Q. What is Pre-IPO?
IPO stands for Initial Public Offering. It is the process by which a private company can go public by selling its stocks to the general public. Pre-IPO trading means buying/selling the shares of a company before it gets listed on the stock exchanges.
Q. Who sells shares in a pre-IPO trade?
The existing shareholders of the company.
Q. Are pre-IPO shares sold in Demat form?
Yes, they are sold in Demat form.
Q. How are the shares of an unlisted company sold in Demat form?
If a company has more than 100 shareholders, it can pass a board resolution and get its shares dematerialized with the NSDL/CDSL.
Q. What does the pre-IPO share trading process look like?
After confirming the investment details like the price and quantity, the buyer has to transfer the investment amount to the dealer’s bank account. Once that amount is credited to the account, the dealer buys the shares from the seller and delivers them to your Demat.
Q. Why is it a good idea to invest in the pre-IPO stage?
Since pre-IPO shares are issued during the starting phase of a company, they have exponential growth prospects when compared to listed stocks and IPO issues. IPOs are issued at a premium, which is decided by merchant banks. Moreover, investing in the pre-IPO stage helps you:
1. Participate in the growth of the company.
2. Get opportunities that otherwise would ONLY be available to big entities like venture capitalists.
3. Enjoy reasonable valuations.
Q. What is the time frame involved in investing in pre-IPOs?
Most pre-IPOs take approximately 2-3 years to get listed. This is because it is a lengthy process. This includes getting shareholder approval, putting internal processes in place, hiring merchant bankers, filing DRHP, getting SEBI approvals, and so on.
Q. What is the minimum amount one can invest in a pre-IPO?
Depending on the scrip, the minimum amount can be between Rs. 25,000 – Rs. 50,000.
Q. Do pre-IPO shares have a lock-in period?
Yes. As per SEBI rules, all pre-IPO shares are locked in for one year from the date of listing.
Q. What are the kinds of risks involved in investing in pre-IPO?
The major risks are:
1. Capital loss: The company might go bankrupt in the future, face organisational failures, or face a lack of financing.
2. The IPO of a company is never scheduled and sometimes, may never take place.
3. Unlisted shares are illiquid, so you may not be able to sell your shares in a hurry.
Q. What are the tax implications of investing in pre-IPO?
If you hold unlisted shares for more than 24 months, the capital gains on the sale will be classified as long-term.
Short-Term Capital Gains (STCG) on the sale of unlisted equity shares is taxable at the applicable marginal tax rate.
Long-Term Capital Gains (LTCG) on the sale of unlisted equity shares is taxable at 20% with indexation.