Employees Rejoice as HNIs Tank up on UnlistedShares

Wealthy investors offer fat premium for Esops in IPO-ready firms

Big bucks from share sales are not just made in the stock market. Employees, especially those working for financial services and ecommerce companies, have started making a killing though their companies are not yetlisted.

In the past few months, shares of some of India Inc’s biggest financial services firms have changed hands in off-market deals as high net worth individuals and brokers chase investment opportunities in companies with a high probability of listing within the next three years.

Traditionally, an employee or a small shareholder of an unlisted company had limited options in case of an exit. They could wait for an IPO or sell it back to the management in case there was a buyback arrangement.

With the emergence of wealth management firms and the rise in the number of high networth individuals, these options have increased. The trend, which began with financial services companies, is now extending to ecommerce firms such as Snapdeal. “In the unlisted space, there’s a huge appetite amongHNIs to own firms that are not represented in the listed space,” saysRajesh Cheruvu, chief investment officer, RBS Private Banking.

Anshu Kapoor, head of private wealth management at Edelweiss Capital, says many HNI family offices are scouting for opportunities in sunrise sectors such as mobile applications, healthcare and telecom.

A look at some recent deals shows employees and other residual shareholders of financial services companies to be among the big beneficiaries. For instance, ICICI Prudential Life Insurance had offered Esops in various tranches of Rs 30, Rs 42, Rs 70 and Rs 130 in 2005-09.

These shares have now changed hands at Rs 210-225 giving a 300% return to the selling employees.

Shares of Kolhapur-based Ratnakar Bank were recently sold at Rs 170, a 209% gain for employees who bought at Rs 52-55. In March, PE fund CDC acquired a 4.8% stake in the lender at Rs 128.1 a share, valuing the bank at Rs 3,500 crore.That’s risen to Rs 4,625 crore based on the latest transactions. Employees of HDFCStandard Life exercised their Esops at ` . 28.36 apiece in March 2012 and Rs 27.37 in March 2014. Shares have been bought recently for Rs 140, a 393% return. In UTI Mutual Fund, the weighted average exercise price of Esops issued in 2007 and vested in 2012-13 is Rs 206 while the shares currently trade at . 300, giving investors a 46% ` appreciation.

Some transactions are also believed to have taken place in the booming ecommercesector with past employees of firms such as Snapdeal among the sellers. Transactions have been few and details about price and valuation could not be ascertained.

Unlike listed stocks, the unlisted space has few brokers and trades are made through known sources. Often, a broker accumulates small lots of shares from employees who have earned them as Esops, or investors who have bought earlier and arelooking for an exit. Once the broker has a sizeable chunk of shares, typically worth more than Rs 1 crore, it’s offered to HNIs.

The biggest deterrent in the case of unlisted shares, when compared with listedones, is the tax treatment, say experts. “The tax treatment of unlisted stocks is unfavourable compared with listed stocks,“ says Sandeep Ginodia, director, Sapphire Wealth Management Systems.

Investments routed through the stock exchange and held for more than a year qualify forzero long-term capital gains tax. However, taxation is different for unlisted shares: you have to pay shortterm capital gains tax of 30% if you sell before three years and long-term capital gains tax of 10% or 20% with indexation if you sell them after three years. Also, as per regulatory guidelines, pre-issue capital will be locked for one year from the date of a public issue. That means investors can sell only a year after the public issue. Also, an employee who acquires an Esop pays a perquisite tax which is the difference between the fair market value (FMV) of the shares on the date of exercise of the option and the price paid by the employee.

Since these companies are unlisted, very little financial information is available. Also, because there’s no formal platform to trade these shares, the demand-supply situation varies and the price at which deals are struck could be a function of the quantity, demand-supply situation and the sentiment prevailing in the secondary markets. Unlike listed shares, where a holder can exit through the stock exchange, liquidity is poor in unlisted companies.

You would have to look for an IPO or another buyer who is ready to buy.

Brokers advise investors to be careful about promoter pedigree and management as there have been several instances in the past when companies offloaded shares to investors and simply disappeared. Also, brokers advise investors to buy a small percentage of such shares in their portfolio as they are illiquid and if the IPO gets delayed, an exit would be unlikely. “Look at companies that have a strong management track record and are likely to go for an IPO within thenext one-three years,” says Nitin Rao, of alphaideas.in, a blog that identifies unlisted stocks.

Source : Economic Times

Date : 05-09-2014

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