Unlisted shares refer to the stock of companies that have not been listed on a formal stock exchange in India. These shares are not available for public trading in the same way that listed shares are, meaning they do not have prices that fluctuate every second. The absence of a publicly traded market for unlisted shares means that their pricing mechanism is quite different from that of listed stocks.
One of the most major differences between listed and unlisted shares is that the prices of unlisted shares don’t change every second. In a listed market, the price of shares fluctuates continuously due to the dynamics of supply and demand, as buyers and sellers trade throughout the day.
Unlisted companies do not have the infrastructure for public trading of their shares. They may not meet the regulatory requirements to be listed on an exchange, or they may simply choose not to go public. Therefore, unlisted shares are generally bought and sold through private transactions where the price is not set by daily market activity but is agreed upon by the parties involved based on various factors, including the company’s value, growth potential, and financial health.
The lack of daily trading means that unlisted share prices can remain relatively stable for long periods, with changes occurring only when new funding rounds or major company events occur.
Less Information Available
One significant challenge in pricing unlisted shares is the limited availability of public information. Unlike listed companies, which are required by law to disclose their financial statements, operational data, and other relevant information to the public, unlisted companies are not obligated to do so. This lack of transparency means there’s often limited insight into the company’s financial health, market position, and future prospects.
Subjective Valuation
Valuing unlisted shares is often more subjective than valuing listed ones. The absence of a daily market price means that valuations must be based on methods that rely on assumptions that can differ widely from one investor to another, making the valuation process less concrete.
Limited Market Data
With unlisted shares, there is no readily available historical pricing data to guide investors. For listed companies, price trends and market data provide a valuable context for determining share value. Without such data, pricing unlisted shares becomes even more speculative and dependent on the parties involved.
The very first element that determines the price of unlisted shares is the company’s value itself, which is a critical part of the valuation process. The valuation of a company is an estimate of its worth and depends on a combination of financial and non-financial factors. For unlisted companies, the valuation is more subjective because there is no daily market price to serve as a reference point.
Some of the major factors involved in deciding a company's value include:
a. Revenue and Profitability
How much money a company is making is one of the most important indicators of its value. A company with high revenue and consistent profits tends to be valued higher, which can translate into a higher price for its shares.
b. Growth Prospects
The future growth prospects of the company are perhaps even more important than its current state when determining the price of unlisted shares. Investors typically base their purchasing decisions on the potential for the company to expand its market share, increase revenues, or even become profitable in the future.
For example, an early-stage startup working on disruptive business models may attract a lot of investor interest even if it has not yet achieved substantial profits. Investors will look at factors such as the scalability of the business, the team’s expertise, the product’s uniqueness, and the market demand for the company’s offerings.
c. Market Position
Companies that hold a strong position in their industry, such as being a leader in technology, healthcare, or e-commerce, tend to have higher valuations. This is because these companies are perceived to have more stability, brand recognition, and competitive advantages that contribute to future success. Investors are often willing to pay a premium for shares in companies that dominate their sectors.
d. Financial Health and Performance
Another factor that impacts the valuation is the company’s financial health. If the company has a strong balance sheet, low debt, and high cash reserves, it is often valued more favorably. On the other hand, companies with high levels of debt or weak financial performance may have their shares priced lower, as investors may see them as riskier.
When a company raises capital through private funding rounds, the price of unlisted shares is usually set based on the valuation of the company at that time. This valuation is typically determined by investors, such as private equity firms, who analyze the company’s financial performance, growth prospects, and industry potential.
At each funding round, the company’s share price is recalculated, reflecting how much the company is worth at that particular point in time. The price of shares in subsequent rounds tends to increase as the company grows and proves itself to be a profitable and promising business.
Unlisted companies often raise money through funding rounds, which also play a significant role in determining the price of their shares. These rounds occur at different stages in the company’s lifecycle, and each stage tends to see a different share price based on how much the company has grown and how much risk is involved.
a. Early Stages
At the very beginning of a company’s journey, it typically raises funds through seed funding. At this stage, the company is in its infancy, and the shares are usually priced lower due to the high risk and uncertainty involved. Investors in seed rounds are typically willing to take on more risk in exchange for a chance to own part of a company.
b. Growth Stages
As a company matures, it enters growth funding stages such as Series A, Series B, and so on. In these rounds, the company has proven itself to a certain extent and is likely generating some revenue. As the company demonstrates its potential for growth and expansion, the share price begins to rise. Investors in these rounds are usually institutional investors or venture capital firms that are betting on the company’s future success.
c. Pre-IPO Stage
The price of unlisted shares reaches its highest point just before a company goes public in an Initial Public Offering (IPO). At this stage, the company is considered to have reached a level of maturity where it is ready for a public listing. Since an IPO is seen as a major milestone, the share price in the pre-IPO stage reflects this upcoming event, and shares become the most active at this point.
Like any asset in a market, the price of unlisted shares is heavily influenced by the demand from investors. If more people want to invest in a company, the price of its shares will naturally rise. This demand can be driven by various factors, including the company’s performance, the industry it operates in, and investor sentiment.
a. Strong Performance or Hype
Unlisted companies that perform well, generate sustainable revenues, or have growth potential tend to attract more investors. For example, a tech startup that develops a breakthrough product or secures a high-profile partnership may see increased interest from investors, driving up the demand for its shares. As a result, the share price will increase because buyers are willing to pay more to own a piece of the company.
Similarly, companies in high-demand sectors, such as renewable energy, fintech, or AI, are often subject to higher demand because investors are eager to gain exposure to these rapidly growing markets.
B. Investor Sentiment
Sometimes, demand for unlisted shares can also be driven by perception. In some cases, investors may purchase shares in companies simply because they believe the company will soon go public, and they expect the price to rise post-IPO. Investor sentiment plays a large role here! If there’s positive buzz about the company’s prospects, the demand for its shares can rise, pushing the price higher. On the flip side, if investors become wary about the company’s future or the industry as a whole, demand can drop, which will lead to a decrease in the share price.
Unlisted companies may also decide on an exit strategy, either by going public through an IPO or being acquired by another company. Both options significantly impact the price of unlisted shares.
a. IPO
As mentioned earlier, companies approaching an IPO typically see their share prices rise as investors anticipate the company’s entry into the stock market. An IPO is a signal that the company has reached a level of maturity and is prepared for public trading, which can lead to more interest in the price of its shares before they officially list on the exchanges.
b. Acquisition
If a company is bought out by another company, the price of its shares can be influenced by the acquisition price. If the acquiring company offers a premium for the unlisted shares, this can drive up their value. In contrast, if the company is acquired at a lower price or struggles with negotiations, the price may fall.
Lastly, the broader economic and industry trends also play a role in determining the price of unlisted shares. Economic conditions such as interest rates, inflation, and overall market sentiment can affect how investors perceive the value of a company. For instance, during economic downturns, even well-performing companies may experience a drop in the price of their shares as investors become more risk-averse.
Similarly, industry-specific trends can influence share prices. If an unlisted company operates in a sector experiencing a boom, such as electric vehicles or cloud computing, its shares are likely to be priced higher. Conversely, if an industry faces regulatory challenges or declining demand, the share prices of companies within that sector may fall.
The lack of transparency in unlisted companies makes it a bit challenging for investors to determine their true value, which is why prices can be more subjective and influenced by factors such as demand from investors and the company’s future growth prospects. For investors considering unlisted shares, understanding these pricing mechanisms and the factors backing the valuations is necessary by doing proper research.
