If you have been investing in the stock market for some time now, the question “What are Pre-IPO shares?” is bound to pop up sometime or the other. IPOs are often seen as the earliest time to invest in a company, which can be quite alluring. However, having the ability to invest in companies about to go public in the near-future can be extremely profitable, if done properly.
Without further ado, let’s answer the questions “what are Pre-IPO shares”, “how can I Invest in Pre-IPO shares in India”, and “who is the best Pre-IPO Investing broker in India” among many other questions that you might have.
What are Pre-IPO Shares?
Late stage private companies that are soon about to go public are often referred to as Pre-IPO companies. These companies usually have well-established business models, and are often considered lucrative companies to invest in. However, since they are not listed on public stock exchanges, investment opportunities are extremely limited.
Fortunately, with Pre-IPO shares, you will be able to purchase shares of these unlisted companies, that are all set to go public.
Typically Pre-IPO shares consist of the shares belonging to the promoters, their relatives/friends that were issued during the company’s establishment. These shares could also consist those shares that were issued during further rounds of fundraising, typically from Angel Investors, Venture Capital firms, investment bankers, etc. Before the company goes public, these shares will usually be available at a huge discount.
Companies that are looking to list themselves in a public stock exchange may have several reasons that are keeping them from getting listed. Usually, companies will not initiate the listing process unless they reach a certain milestone. Furthermore, the process of listing in a public stock exchange is tedious and costly.
Where do These Stocks Come From?
As mentioned earlier, Pre-IPO stocks generally come from the promoters of the company looking to raise additional funds for the business. These stocks could also be from angel investors, VC and private equity firms that invested in further rounds of funding, but this is a rare occurrence.
Usually, promoters place large blocks of shares for sale, which are purchased both by institutional and retail investors.
Is Investing In Pre-IPO shares for Me?
Investing in Pre-IPO shares is considered fairly risky, and should only be invested by individuals with a high risk appetite. There is a high barrier to entry, as it is required to purchase entire blocks of shares (albeit at a discounted price), which might be an issue for most retail investors.
These shares are typically preferred by High Networth Individuals (HNIs), Angel investors and VC firms, but the interest for Pre-IPO shares from retail investors is increasing day-by-day.
It is important to note that SEBI has imposed a mandatory lock in period, which requires for retail investors to hold their investments for a minimum period of 6 months from the date of allotment in IPO.
Here’s a complete list of lock in period rules, as imposed by SEBI.
- For promoters – 20% of holdings should be locked in for a minimum period of 18 months from the date of allotment in IPO, while the remaining shares can be sold after a period of 6 months from allotment date on IPO.
- For venture capital funds, alternate Investment Funds (category I/II), or Foreign Venture Capital Investors – Investments are locked in for a period of 6 months, calculated from the date of acquisition.
- Other Public holdings (Including HNIs, Retail Investors and Body Corporates) – Shares are locked in for a period of 6 months calculated from the date of allotment in IPO.
Yes, purchasing pre-IPO shares are 100% legal in India. In fact, purchasing Pre-IPO shares is the number one method that angel investors, Venture Capital and Private Equity firms employ to generate a high Return on Investments. However, care should be taken to ensure that you conduct proper research before investing in pre-IPO shares, as it is considered a fairly risky asset class.
Pre-IPO investment platforms like Goodwill conduct independent research and allow only those shares that are fundamentally solid to be traded via their platform. However, this does not act as a replacement to you conducting your own research, before deciding to invest in Pre-IPO shares in India.
How to Invest in Pre-IPO shares in India?
As mentioned earlier, since Pre-IPO companies are not listed on the stock exchange, investment opportunities are restricted. There are multiple offline and online avenues, but the benefits of investing in Pre-IPO online definitely gives an edge to the online avenues.
With Goodwill Wealth Management, the best Pre-IPO investing broker in India, it is fairly straightforward to invest in Pre-IPO shares in India. Just follow these following steps.
- Create a Free Demat account with Goodwill.
- Furbish basic KYC Documents.
- Purchase Pre-IPO shares. Proof of Share allotment and transfer will be made on confirmation of the purchase.
- The company will directly issue a Share Purchase Agreement in the Name of the investor.
How are Pre-IPO Shares different from Unlisted Shares?
Unlisted shares, simply put, are the shares of privately held companies that are not listed on the stock exchange. Pre-IPO shares are specifically those unlisted shares of companies that have an intention to get listed sometime in the near future. While there are plenty of solid unlisted companies that give amazing returns in the form of dividends, liquidity of such shares remains a problem.
Unlike Pre-IPO shares, where once listed you can freely trade your shares after IPO (post the initial lock in period), selling/trading in unlisted shares in India can be quite difficult. Since these unlisted shares are not listed on public stock exchanges, it requires for you to manually find individuals willing to purchase your stake in the company.
