1.What is the meaning of Pre-IPO?
Pre-IPO means buying/selling shares in a company before its IPO i.e. before it gets listed on the Stock Exchanges
2.Who sells shares in a pre-IPO ?
Existing shareholders of the Company sell shares in the pre-IPO.
3.Is the Company involved in selling shares in a pre-IPO?
No.This is a secondary off market transaction and the Company is NOT involved in any way in the transaction.
4.Are the shares being sold in the demat form?
Yes.The shares being sold are in the demat form.
5.If a company is not listed,how come the shares are in the demat form?
Any company which has more than 100 shareholders can pass a Board resolution and get its shares dematerialised with NSDL/CDSL
6.What is the process to buy & sell shares in a pre-IPO?
The process is as follows:
- The Buyer & Seller confirm the quantity & price
- The Buyer provides his demat & bank account details.
- The Seller provides his demat & bank account details.
- On Trade Settlement Date, the Buyer xfers the purchase amount via NEFT/RTGS/IMPS.
- On receipt of payment, Seller pays the stamp duty and xfer the shares to Buyer’s demat account and issues the Sale Note.
7.Why do investors sell in a pre IPO?
Mainly because they need the money which they can use either for expenses or investments
8.Why do investors buy in a pre IPO?
Most of the IPOs today (Alkem, Narayana Hrudalaya, Dr.Lal Path,Thyrocare, Mahanagar Gas,L&T Infotech etc) are meant to provide exits to existing shareholders and not really for growth capital. As such,IPOs are priced expensive and even at those expensive valuations,retail investors do not get allotment
Investing in pre-IPO helps the investor:
1. To participate in the growth of the company
2.Get opportunities which otherwise would ONLY be available to big entities like PE Firms etc
3.Get in at reasonable valuations
9.What is the kind of time horizon is involved in investing in Pre-IPOS?
Most pre-IPOs take 2/3 years to get listed as it involves taking shareholder approval,getting internal processes in order,hiring merchant bankers, filing DRHP, getting SEBI approvals etc
10.What is the minimum amount one can invest in a Pre-IPO?
Depending on the Scrip,the minimum amount can be between Rs.20,000-Rs.50,000
11.Do the pre-IPO shares have any lockin?
Yes.As per SEBI rules,all pre-IPO shares have a lockin for six months from the date of listing
12.What is the kind of returns one can expect in investing in pre-IPO?
Depends on the Company and its management’s execution capabilities.In Equities, nobody can guarantee any kind of returns.
13.What are the kinds of risks involved in investing in pre-IPO?
Basically,the following three risks:
A.Management Risk-The Company Management may execute poorly and the Company’s results falter
B.Timeline Risk-The Company takes longer than expected to get listed
C.Liquidity Risk-Unlisted shares are inherently illiquid and you may not be able to sell your shares in a hurry.
14.What are the tax implications of investing in pre-IPO?
Capital gains on sale of unlisted shares will be classified as long term, if held for more than 24 months.
STCG on sale of unlisted equity shares is taxable at applicable marginal tax rate.
LTCG on sale of unlisted equity shares is taxable at 20% with indexation
15. What is the role of Alpha Ideas?
Alpha Ideas plays the role of a market maker.It buys from those who wish to sell and sells to those who wish to buy.I make my money from the spread i.e. the difference between my buy price and my sell price
16.Is Alpha Ideas an Investment Advisor?
I am NOT an Investment Advisor. As such,I DO NOT recommend to buy/hold/sell any shares.You ought to consult your own investment advisor and do your own research before buying/selling any shares.
A podcast interview of me covers these and other FAQs.