It is common knowledge that investing in the stock market through buying and selling of shares comes with a fair share of uncertainty and risk. While certain trends in the market can often be predicted and sizeable profits can be made through a strong understanding of the market, there are uncertain times when the stock markets are more vulnerable and volatile. To avoid huge losses, therefore, ensuring the underlying security of funds and safeguarding a basic corpus is important.
Unlisted shares are shares that are not listed on the stock exchange that is governed by the regulating bodies. They may be unlisted for several reasons. They may be issued by companies that may not meet the requirements that are laid down by the regulatory bodies or may not wish to do so. They may not be in a position to pay the listing fees which is required to be paid to a stock exchange to enter the listing. In short, it is often the more established companies with a proven track record and annual turnover that are able to satisfy the requirements to get listed. Unlisted shares, therefore, indicate a higher risk for investors.
Sometimes, however, companies may issue unlisted for other reasons too. A number of start-ups have gained unprecedented popularity and gone on to become case studies in the world of entrepreneurship. Cab services, phone payment apps, online shopping portals and so many more companies that are household names today by virtue of the services they provide are companies with unlisted shares. These companies may choose to remain unlisted for several reasons despite being able to afford getting listed. They may want to take more risks or may want greater autonomy. They may not need to raise capital to further their company as their venture capitalists. Such companies may issue unlisted shares as they want to remain private with undisclosed financial statements. The unlisted shares of such companies, on the other hand, are lucrative despite the lack of regulations around them.
One can trade in unlisted shares in an over the counter (OTC) market, which is upheld by a nexus of dealers who facilitate buying and selling. Companies are able to raise capital with the sale of their unlisted shares in an OTC market, and buyers are able to purchase these without having to pay an additional transactional cost. The buyers of these shares, however, are also prone to manipulation and fraud owing to limited information on the issuing companies and less trade liquidity owing to a low volume of stocks, all while trading in a relatively less regulated market. The shares can also be difficult to sell for the same reasons. The lack of a robust and dependable regulatory body overseeing the trading of unlisted shares is one that is strongly felt in the market.
Despite the difficulties that buyers of unlisted shares face, India is an emerging market for these securities with an increasing number of individuals developing awareness and risk tolerance. Besides, there is always the possibility of an unlisted company entering the stock exchange and getting listed, which will significantly boost the value and security of the shares.
An advantage of having a stock exchange overseen by a regulatory body is that it can establish credibility and transparency in an organised market for trades. While there is still the factor of risk, there is safety, security and fairness in the share market for listed shares. This lacunae of transparency and credibility – which is largely missing in the more volatile and uncertain OTC market for unlisted shares – is what escrow addresses.
Using escrow as a neutral third-party payment platform helps in several ways while dealing with unlisted shares. Reducing the likelihood of manipulation by dealing with reliable and credible unlisted companies, escrow allows the investor to take a more protected risk. Considering the difficulty involved in reselling the unlisted shares, an investor who is also an escrow account holder is more likely to be able to sell shares to a speculative buyer. Escrow can also ensure that the seller can transact at a fair selling price in a relatively less-regulated OTC market.
Escrow therefore, is a more accessible, affordable platform for OTCs and investors that can provide a secure platform for the trading of the lucrative unlisted shares of booming start-ups. This is how investors and start-ups can take flight and soar high.