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Down from heady highs: Unlisted firms’ shares melt as market tanks

Brokers who transact in unlisted securities say that promoters have been placing shares in the private market at a significant premium ahead of their public offerings.

For instance, PharmEasy started offloading shares through some investment banks at Rs 140/per share and these are now quoting at '70'. It's the same story for many other IPO-bound companies.
For instance, PharmEasy started offloading shares through some investment banks at Rs 140/per share and these are now quoting at '70'. It's the same story for many other IPO-bound companies.

By Malini Bhupta

Frothy valuations of new-age companies are getting a reality check, especially after the Securities and Exchange Board of India’s (Sebi) consultation paper on disclosures from companies that do not have a track record. Promoters have been placing shares of hitherto unlisted companies in the private market at a significant premium, in order to create a buzz in the market. The recent meltdown in the market has also impacted the prices of unlisted securities.

Brokers who transact in unlisted securities say that promoters have been placing shares in the private market at a significant premium ahead of their public offerings. PB Fintech’s shares were placed at a high price in the unlisted market, but the IPO price was much lower, resulting in losses to retail investors. Sandip Ginodia, CEO of Altius Investech, said: “Prices of unlisted companies that are headed for an IPO have gone down from their euphoric levels. Promoters of some new-age tech companies have used their fame and publicity to dump their shares in the unlisted market before their IPO. For instance, PharmEasy started offloading shares through some investment banks at Rs 140/per share and these are now quoting at ’70’. It’s the same story for many other IPO-bound companies.

In the unlisted market, shares of One97 Communications rose to heady highs of Rs 4,000 per share last year but its shares crashed upon listing. Bikaji Foods, which has filed its draft red herring prospectus with Sebi to raise Rs 1,000 crore, has placed shares in the private market at Rs 400 per share, but the value has declined since.

Alok Saigl, president & head, Edelweiss Private Wealth, said: “Few of the companies’ shares were trading at 30% to 40% premium in unlisted/private markets in comparison to the price it received once the IPO was launched. The recent fall in the prices of new-age companies has taught investors that it is not a one-way street. The correction has hurt some of the investors who invested in these pre-IPO allotments. We believe this instrument is for sophisticated investors who understand the risk and have the ability to do an independent and in-depth evaluation of such companies.”

Ginodia says that a disturbing feature is the stock split and bonus issues that promoters announce to make scrips appear cheap. Many of the above companies have increased the number of shares by between 10 times and 4,000 times. Another glaring problem, say investment bankers, is the complex capital structure, several convertible issues and dilution of equity making it difficult for investors to figure out the real picture.

While Sebi’s new disclosure framework will make things a little more transparent, this market is not for retail investors. Investors should also beware of these pre-IPO placements as these are avenues for insiders to cash out ahead of the share sale.

Market sources said the ministry of corporate affairs needs to make it mandatory for companies to inform immediately any dilution by way of stock split and bonus on record date of corporate action. They added that such database of all unlisted companies should be available.

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