SEBI Examines Oversight of Unlisted Shares Market

The Securities and Exchange Board of India (SEBI) may broaden its regulatory scope to encompass unlisted shares in India, which currently falls outside its formal regulatory framework. SEBI and the Ministry of Corporate Affairs are discussing how much jurisdiction to exercise over the unlisted market.
At the annual convention of the Association of Investment Bankers of India held on Thursday, SEBI's chairperson, Tuhin Kanta Pandey, noted discrepancies between pricing in the unlisted market and the valuations assigned to IPOs. These discrepancies occur during the book-building phase of the IPO offering, whereby the offer price in the unlisted market may differ from the actual sale price of the shares at the time of listing. 

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Unlisted Market Characteristics

Unlisted stock refers to stock of companies that have not been listed on a stock exchange. Instead, investors acquire shares of unlisted companies via private agreements with existing shareholders, through an employee stock option programme, or by using the services of an intermediary. In contrast to listed companies, unlisted companies have fewer requirements for financial disclosures and the availability of risk-related information. Therefore, the Ministry of Corporate Affairs has primary responsibility for monitoring unlisted companies, while SEBI has a lesser role in monitoring them until they apply for a public listing.

Pricing Mismatch Challenges

The pricing of unlisted shares often deviates from what was determined during the initial public offering (IPO) process, resulting in differences as companies transition into the publicly traded markets. The SEBI is currently assessing how best to address these differences without applying the same strict rules and regulations that exist in the publicly traded company markets to private market sectors.

The SEBI has recognised that regulations are important to the ongoing growth of the private sector, and has determined that it is critical within its regulatory framework to have a clear understanding of the boundaries surrounding the regulation of private market activity.

Regulatory Discussions and Limits

A review of SEBI's discussions with the Ministry of Finance provides additional information on the extent to which SEBI will develop new authorities related to the regulation of unlisted private markets. In general, SEBI interacts with companies in the process of an IPO and an expansion of SEBI's authority to govern unlisted private markets creates the opportunity for continued growth of the markets while also protecting the interests of investors.
This review represents an increased level of scrutiny on the unlisted market due to the increase in the number of IPOs being processed by the SEBI. Therefore, an alignment between unlisted and publicly traded company pricing could greatly improve the effectiveness of public market entries for many companies. Using comments from these discussions, SEBI hopes to issue an outline for the development of these new authorities.