Financial intermediaries are going around selling unlisted stocks to unsuspecting and inexperienced small investors. Some of these investors are not even clear about the exact difference from listed stocks and how this affects the value and liquidity of their investments. As far as I can see, these sales (probably) follow the letter of the prescribed legal norms, but are so far outside the spirit and intention of the law that they definitely merit some close regulatory attention.
I was recently approached by a childhood friend for some investment advice and was amazed to discover that while he had a substantial equity exposure, all of it was in unlisted stocks. He had all the proper paperwork of ownership but he did not realise--had never been told--that he was missing the most important part of retail equity investing. These are a fair price which has been discovered in a public and transparent market, as well as an ability to sell the stock whenever he wanted to.
The strange part is that these stocks are sold to unsuspecting savers with a veneer of something exclusive and private--as a kind of a special favour of being let into a deal which is not available to the common person. That's a clever sales tactic but basically just a trick that is being played on an unsuspecting victim. I'm not an expert at the relevant law but it seems that there is no effective limit to the number of shareholders that a public (but unlisted) company can have. In fact, properly structured, and helped along by the internet and social media, there could well be a substantial underground market in unlisted stocks in the country, with a lot of people being misled into buying something that is an utterly unsuitable vehicle for investments at their small scale.
Now, it's no one's case that there's anything wrong in unlisted shares being bought and sold. Raising capital privately from a small group of people is a legitimate and even important part of financing businesses. In fact, angel investing and venture funding are but special cases of such share sales. Equally, there's nothing wrong with owners of such stock selling them off to others privately. If the two parties have the scale and the knowledge to understand the underlying business and take a call then that's fine. However, if one of them is a PPF-and-SIP kind of person who is being relieved of two or three hard-earned lakhs by a hard-selling story-teller, then there's something wrong.
Another interesting aspect is that, based on the details of actual sales I have seen details of, is the nature of the companies whose stocks that are being sold. It appears that the sales pitch is not that you can buy these stocks privately and then sell them privately. Instead, the pitch is that these companies are about to get listed and after that, the stocks' price will go up manifold. However, in reality, it would appear that many of these are shares that were sold to insiders as ESOPs and then the companies' IPO plans came a cropper and now the employees are desperate to unload the stock. The National Stock Exchange (some serious irony here!) and UTI are two such stocks that are being sold in this manner. Unfortunately, the typical small buyer of these unlisted stock is not aware of the problems and delays in the said IPOs. If there really was any transparency in the pricing, then such stock would be available for a pittance as there would be eager sellers but buyers who would have much better options in the proper stock markets. It is this lack of a real, openly discovered price that is the worst part of this practice.
As I said earlier, in theory, there is nothing wrong in trading unlisted shares. However, one clearly gets a sense that there are some decidedly unhealthy practices in this business. Just the kind of thing that needs some regulatory attention before too many small investors are misled into unsuitable investments.
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