Whalesbook
Legal Framework and Expert Views
The push for regulating India's burgeoning unlisted share market stems from significant concerns over transparency and investor protection. Legal experts emphasize that legislative amendments are crucial to empower the Securities and Exchange Board of India (SEBI) with broader jurisdiction, rather than introducing a new regulatory body.
Vaibhav Kakkar, senior partner at Saraf and Partners, stated that extending the roles and oversight of SEBI and the Ministry of Corporate Affairs through legislative amendments is the likely path forward. He added that empowering SEBI to supervise and enact formal regulation would be a logical step, as the regulator already possesses the power to oversee certain unlisted securities under the Securities Contracts Regulation Act, 1956. However, shares of private limited companies often fall outside this Act due to transferability restrictions.
Addressing Price Discrepancies
SEBI Chairman Tuhin Kanta Pandey has highlighted significant price differentials between the unlisted market and Initial Public Offering (IPO) discovery prices. A prominent example is Tata Capital, which saw its grey market price peak above ₹1,100 in September last year. Just a month later, its stock debuted on the National Stock Exchange at ₹330, less than half the grey market price and only a slight premium to its ₹326 issue price.
Jayesh H, Co-founder at Juris Corp, noted that such stark price differences are largely due to the absence of stringent regulatory compliance requirements. Investors often face delays in receiving securities and lack clarity on how much of their payment reaches intermediaries.
Challenges in Monitoring Private Deals
Monitoring activity within the private, unlisted space presents a primary challenge for any regulator. Since most transactions occur away from public view, establishing an effective oversight mechanism is critical.
Pre-IPO Platform Considerations
Last August, SEBI had indicated consideration of a pilot program to trade shares of companies prior to their IPOs on a regulated platform, subject to disclosures. Jayesh of Juris Corp suggested that any such new mechanism would take several months to implement. If well-designed, he believes it could significantly curb current malpractices in the unlisted segment.