Grey Market

Research By: Bhumika jain

Many celebrities have acquired stakes in Swiggy, an Unlisted Company. Its shares are selling like hot cakes in the unlisted market as IPO buzz fuels a 40% jump.

Amitabh Bachchan and actress Madhuri Dixit have made headlines by acquiring a minority stake in Swiggy, together investing ₹3 crores alongside other notable investors like cricketers Rahul Dravid and Zaheer Khan.

In April 2024, Swiggy filed for an IPO via a confidential pre-filing route with the SEBI in April, aiming for a fresh issue of equity shares worth INR 3,750 Cr ($450 Mn) and an offer-for-sale (OFS) component worth INR 6,664 Cr. In July, the stock was trading around ₹355, but it has surged nearly 47% in just two months, currently commanding a price of ₹525. This increase has significantly boosted the market value of the SoftBank and Prosus-backed company (Swiggy's early investors), which jumped from ₹70,000 crore to ₹1.16 lakh crore over the same period. Goldman Sachs also joined Swiggy in 2021 when it was valued at approximately $5 billion. Current valuation of Swiggy is $15.1 billion. 

But Swiggy is not listed on the stock market, so how is the company's shares trading?? Just because some companies aren’t listed doesn't mean you can’t trade in these shares.

Share in a company represents ownership in that company and to gain ownership in a company it does not need to be listed on any market. Anyone can buy shares over-the-counter by 

• Directly investing in startups
• Buying from promoters of the company
• Buying ESOP from employees
• or any other way

Company gets listed on exchanges to raise more capital by reaching out to a vast market and increasing its visibility. However, these are some common ways to get ownership in any company. Aside this, there is one more way to trade over-the-counter in the market that is trading in Pre-IPO market. 

Pre-IPO investments are considered off-record trades that don't involve an exchange. Market involving trading of shares before they are officially launched for trading on the stock exchange is generally referred to as Grey Market. A small set of individuals runs the grey market stock and the deals are based on the mutual trust of individuals. The trading done in the grey market stocks in India is legal but unofficial. 

The allocated IPO shares in the Grey market can be traded both ways i.e. can be sold before they get listed on the stock exchanges or can be sold at a particular premium after listing.

Why invest in Unlisted shares? Generally, there is a profit motive to invest in unlisted shares as they are available at discounted price. 

• They also have the potential to offer higher returns than listed shares because they are not subject to the same market fluctuations and are not influenced by the same factors as listed shares. 
• Since these shares are not subject to the same regulations as listed companies, they may have more flexibility in deciding how to distribute profits. This means that investors in unlisted shares may have the potential to earn higher dividends than those who invest in listed shares.

But not every flower blooms, hence every unlisted company does not perform well, as in case of Paytm (One 97 Communications), it was trading at around ₹2,800-₹3,000 in the grey market.

However, its listing price on the stock exchanges was ₹1,955, and it fell further to around ₹1,560 on its debut, resulting in a significant drop from both the grey market price and the IPO price of ₹2,150 per share. 

So, to lower this risk, informed investing is very necessary whether investing in listed companies, IPOs or unlisted companies. It is mandatory for the listed companies to submit and publish their audited financial statements including balance sheets and profit and loss accounts to the stock exchange. It is also mandatory for companies to submit Draft Red Herring Prospectus (DRHP) to the stock exchange while filing for an IPO. DRHP contains essential information about the company's business, operations, financial performance and prospects. Investors can analyze a company's potential to give returns through these financial statements. But, unlisted companies are not required to disclose their financial statements to the public.

Then, How to evaluate unlisted stocks? It is mandatory for every company, whether listed or unlisted, to file their balance sheet and other financial statements with the Ministry of Corporate Affairs (MCA). But, financials are just one part of analysis while investing; a company's business model, unique value proposition, market share, industry and many more such things also contribute to informed investing. There are some cases where unlisted companies may release certain documents, but they are typically shared with potential investors, venture capitalists or private equity firms rather than the public. In order to get information apart from financials you can check:

- Information Memorandum: This document can outline key details about the business model, industry, revenue generation and future plans. However, it’s typically shared only with interested parties during funding rounds. 

