot up rapidly, which makes the market more price-sensitive. Investors must have a long-term horizon to witness growth of business, but everyone is keen on making a quick buck,” he said.

Barbeque Nation Hospitality was trading at Rs 550 in off-market deals, but is now marginally up at Rs 625. MSTC and CSB Bank are some other notable examples that failed to reward investors, despite the buzz in the unlisted market.

However, Rakesh Jhunjhunwala-backed Nazara Technologies has bucked the trend, delivering up to 85 per cent return to investors since listing.

Many of these shares had been sold to insiders as ESOPs, which then found their way to the unlisted market. The lack of a real, fair and open price discovery adds to the woes.

Gupta of UnlistedZone compares the current situation of the unlisted market to exit polls in elections. He said just like poll results are estimated on the basis of data from a limited sample size of total population, similarly, investors end up overvaluing a company as the free float in the pre-IPO market is very limited.

On the flip side, raising capital privately from a small group of people is a legitimate and important part of the financing business. Angel investing and venture funding are but special cases of such share sales. There’s nothing wrong with owners of such stocks selling them off to others privately.

However, investors are neglecting the sky-high and lofty valuations and are willing to pay unjustified premium. For instance, Reliance Retail is trading at an absurd market-cap of Rs 9-9.5 lakh crore, compared with Rs 12.5 lakh crore for Reliance Industries.

“Big players with deep pockets have entered the market, but there is limited depth to absorb money. So they are willing to pay much higher prices than the intrinsic valuation,” Sandip Ginodia, CEO of Kolkata-based Altius Investech said.

He said the entry of wealthy investors and big ticket-sized large alternative investment funds (AIFs) has hampered the process of wealth creation in unlisted markets. The scarcity premium is reaching bizare levels.

Devendra Agrawal, Founder & CEO, Dexter Capital Advisors said the pre-IPO market has been a puzzle for many novice investors. Institutions buy stakes in top-notch nascent businesses but HNIs and retail investors are now rushing to this space, chasing the trend or buzz, thus pushing up prices.

“Not all the companies from this space are backed by robust fundamentals, unable to sustain premium pricing," he said. “Investors must be cautious and bet on quality companies at fair prices with decent growth opportunities.”