This makes Pre-IPO shares much more desirable, as compared to unlisted stocks.
If your risk profile allows you to purchase unlisted shares in India, the question “How to buy unlisted shares online” should have obviously popped into your mind. However, most unlisted shares that are available online are of companies that are on the verge of being listed on public stock exchanges (Pre-IPO stocks).
Goodwill offers only Pre-IPO shares for investors. We only make available those shares that have, by our independent research, solid fundamentals, and have high probabilities of succeeding. However, the process should be fairly similar for external brokers as well.
- Share the CMR copy of your free Goodwill Demat account to the online agent willing to trade in unlisted shares.
- Transfer the money to your agent, and await the transfer of shares to your Demat account.
- Proof of Share allotment and transfer will be made on confirmation of the purchase.
- The company will directly issue a Share Purchase Agreement in the Name of the investor.
Investing in Pre-IPO shares can be extremely beneficial, if done right. By investing in companies that are all set to be listed on a public stock exchange (primarily the NSE or the BSE), you stand a significant chance to benefit immensely at a later date.
When investing in a pre-IPO share, the investor usually purchases the share at a significant discount. When the company goes public, the investor gains significant returns on the investment in the form of capital gains. Typically, successful investment in a pre-IPO shares is characterized by a high ROI.
For instance, stocks of RBL Bank limited were traded at INR 60 pre-IPO, which shot up to INR 225 (375% increase in value) at the time of IPO.
Not only do the returns on investment are high, pre-IPO stage companies are usually in the ultra-growth phase. During this phase, it’s not only their financials that show high growth, but the valuations tend to sky-rocket. This is perhaps the latest by which one can invest in a company before the true valuation of the company is realized.
After a successful IPO, the prices of the shares tend to be inflated for a while, before a market correction happens. If you get a chance to invest in a company just before its IPO, the prices will be highly discounted, as compared to its market value/value post IPO.
This is not to be confused with Shares discounted at a discount (wherein the company issues shares at a value less than the par value), which is outlawed by the Companies Act, 2013.
If you want to wait for the IPO before investing in a company, the maximum you can invest is capped at INR 2 Lakhs. However, if you really believe in the fundamentals of a particular Pre-IPO company, you will be allowed to invest even in crores, if you wish to do so.
If the IPO is highly successful, allotment of shares might not be a certainty. If the demand during the IPO is high, it is highly probable that the quantity of shares allotted to you will be fewer than what you applied for (if not complete rejection of the application). However, in the case of Pre-IPO shares, you are certain to have your shares allotted, once the purchase is complete.
- Capital Lock-in – The minimum lock-in period of 6 months post the date of allotment in IPO means your investment is illiquid for a considerable time.
- High barrier to entry – Since Pre-IPO shares are usually sold in blocks, a high initial overlay is required to purchase Pre-IPO shares.
- Failure in IPO – Companies may fail to meet the expectations during the IPO, and may cause a significant capital loss, due to external factors not under their control.
- Delays, Halts or Cancellation of IPOs- Though the companies may intend to get listed in the public share markets, there are significant possibilities that the much-expected IPO never happens.
Investing in Pre-IPO Shares in India – The Goodwill Edge.
Goodwill Wealth Management is a well-renowned player in the Indian Pre-IPO market, with decades of experience in this field.
Apart from being a well reputed Pre-IPO investment platform, we also provide regular financial advice and insights generated from trained financial professionals.
We recommend only those Pre-IPO shares of those companies that have high chances of profitability based on thorough research. Our parameters include:
- Identification of companies with good market reports and past performance.
- Thorough analysis of the promoter’s backgrounds and track record.
- Comprehensive examination of critical financial data, including dividend payments, going back several years.
- Estimated IPO price and dates.
- A comprehensive study of their industry, product/service, market share, order books, among other crucial factors.
- Competition, peer and valuation analysis.
- A study of the holding patterns of the shares, and research on the major shareholders.
- Constant eye on the market news, and the potential long term prospects for the company.
- And many other benefits, as can be found in Goodwill’s Pre-IPO page.
Pre-IPO shares are becoming one of the most popular methods to profitable investing even among retail investors. These shares of unlisted companies that are set to get listed on stock exchanges are often sold at a discount, enabling you to grab a significant chunk of the company even before they are publicly listed. However, it is essential that you invest in Pre-IPO in India shares only through reputed Pre-IPO investing apps, like Goodwill, to minimize the risk of undesirable investments.
What are you waiting for? Create your free Demat account now, and begin investing in these lucrative Pre-IPO shares. Looking for more details? Contact +91 80122 78000.