- Pitch Deck: A pitch deck is a presentation or document that startups or unlisted companies use when seeking investors. 

- Private Placement Offer Letter: If an unlisted company is raising funds privately (through private placement), it might issue an offer letter to prospective investors.

Apart from this, there are various publicly available resources that can provide insights into the business like 

• Management interviews on TV, Webinars, Podcasts or Youtube.
• Many company executives participate in industry conferences and speak about their business and the market they operate in. These talks are often publicly available online or covered in media reports.
• News portals also frequently cover announcements regarding unlisted companies, especially if they have strong growth prospects.

These are some ways to gain information about unlisted companies that do not have the same disclosure and reporting requirements that listed companies do. Limited information about private companies can make it challenging to make fully informed decisions. 

There are similar Drawbacks in investing in unlisted shares:

• Since SEBI helps protect investors by mandating strict norms for board independence, audits and protecting shareholder’s rights, the absence of SEBI oversight can lead to weaker corporate governance, which can increase the risk of mismanagement or even fraud.

• SEBI-regulated listed shares are traded on stock exchanges, providing investors with an easy way to exit their investment. Unlisted shares, on the other hand, are illiquid, making it difficult to find a buyer. This poses a risk if you want to sell the shares quickly or if the company does not perform well.

• SEBI ensures listed companies adhere to standardized accounting and valuation methods, making it easier for investors to gauge a company’s fair value. For unlisted companies, there is often a lack of audited financials or standardized valuation techniques, wes it hard to assess whether the company is overvalued or undervalued.

• While unlisted companies may eventually opt for an IPO, there's no certainty on the timing. It could take years for a company to go public, if at all. This means investors may be locked in for an extended period without any opportunity to cash out.

What factors drive the price in the grey market? Grey markets work on demand and supply situations. The perceived value of the company, investor sentiment and other market factors influence the prices at which shares are bought and sold in the grey market. 

Its premium is known as Grey Market Premium (GMP). GMP is the difference between the unofficial grey market price of a company’s shares and the IPO price set by the company itself. Live GMP reflects how the IPO will react on its listing day which depends on its demand. 

• A Positive GMP indicates that investors are willing to pay a premium for the shares in the grey market.
• Negative GMP suggests that the grey market price is lower than the IPO price.

However, GMP can be used as a reference point for determining initial interest in an IPO, but it should not be relied upon solely as a predictor of listing day performance. Investors should consider a combination of factors including the company’s fundamentals, market conditions and their own risk tolerance before making investment decisions. 

There is a process during an IPO that helps determine the price of shares when a company goes public. This process is known as the Book Building process. In this process, the company establishes a price range with a minimum and maximum limit. Investors interested in the public offering place their bids within this range. The lowest price at which the underwriters are willing to sell the shares to investors is referred to as floor price and highest price as ceiling price. After the bidding period ends, the company and the fund managers use a weighted average method to set the final issue price. This final price is at which the shares are sold to investors.

While exiting any investment, its capital gains are subject to tax depending on the type of investment. Tax also differs based on the holding period of the investment. If an investor sells an unlisted stock that has been held for up to 24 months or two years, any gain from the sale is considered a Short-Term Capital Gain and if held for more than 24 months or two years is categorized as a Long-Term Capital Gain.

Investment	Listed stocks	Unlisted stocks
Short-Term Capital Gain Tax	15% excluding surcharge + cess	*
Long-Term Capital Gain Tax	10% without indexation	20% with indexation

Indexation refers to a benefit where the cost of an investment is adjusted according to the inflation rate. This helps in reducing the overall tax incurred.

* Short-Term Capital Gain Tax earned from unlisted stocks is taxed as per the investor's tax slab for the year. These profits are added to the total taxable income for the concerned year and taxed as per the prevailing income tax laws.

Do the unlisted shares have any lock-in? Depends on certain factors. As such, there are no restrictions on the sale of unlisted shares. However, if the company comes up with an IPO and gets itself listed, then as per SEBI rules, all unlisted shares have a lock-in period of 6 months from the date of listing. Also, once the company issue date and listing are published, typically within a few days of the actual listing, corporate action restricts an investor from selling the stock.