Price of FOMO: Investors piling into unlisted shares get a harsh reality check

The unlisted subsidiary of HDFC Bank on Friday announced a price band of ₹700-740 a share for its initial public offering (IPO) this week, wiping out more than 30% of the premium from its shares that were happily picked up at ₹1,100-1,200 till Thursday, according to brokers who declined to be identified as the prices are private information and of competitive nature.

According to the brokers, some investors had bid the unlisted shares up to as high as ₹1,400 per share a few days ago based on parent pedigree and likely supply crunch, ascribing a price-to-book ratio of 6-7 times, which is higher than rival Bajaj Finance's 5.7 times as of end FY24. The P/B ratio offers insights on the over- or undervaluation of a financial stock just as price-to-earnings (P/E) multiple does for non-financial stocks.

The bigger impact has been investors getting uneasy over potential hits from shares of other big, unlisted names.

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“Post HDB Financial setting its IPO price band way lower than what the unlisted market anticipated, a creeping concern has arisen among retail and HNI (high net-worth) investors on true valuations of other unlisted shares which, like HDB Financial, shot through the roof in recent past," said Hasit Pandya, director at brokerage HPMG Shares.

In recent months, retail interest has risen in unlisted shares of stock and commodity derivatives exchanges such as NSE, NSDL, MSEI, NCDEX and custodian Orbis after seeing the success of listed peers like BSE, MCX and CDSL. Apart from these, names like Nayara Energy, formerly Essar Oil, and OYO, India’s leading travel and hotel booking platform, have also attracted retail interest.

According to Viral Mehta, product lead at IIFL Capital Services, concerns around not getting desired allotment at a potential IPO or anticipated supply crunch are drawing investors to the unlisted space.

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B. Gopkumar, managing director and chief executive officer of Axis Mutual Fund, said that retail investors are being drawn in on expectations of price increases and huge demand-supply mismatches, and a sense of FOMO (fear of missing out), and are not basing their investing decisions on fundamentals like profitability and market share. “Given what’s happened to investors in unlisted HDB Financial shares, there is bound to be some introspection by retail on pricing of other shares in the unlisted space," Gopkumar said.

High expectations

Indeed, a Mint review of unlisted share quotes from various brokers showed that commodity derivatives bourse NCDEX, which announced the launch of an equity and equity derivatives segment this February, saw its price jump more than 47% from ₹170 apiece in the unlisted market three months ago to around ₹250 a share currently only on this news. The company’s share price has jumped despite it incurring a loss of ₹27.7 crore in FY24, per its latest annual report.

To be sure, NCDEX had a mere 0.19% market share in commodity derivatives trading, compared to a staggering 97% share of MCX in April, per data from the Securities and Exchange Board of India (Sebi).

The share of MCX, which is fundamentally on a stronger wicket than NCDEX, rose 49% to ₹8,085 in the three months through Friday, per NSE data. MCX, which specialises in metals and energy trading, posted a total income of ₹816 crore in FY24.

Also read | NSE investors hold tight as price surges in grey market

In the case of depository NSDL, the unlisted company reported a total comprehensive income of ₹275 crore in FY24 against ₹417 crore by listed rival CDSL during the same period, per data from the annual report and stock exchange. According to brokers, the company’s share has risen 16% to ₹1,100 in the unlisted market over the past three months, while CDSL’s shares have jumped 36% to ₹1,686 in the same period.

“The investors expect NSDL to go public at some point and because of that the unlisted share price is rising, taking cues from listed CDSL, which has seen a stellar rise in share price on account of growth of the capital market," said IIFL Capital Services’ Mehta.

The exception

The rare exception in the unlisted space where the room for rally still appears to remain despite a 53% spike in price is NSE, which is expecting to get a no-objection certificate for its listing from Sebi prior to filing a draft red herring prospectus.

NSE’s share in the grey market has risen to ₹2,300 currently from ₹1,500 three months ago, after the company eased share transfers resulting in a spurt in shareholders to more than 100,000 from 39,201 as of end-March this year, per an exchange official.

The bourse, whose market capitalisation at ₹5.69 trillion is more than five times BSE’s ₹1.09 trillion, trades at a P/E multiple of 47 times (based on an EPS of ₹49.24 as of FY25) against BSE’s P/E multiple of 88 times. EPS refers to earnings per share. This means it’s cheaper than BSE currently despite being significantly bigger.

Unlisted market vs grey market

The unlisted market is one wherein shareholders–private equity, foreign direct investors, employees of a company owning shares,etc.–offload their holdings in part or full before a company goes public using intermediaries like brokers. The buyers are ones who expect the company to list at a future date and hope to benefit from a higher listing price.

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The grey market, on the other hand, is an unofficial trading platform where investors trade for shares before they actually get listed. The grey market activity begins after a company sets an offer price for its shares until the share actually lists. The shares can be traded at a premium or a discount to the offer price.