Boom in unlisted NSE shares strains grey market trades

The unexpected surge in prices for the country’s dominant stock exchange is fuelled by hopes of an imminent listing and attractive valuations, creating huge demand among investors and a significant supply crunch. Declaration of a rich dividend by NSE and its chief executive saying that its market share loss to rival BSE had “run its course" further boosted the demand for its shares.

NSE’s shares in the unregulated unlisted market, where firms bound for prospective listing are traded between residents and non-residents, rallied as much as 9-10% to a record high of ₹1,680-1,700 apiece since 6 May when the company released its earnings for the quarter ended March.

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"We have heard of pre-agreed deals wherein a party wanted to acquire shares at a certain price to down-sell the same but was unable to get delivery as the seller backed out after the steep jump in the share price from around ₹1,550 to ₹1,700 levels now," said Narinder Wadhwa, managing director of SKI Capital Services. “Consequently, the party was unable to downsell to its counterparty."

Wadhwa explained that deals for NSE shares had been “falling through" in the past two weeks as retail and HNI (high net-worth individual) demand for the unlisted shares had spurted for reasons like “imminent listing, attractive valuation, and big shareholders holding on to their stocks, which had created a supply shortfall".

“Such reneging can happen only where a delivery instruction slip (DIS) has not been issued," a person aware of the issue said. “Once a DIS is issued, the shares compulsorily get credited to the buyer's account. But if two parties get into an agreement without a DIS and if prices move significantly, trades fall through. That's what we are seeing now."

An executive from a broking company who requested anonymity said: “It’s quite possible that some deals which were outstanding might have fallen through as this is an unregulated, over-the-counter market where counterparty risk cannot be insured, unlike on an exchange where the clearing corporation stands guarantee to all settlements being honoured."  

A query to NSE on share deals falling through in the unlisted market remained unanswered till press time.

Factors fuelling the NSE rally

The demand spike among investors was facilitated by ease of transferring of NSE shares after March this year per a regulatory circular, which reduced transfer time to one day from six months earlier. This resulted in the investor base rising from 22,000 levels in March to more than 100,000 currently.

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Viral Mehta, product lead for private equity at IIFL Capital, agreed that a huge supply-demand gap had arisen in recent weeks. “There is a spurt in demand for unlisted NSE shares in the past two weeks since the company announced the dividend of ₹35 a share," Mehta said. “The huge supply-demand gap, which is driving up prices, is because institutional shareholders are not selling in desired quantities in anticipation of listing announcement, and also because the stock is available at attractive multiples of 35 times forward earnings."

NSE’s listed competitor, BSE, trades at a forward price-to-earnings multiple of 52.75 times despite its market value ( ₹0.95 trillion) being less than a fourth of NSE’s ₹4.2 trillion, per Bloomberg and exchange data. This is also partly resulting in demand for the shares of NSE, which despite being the leader, was trading at a lower multiple than its rival, said Wadhwa.

Interestingly, BSE stock has also rallied 12% from ₹6,245 on 6 May to ₹6,996.50 on Thursday after it recommended a dividend of ₹23 per share. 

NSE’s operating profit margin jumped to 74% in Q4FY25 from 66% a year ago despite the operating profit shrinking 8% year-on-year to ₹2,799 crore, reflecting the operating leverage the bourse enjoys.

The company additionally declared a dividend of ₹35 per share with a face value of ₹1, which has yet to be approved by shareholders. This should reduce the price proportionately on the ex-dividend date, but the share price surged as hopes grew of Sebi’s approval for the IPO, which has been hanging fire since 2016 because of prior governance lapses by former management.

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After its Q4 results, NSE chief executive Ashishkumar Chauhan said the market share loss to BSE in the equity options segment had run its course and that further losses are unlikely.

Data from NSE shows its market share in equity options (stock and index) fell from 96.9% in FY24 to 87.4% in FY25 after Sebi restricted exchanges to launching a single weekly index option expiry from November last year against multiple weekly expiries earlier. The share was captured by BSE, which ran a single liquidity index weekly expiry.