Market experts urge SEBI to regulate India's unlisted share market

Market experts urge SEBI to regulate India's unlisted share market

Expose that brokers build momentum around a company and set high entry prices for unlisted shares, but the price often falls below the valuations

Market experts have urged the Securities and Exchange Board of India (SEBI) to ensure transparency, investor protection, and fair price discovery in the booming pre-initial public offering (IPO) market, which offers early access to popular firms but is plagued by pricing opacity, regulatory gaps and speculative trading.

Pre-IPO shares offer investors an opportunity to enter their favourite companies with guaranteed allotment, unlike the IPO bidding process where few make the cut. And many hope to enter at lower prices to earn alpha returns upon listing.

However, the outcome is often contrary.

Among the platforms acting as exchanges for unlisted securities, Unlistedzone offers a list of 24 companies on its website with a pre-IPO price range shares in the grey market and issue price. However, in all cases, the share fell short of its pre-IPO price.

For instance: Swiggy commanded a pre-IPO price of Rs.340-525 but the issue price was set at Rs.390, far below the upper range. In case of National Security Depository Limited (NSDL), the last trading price of the share was Rs.1,025 but the issue price was set at Rs.800 per share.

Commenting on the matter, Shruti Kanodia, Managing Partner at Sagus Legal, said, "Brokers build momentum around a company, set high entry prices for unlisted shares, and retail investors jump in. But once the IPO hits the market, the listing price often falls below the pre-IPO valuations. That gap exposes the speculative nature of the pricing.”

Legal experts claim that in the ‘grey market’, it's often believed that the price discovery of an unlisted company's share happens through economics of demand and supply but it's seldom the case. Traders engage in unofficial transactions based on mutual trust. The price discovery is not transparent in the unlisted securities market as there is no credible, centralised system to track demand or supply.

Kanodia added, "What you have is a hype-driven pricing mechanism often influenced by brokers or intermediaries with vested interests. It's speculative and unverified.”

Due to a lack of centralised mechanism governing the prices, different platforms offer the same share at different prices.

For example – on 5 August, the National Stock Exchange (NSE) pre-IPO share was offered between Rs.2,170 to Rs.2,243 on platforms including RR Finance, Wealth Wisdom India, Stockify, Incred Money, and Unlistedzone.

However, the IPO is still stuck in regulatory hurdles, as the country's largest equity exchange is eyeing an NOC from SEBI and has yet to file a DRHP for its IPO.

On the laws governing the pre-IPO share market, experts believe that while regulators like SEBI have an indirect control over the unlisted securities market, there’s no direct control over the platforms that facilitate the trades.

Many brokers and platforms facilitating pre-IPO trades operate in a grey area. Thus, without governing principles or oversight, it's hard to separate legitimate intermediation from profiteering, Kanodia maintained.

Legal luminaries complained that the Securities Contracts (Regulation) Act, 1956, applied to ‘Marketable Securities’, which was wider than listed securities. SEBI, the primary regulator for the market, was also responsible for implementing the SCRA, which ensures a fair, transparent market, protect investors, and prevent market manipulation.

Jayesh H, Co-founder of Juris Corp, expressed, "There is no doubt that provisions of the SCRA equally apply to unlisted shares. While the law is there, it is not being applied. Transactions in unlisted shares are also to be settled on spot delivery basis.”

Meanwhile, in December last, SEBI issued a statement clarifying that the platforms facilitating the unlisted trades violated the SCRA and the SEBI Act. Thus, investors should stay away from these platforms.

Jayesh explained that modern markets have clear norms for trading in unlisted shares, including regulatory oversight of intermediaries, but India lacks in this sphere.

Thus, SEBI is under pressure due to the unlisted share market booming, fuelled by employee ESOPs, pre-IPO enthusiasm and informal broker networks. It is expected to regulate the financial ecosystem. While shares represent legitimate investment interest in high-growth private firms, they also pose serious risks, including poor disclosure, pricing opacity, settlement delays, and near-total absence of investor protection.

The Juris Corp founder stated, "The bid spread on many of these shares is often more than 10 percent. Further, the pricing is opaque and it is likely that the so-called broker could be profiteering. And there is the aspect of payment as these brokers take the payment into their own account.”

Experts maintained that regulatory oversight was overdue, especially in the to-be-listed companies. If SEBI governs IPOs and even mandates ESOP regulations for companies planning to list, it should also regulate pre-IPO trades.

Compared to India, globally, there’s significant regulation of the intermediaries involved in the trading of unlisted shares. The US has an Over-The-Counter Bulletin Board (OTCBB) with regulated brokers.

Jayesh added, "When you have intermediaries who are regulated and subject to inspection, some accountability automatically comes in and many of the ills diminish.”

For instance, the Reserve Bank of India (RBI) issued regulatory directives for the RBI Master Direction on Electronic Trading Platforms (MTETP), 2025, replacing the earlier 2018 directions.

The new norms regulate electronic trading platforms for securities, money market instruments, foreign exchange, and derivatives, incorporating advancements in technology and market practices.

Jayesh added, "The RBI has allowed ETPs. SEBI should permit the same and create some threshold requirements as to who can access such a trading platform. A ban will be a bad idea. It is better to create a lightly regulated market, wherein the intermediaries are fully regulated and are accountable.”