NSE, CSK To MSEI: Zerodha's Nithin Kamath Flags Risks Behind Unlisted Stock Craze Pre-IPO, 'Even If An...'

As India's primary market is again brewing with multiple initial public offerings (IPOs), Zerodha's co-founder Nithin Kamath has flagged risk of a dominant trend among retail investors. Many of them attempt to maximise their IPO gains by purchasing stake in unlisted companies even before the launch of their IPO to make hefty IPO gains. But there are all sorts of risks associated with picking pre-IPO companies waiting for their IPO, according to Nithin Kamath.

Citing the example of unlisted companies like NSE, Chennai Super Kings (CSK), MSEI, etc, the young billionaire said that investors think that it is easy to make money by "picking pre-IPO companies waiting for IPO and making big listing gains".

"Even if an unlisted company IPOs, its price can be below what you paid. For example, HDB set its IPO price band 40% below the last traded prices on unlisted platforms," read a post shared by Kamath on X on Friday.

What Are The Risks of Investing In Unlisted Companies Ahead of IPO?

The multiple risks involved in investment in unlisted companies include improper price discovery, lack of regulation, unfair competition, risk of massive losses, getting stuck with liquidity risk, improper disclosure leading to lesser transparency, etc.

"Unlike stock exchanges, there's no price discovery for unlisted shares. The markups and commissions are ridiculous. These platforms are also unregulated, so there's nobody to protect you. Companies can go a long time without an IPO like NSE, which means you can get stuck without liquidity. Unlisted companies also make fewer disclosures than listed companies," added Lamath in his post.

After contemplating the risk of investing in unlisted firms, he urged retail investors to build their portfolio by investing in mutual funds.

What Are Unlisted Shares? How Are They Different From Listed Stocks?

Unlisted shares are different from listed shares as there is no regulated platform for their sale and purchase. Unlike platforms like BSE and NSE, where the stock prices are fixed based on their demand, fundamentals, etc. Price of the unlisted shares are fixed based on the seller quotes, which means that retail investors are at the risk of losing money due to unfair prices of these shares.

Nithin Kamath's Zerodha is an Indian financial services company and has a specialisation in online trading and investment platforms. It also offers services like brokerage-free equity investments, retail and institutional broking and trading in currencies and commodities.

The boot-strapped company began its operation on 15 August, 2010. The company's name derives inspiration from a combination of Zero and "Rodha", the Sanskrit word for barrier.
The company handles more than 1.6 crore clients and has placed billions of orders every year through its investment platforms. According to the company website, Zerodha contributes around 15% of all Indian retail trading volumes.