Interest Peaks In Unlisted Shares' Market But Zerodha's Nithin Kamath Has A Stern Warning

Zerodha Co-founder Nithin Kamath on Friday warned investors about the risks of buying unlisted company shares, highlighting problems like the lack of price discovery and the lack of adequate regulation in the space.

Kamath’s advice comes amid rising interest among Indian investors, who are eager to buy unlisted shares, hoping to earn big returns from initial public offerings (IPO) and subsequent listing of shares on the stock exchanges.

“A wealth manager approached us recently to buy one of our unlisted companies so that he could sell it at a 50% markup immediately. The popularity of some of these unlisted companies, like NSE, MSEI, Chennai Super Kings, among retail investors is crazy," he said in a post on X.

In his post, Kamath highlighted issues with such forms of trading, including the lack of price discovery, high markups and lack of a proper regulatory framework. According to him, investors should be cautious as IPO prices can often be lower than unlisted share prices, making gains uncertain. 

To support his claim, Kamath shared a blog post by Zerodha highlighting the recent case of HDB Financial Services, which launched its IPO on Wednesday. Several investors faced significant losses for going through the 'unlisted' route as the IPO price band was set at Rs 700 to Rs 740 per share. This marked a nearly 40% drop from its peak unlisted market price of over Rs 1,500 apiece, highlighting the risks associated with investing in unlisted shares.

"Even if an unlisted company IPOs, its price can be below what you paid. For example, HDB set its IPO price band 40% below the last traded prices on unlisted platforms," Kamath said.

The Zerodha chief also outlined that trading in unlisted markets can leave investors with liquidity issues. He cited the example of the National Stock Exchange (NSE) IPO, which is highly anticipated but has faced delays.

"Companies can go a long time without an IPO like NSE, which means you can get stuck without liquidity. Unlisted companies also make fewer disclosures than listed companies," he noted.

According to Kamath, retail investors should stick with mutual funds as they are a much safer and more reliable investment option. "You are better off investing in mutual funds than trying to pick unlisted companies," he said.

With over 44,000 views on the post, many users agreed with Kamath, calling unlisted shares a "liquidity trap with sky-high risk".