What Is the Unlisted Market? A Beginner's Guide

If you've been following financial news, you've probably heard about unlisted shares – people buying stock in companies like Swiggy, NSE, or OYO before they go public. But what exactly is the "unlisted market"? And is it something regular investors should care about?

Let's break it down in plain English.

The Simple Definition

The unlisted market is where shares of companies that are NOT listed on stock exchanges (like NSE or BSE) are bought and sold. Think of it as a marketplace for company shares that aren't available on your regular trading apps yet.

These companies include:

Pre-IPO companies: Startups and established businesses planning to go public

Subsidiaries of listed companies: Like HDB Financial (subsidiary of HDFC Bank)

Government-owned entities: Like NSE India itself

Private companies: That may or may not plan to list eventually

How Is It Different From the Regular Stock Market?

Regular Stock Market (Listed):

Shares trade on exchanges (NSE, BSE)

Real-time pricing, you see prices on Zerodha, Groww, etc.

Highly liquid – buy or sell instantly

SEBI-regulated with strict disclosure requirements

Settlement in T+1 (next day)

Unlisted Market:

No exchange – trades happen directly between buyers and sellers

Prices are negotiated, no real-time quotes

Less liquid – may take days or weeks to buy/sell

Fewer regulations and disclosures

Settlement takes 3-7 working days

Who Participates in the Unlisted Market?

Sellers

ESOP holders: Employees of startups who received stock options

Early investors: Angel investors, VCs wanting partial exit

Promoters/founders: Sometimes sell small portions

Existing shareholders: Looking for liquidity before IPO

Buyers

HNIs (High Net-worth Individuals): Looking for high-growth opportunities

Retail investors: Individuals like you wanting pre-IPO exposure

Family offices: Managing wealth for wealthy families

Institutional investors: Building positions before listing

Intermediaries

Brokers/platforms: Facilitating transactions between buyers and sellers

RTAs: Registrar and Transfer Agents maintaining share records

Why Do People Invest in Unlisted Shares?

Potential for Higher Returns

When a company IPOs, early shareholders often see significant appreciation. Those who bought Zomato or Paytm shares in the unlisted market before their IPOs (at least initially) had exposure at lower prices. While not all stories end well, the potential for 2-10x returns attracts investors.

Access to High-Growth Companies

Some of India's fastest-growing companies are unlisted. By the time they IPO, a significant part of their growth journey may be over. Unlisted investing lets you participate earlier.

Portfolio Diversification

For investors with well-diversified listed portfolios, unlisted shares offer exposure to a different asset class with different risk-return characteristics.

Strategic Positioning

If you believe a company will IPO successfully, buying unlisted shares positions you to benefit from listing gains without competing in the IPO lottery.

The Risks You Must Understand

Before getting excited about potential returns, understand the risks:

Liquidity Risk: You might not find a buyer when you want to sell

Information Asymmetry: Less public information than listed companies

Valuation Risk: Prices can be inflated; no transparent market price

Company Risk: Startups can fail; IPOs can be delayed or cancelled

Fraud Risk: Unregulated space means more potential for scams

Regulatory Risk: Rules around unlisted shares can change

Is the Unlisted Market Legal?

Yes, absolutely. Buying and selling unlisted shares is completely legal in India. It's governed by the Companies Act and subject to capital gains tax just like listed shares.

What makes it different is that it's less regulated than the stock exchange. There's no SEBI oversight of prices or transactions. This is why due diligence is crucial.

Key Takeaways

The unlisted market lets you buy shares in companies not yet on stock exchanges

It offers potential for higher returns but comes with higher risks

Liquidity is limited – think of it as a long-term investment

Not regulated like stock exchanges, so verification is crucial

Legal in India, but requires careful due diligence

Best suited for informed investors who understand the risks