Pre-IPO Valuations: Who Actually Decides The Price of Unlisted Shares In India?

Investors prefer public markets for equity investments, but the market for unlisted shares has been gaining popularity as an alternative investment option. Unlisted shares provide investors with equity ownership rights for companies that have not yet listed their stock on exchanges like the National Stock Exchange of India and BSE Limited.

These securities give investors the opportunity to invest in companies that are still developing before those companies go public through an Initial Public Offering (IPO). Investors who want to enter this market want to understand the process that determines how unlisted shares will be valued. The unlisted market operates in a decentralized system, which uses various factors to determine price, while listed equities trade continuously with clear price discovery.

Valuation as the Starting Point

The process of determining prices for unlisted shares starts when registered valuers, merchant bankers, and chartered accountants perform their official valuation assessments.

"The professionals assess fair market value (FMV) through established valuation techniques when companies conduct private placements or issue new shares. The Discounted Cash Flow (DCF) approach estimates a company's present value by calculating its future cash flow projection. The Net Asset Value (NAV) approach derives company value through the assessment of its total assets and total liabilities. Analysts frequently apply comparable company analysis to assess the company's performance through comparisons with other firms that operate in the same market segment." commented Piyush Jhunjhunwala, Founder & CEO, Stockify.

The frameworks assess multiple factors, which include revenue growth and profitability trends, competitive positioning, market size, and long-term projections. The valuations function as benchmarks that traders use to measure value, but they do not establish the ultimate trading price.

Demand and Supply Dynamics

The actual transaction price of unlisted shares depends on demand and supply in the real economy. Investors show strong interest in companies that operate in high-growth sectors or plan to launch an IPO within the upcoming three months. Their shares will then be sold at prices that exceed their actual worth because of this situation.

"The market value of a company will decrease when it faces uncertainties about its growth potential and governance issues, and its stock market listing is postponed. The outcome of pricing determines the value of two main economic factors, which include investor sentiment and market expectations," stated Piyush Jhunjhunwala.

Influence of Institutional Investors

Piyush Jhunjhunwala stated that valuations in the unlisted market experience changes because institutional investors, which include venture capital funds and private equity firms, enter the market.

The funding process requires these investors to conduct thorough research about the company, which includes its business model, management ability, and its ability to grow and its market opportunities.

The valuation agreed upon during such funding rounds often becomes a benchmark for subsequent transactions in the secondary unlisted market.

Secondary Market Activity

The secondary market for unlisted shares has grown significantly in recent years. Early investors, promoters, and employees who hold stock options have the option to sell their shares before the company goes public.

"The transactions take place through three main channels, which include brokers as well as investment platforms and private investor agreements. The transaction prices depend on various elements, which include expected IPO dates and the company's financial results, its industry projections, and the general market mood," commented Piyush Jhunjhunwala.

The private nature of these transactions leads to different price levels between various deals.

The Road Ahead

The Indian startup ecosystem will attract more interest in pre-IPO investments as its capital markets develop further. The unlisted shares market will become more transparent and efficient because institutional investors and intermediaries will increase their market participation.

Investors who dedicate time to researching unlisted shares present an exclusive chance to discover promising businesses before they become public companies.

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