Defaults Are Rising In Unlisted Share Trade Market, As More Brokers Enter This Lucrative Trade

Instances of trade defaults in private markets have surged, raising concerns for investor protection—even though these trades fall outside SEBI’s direct regulatory purview.

Investors are increasingly reporting defaults in over-the-counter (OTC) trades, particularly involving unlisted shares. These private market transactions have grown in popularity due to the revival of IPO markets and the lure of listing-day gains. As a result, many investors are purchasing unlisted shares from individuals or brokers ahead of IPOs.

The ease of dematerialisation and share transfers between demat accounts has led to a spike in trading activity. However, this has also resulted in a rise in defaults, where buyers fail to receive the shares they paid for.

Notably, several domestic brokerages and their officials are now actively participating in these private share sales. While such services were once limited to high-net-worth individuals, smaller and midsized brokers are now offering them to retail investors with investment capacities of Rs 2–5 lakh. These brokers often pool demand and attempt to place shares from large shareholders.

A growing issue is that some sellers back out at the last moment, especially if share prices rise after payment is made but before delivery. This has led to a wave of complaints against brokers, including delays in refunding money when deals fall through.

Brokerages are entering this space to boost income, as private deals offer higher fees than exchange-based trades. However, these transactions often lack proper documentation and compliance, making it difficult to verify counterparties or enforce agreements.

Some public companies seeking IPO approval have already exceeded the 200-shareholder limit, and others—yet to file—report having 30,000 to 40,000 shareholders, raising regulatory red flags.

SEBI regulations prohibit its registered entities from engaging in private market share transactions. All share trades are required to occur on exchange platforms, which offer counterparty guarantees to protect investors.

In pursuit of higher returns, investors are increasingly shifting to the private market. This trend has led to a surge in defaults on unlisted share trades, as growing participation often overlooks the safeguards established by stock exchanges and regulatory bodies.

Investors Beware! Dealing in unlisted shares is subject to significant financial loss.