Unlisted shares are becoming more common as an investment option in Indian markets. Unlike listed shares, which are bought and sold on the stock exchange, unlisted shares don’t have an easily accessible price. This dual nature makes it important to understand what factors affect their value.

While public companies are priced based on constant market trading, unlisted shares take on a different dynamic. They're not influenced by the hourly buying and selling seen in listed markets, but instead, their prices are more influenced by perception of investors on how well a company is positioned for future growth, how much competition it faces, and broader economic trends, because of which, one must take a closer look at what is happening within the company and its industry to properly assess the true value of unlisted shares.

Types of Factors Influencing Unlisted Share Prices

1. Company-Specific Factors

Company-specific factors are key internal elements that shape a company’s performance and share price. These factors can vary widely between businesses, and understanding them gives investors a clear picture of what drives a company’s value.

• Profit Sustainability:A company can grow its revenue, but without a sustainable profit model, that growth could fizzle out. Looking for companies with a solid history of profitability, even when growth slows. For example, a company might have high revenue but poor profit margins due to increasing operational costs which raises red flags.
• Disruptive Potential in Established Markets:Rather than focusing solely on startups, looking at how established companies are positioning themselves in emerging industries or disrupting their own market. A company that can redefine or reinvent its market niche has a unique competitive advantage. For instance, integrating automation in the daily operational tasks for a company could cut down on costs.
• Brand Loyalty and Customer Retention:While initial focus is on short-term sales figures, long-term success often hinges on customer retention and brand loyalty. Companies with a dedicated customer base that continuously choose their product over competitors are often in a strong position to weather market fluctuations.
• Corporate Governance and Transparency:Strong corporate governance is crucial in the unlisted world, where investors often have less access to information compared to public markets. Companies that maintain transparent, ethical, and accountable governance practices tend to build investor trust. Whether it’s clear communication about financial health, regular updates on business progress, or strong internal controls, these practices create confidence in the company's future prospects, affecting share valuation positively.

Market-driven factors come from outside the company and can greatly influence how investors feel about buying unlisted shares. These external factors shape the environment in which a company’s value is decided.

• Investor Demand:The price of unlisted shares can rise quickly when there’s strong demand. This demand can come from several factors, like the company’s success, industry growth, or overall market trends. If a company is performing well or operates in a fast-growing industry, investors are more likely to show interest, pushing the price higher.
• Liquidity Constraints:Unlisted shares are harder to buy and sell compared to listed shares because they aren’t traded on public exchanges. This limited trading ability can create price differences, as there are fewer buyers and sellers. Due to this illiquidity, investors often expect higher returns (or a “premium”) to make up for the risk they take when buying these harder-to-trade shares.
• Perceived Exit Opportunities:Investors are often willing to pay more for unlisted shares if they believe there’s a good chance the company will eventually go public (through an IPO) or be acquired. The possibility of a successful exit, where they can sell their shares at a higher price, can drive demand.

Valuing unlisted shares is often tricky because it involves both numbers and judgment. Several methods are used to estimate a company’s share price, but these methods can vary depending on the data available and the company itself.

• Comparable Company Analysis:This approach looks at companies that are similar to the one being valued, usually within the same industry. By comparing key metrics, like revenue or profit, one can get an idea of what the company’s shares might be worth. The problem here is that it’s harder to find reliable data for unlisted companies, making this method less accurate.
• Precedent Transactions:This method looks at past deals involving similar companies. For example, if a similar company was recently bought or raised funding, the price it was sold at can serve as a guide for valuing the company in question. By studying these past transactions, investors can estimate a fair price for unlisted shares based on what similar companies have been valued at.
• Book Value:Sometimes, book value, which is the value of a company’s assets, as listed on its balance sheet, is used to determine the share price. This method works well for companies with many physical assets, like factories or equipment. It’s most common in industries where tangible assets are a big part of the business value. However, it might not capture the true value of more innovative or tech-focused companies that rely on intangible assets like human capital or goodwill.

The broader economic environment and industry trends play a huge role in setting the price of unlisted shares. These external factors affect how well a company can perform and grow, influencing investor decisions.

• Economic Climate:The overall health of the economy—like GDP growth, inflation, and interest rates—directly impacts investor behavior. When the economy is doing well, investors tend to be more confident, leading to higher demand for unlisted shares. On the flip side, during economic downturns, investors may become more cautious, causing share prices to drop as optimism fades. For example, in times of high inflation, investors may shy away from riskier assets, lowering the value of unlisted shares.
• Industry Trends:Certain industries, like renewable energy, fintech, or artificial intelligence, are currently seeing rapid growth. Companies in these sectors often attract more investors because they seem poised for strong future growth. If investors believe an industry will expand, they are more likely to pay a premium for shares in companies operating within it. For instance, a company in the electric vehicle market might see higher demand for its shares as the industry is expected to grow substantially in the coming years.
• Regulatory Environment:Changes in government rules or policies can have a big impact on the value of unlisted shares. If new laws or incentives make it easier or more profitable to operate in a certain sector, investors might become more interested in companies in that sector. For example, tax breaks for startups or lower regulatory barriers for tech companies could make investments in those industries more attractive, driving up their share prices

Unlisted share prices don’t just depend on a company’s performance; outside events—like new technologies, global politics, or shifts in the economy—can significantly influence prices. These factors change the overall market landscape and impact how investors view certain investments.

• Technological Advancements:New technology can open up fresh opportunities for companies, making them more appealing to investors. Companies that use cutting-edge technologies or create game-changing products are seen as having more potential to disrupt their industry and lead in the market. For example, a company developing next-gen AI or green energy solutions may experience a rise in valuation because it could revolutionize its industry. Investors are often willing to pay more for shares in companies they believe will lead these tech-driven changes.
• Geopolitical Events:Political events and global relations can affect how investors feel about a company’s prospects. Things like trade agreements, tariffs, or international tensions can either create new opportunities or risks for certain industries. For example, a political conflict in a region that is critical for oil production could increase the cost of energy, impacting companies in the energy sector. Conversely, a new trade deal could open up growth opportunities for businesses in certain countries, pushing their share prices up.
• Global Economic Trends:Shifts in global economic power or changes in consumer behavior can affect entire industries. For instance, as more consumers demand sustainable products or services, industries like renewable energy or electric vehicles could grow rapidly, leading to higher share valuations for companies in these sectors. Similarly, changing resource availability, like a global shortage of key materials, could drive up the value of companies involved in mining or alternative sourcing.

However, it's important to remember that investing in unlisted shares comes with risks. The lack of liquidity, limited access to information, and market volatility can make these investments more uncertain than those in public companies. Because of these risks, it's crucial to do thorough research and consider professional advice, especially for those who are new to this type of investment.

While unlisted shares can offer great potential for returns, they require careful thought, planning, and a long-term perspective. By balancing optimism with caution, investors can make smarter decisions and better navigate the challenges of this exciting but complex market.