The unlisted share trading market in India has always been a niche business, dominated by institutional investors and HNIs, but now the retail players are also getting attracted towards it. With the promise of handsome pre-IPO gains, this rush has seen a corresponding increase in cases of default, especially with more brokers joining the trade. A recent report by NDTV Profit stated that defaults are getting progressively frequent in the over-the-counter (OTC) market, where unlisted stocks are bought and sold privately-outside the regulated stock exchanges.
Why Investors Feel Doubtful About Unlisted Share Brokers?
In the unlisted share transactions, brokers are playing a major role as they stand to gain high brokerage, as compared to the normal exchange trade, between company insiders and retail clients, who generally invest between 2-5 lakh rupees.
These transactions can be grounded in trust and verbal contracts, without any contract or escrow system. Sellers have been known to renege on a deal, and either delay or fail to deliver the shares at all, when the price of the stock slips sharply after a buyer has paid their money.
This has led to a rise in investor complaints as they end up pursuing the brokers to get their money back, with not much legal help available to them. In contrast to listed markets, the counterparty guarantee system does not exist, and there is no central authority to decide such disputes.
Lack Of Regulatory Check
What is even more worrying is that a good number of the firms whose shares are being traded have more than 200 shareholders, the number that forces some regulatory disclosures under the SEBI norms. The number of shareholders per company is also an issue of concern, with some companies having up to 40,000 shareholders before listing. With an increasing number of brokers and platforms offering such transactions, the absence of regulatory clarity and lack of investor protections has made this profitable sector a risky one.
Moreover, the unlisted share market- dematerialisation has simplified the transfer of shares, and brokers provide access to pre-IPO transactions. However, without effective regulations, retail investors remain exposed to defaults, fraud and price manipulation. SEBI requires that all trades in shares must preferably occur on recognised stock exchanges where there exist investor protection devices. However, the promise of better gains is the bait that keeps unlisted trading going at the cost of financial stability.
What should investors do?
Extreme caution needs to be taken by the investors who explore this market. Record keeping of all transactions is vital, written contracts are mandatory, check the reputation of the brokers and sellers, and whenever, escrow services of a third party can be utilised to secure funds. One should also be aware of the refund time schedules and keep track of the SEBI circulars on the unlisted trading guidelines.
Although the unlisted share market presents thrilling opportunities, particularly with the possibility of gaining access to high-growth potential companies early enough, it is so risky because of the absence of formal regulation, contract enforceability, as well as effective dispute resolution procedures. Retail investors need to be careful as the rate of defaults increases and as more brokers join the fray.
Make sure you trade with a credible unlisted share broker. Demand a written contract. And use escrow accounts whenever possible. It is also prudent to be aware of SEBI guidelines and know about the refund process before investing money.