Zerodha’s Nithin Kamath Cautions Retail Investors Amid Unlisted Stock Surge
Zerodha co-founder Nithin Kamath has raised concerns about the increasing popularity of unlisted shares among retail investors, emphasizing that the associated risks are often underestimated. His remarks come in light of recent investor losses, particularly following the HDB Financial Services IPO, where share valuations plummeted below their unlisted trading prices. Kamath’s cautionary message highlights the complexities and potential pitfalls of investing in pre-IPO companies, urging investors to consider safer alternatives.
Risks of Unlisted Shares
Kamath’s warnings stem from a wealth manager’s recent approach to Zerodha, seeking to purchase shares in an unlisted group company with plans to resell them at a significant markup. He described the current enthusiasm for unlisted shares, such as those from NSE, MSEI, and CSK, as excessive. Many investors are drawn to the allure of quick profits by investing in these pre-IPO companies, anticipating substantial gains once they go public. However, Kamath cautioned that this strategy is fraught with risks that are not immediately apparent. He pointed to the HDB Financial Services IPO as a stark example, where the initial pricing was set nearly 40% lower than the last traded price on unlisted platforms, resulting in significant losses for early investors. Kamath advised that investing in mutual funds may be a more prudent choice than attempting to navigate the unlisted shares market.
Challenges of Price Discovery and Liquidity
One of the primary challenges with unlisted shares is the lack of reliable price discovery. Unlike transactions on regulated stock exchanges, where trades are transparent and reflect market dynamics, unlisted shares are often traded on unregulated platforms. Kamath noted that these platforms can impose excessive markups and commissions, making it difficult for investors to gauge the true value of their investments. Additionally, liquidity poses a significant hurdle. Many companies take years to go public, leaving investors with illiquid holdings and limited performance data. For instance, the IPO of NSE has been in the pipeline for over a decade, leaving investors in a prolonged state of uncertainty. Kamath emphasized that unlisted companies typically provide fewer disclosures than their listed counterparts, further complicating the investment landscape.
Regulatory Concerns and Investor Awareness
The surge in retail interest in unlisted shares has been particularly notable since the COVID-19 pandemic, with many investors eager to identify the next big startup before it goes public. However, this enthusiasm has not come without consequences. In 2023, for example, shareholders of Reliance Retail experienced losses of up to 60% following a share capital restructuring. The Securities and Exchange Board of India (SEBI) has also taken notice of these trends. In December 2024, SEBI issued a circular highlighting that certain electronic platforms facilitating transactions in unlisted securities are operating in violation of existing regulations. This regulatory scrutiny underscores the need for greater awareness among investors regarding the risks associated with unlisted shares.
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