Start-up universe is 10x of the listed universe while Pre IPO universe may only be 25 stocks. Grey Market is NOT EQUAL to Pre IPO Market.
Start-up not equal to Pre IPO
Than what exactly is this PRE IPO Category of companies
Characteristics Of most IPO’s
- Very Expensive
- Doesn’t provide growth capital to companies, mostly an exit to existing investors like Tatva Chintan, SBI Cap
- Difficult to get allotment
- Fast growth days already over
Why Investment in Pre IPO?
- Reasonable Valuations
- Part of growth years
- Rare Opportunity to invest with institutions like Seqouia Capital
- Relatively easier to get shares
90% people should not participate in Pre IPO because it takes a long time and is not meant for impatient investors & speculators as the pre-ipo market is it not that liquid. It is also not suitable for concentrated investors.
Know the company
- Know the Management
- Business group backing is good
- Iconic Companies can give tremendous upside- Like Mohan Meakin because of their brand & great business model
- Regulated companies give margin of Safety
Know the Valuations
- Always compare to listed companies Like Mohan Meakin is much cheaper to say United spirits, so we can look into it.
- For unique cos, see what PEs/VC paid in last round of equity raise
- Compare to global peers valuations
FAQ regarding Pre-IPO Market
1) Who sells shares in a pre-IPO?
a. Existing shareholders
2) Is the company involved in selling share in pre-IPO?
3) Is it in Demat form?
a. Yes, it is done only in demat form
4) If a company is not listed, how come the share are in demat form?
a. Any company which has more than 100 shareholders can pass a Board resolution to get its shares dematerialized with NSDL or CDSL
5) How does one buy & sell in Pre IPO?
a. Buyer and seller confirm Quantity and price
b. Bank & Demat details are shared by both
c. Then the buyer transfers the purchase amount via NEFT/RTGS/IMPS
d. On receipt seller pays stamp duty and transfers the share to buyers Demat and issues sale note.
6) What is the minimum amount one can invest in a pre-IPO?
a. Depending on the scrip can be between 20,000 – 50,000
7) Do the pre-IPO shares have locking?
a. Yes, as per SEBI rules pre-IPO have 1 year from date of listing.
- Separate section in ITR for unlisted scrips
- Capital gains will be long term if held for more than 24 months
- STCG applicable at marginal tax rate
- LTCG taxable at 20% with indexation
- Management may execute poorly
- Takes longer to get listed
- Liquidity risk because they are not listed
- Indofil – Great co but promoter infighting
- UTI AMC, MSTC – IPO price lower than Pre-IPO price
- Bharat Hotels – Tax Raids
Role of Market Maker
Buy from seller and sell to buyer, assist in price discovery and remove counter party risk
Pre-IPO via AIFs
- IIFL Special Opportunities Fund
- IIFL late Stage tech Opportunities Fund
- Kotak Pre-IPO fund
- Avendus Future Leaders Fund
A 5-10% allocation to start-ups/unlisted can provide an optionality to the portfolio