A Public Interest Litigation (PIL) in the Bombay High Court has raised concerns of risk to investors due to mushrooming platforms for trading of unlisted shares and trends of offline share trading, promoted by such platforms and brokers.
The petition, filed on June 16 and later withdrawn after Bombay HC’s observations on the matter, highlighted the unregulated platforms as lacking transparency, and prone to distorted method of price discovery, with no investor protection or mandatory disclosures like Sebi-regulated stock exchanges. The PIL also highlighted the risk to investors associated with pre-IPO speculative trading in unlisted shares.
Filed by advocate Prakash Narayan Shukla, the petition had made Sebi and Ministry of Corporate Affairs a party, and sought urgent intervention under Sebi Act and Companies Act.
“The parallel market has rapidly emerged where such entities solicit retail investors through websites, social media and informal networks, publishing indicative prices and facilitating trades without Sebi registration, disclosure or investor safeguards”. The petition further added, “These actions violate Section 12 of Sebi Act, Section 13 and 16 of SCRA and Section 56 of the Companies Act.”
The petition also mentioned that many platforms misuse the Section 56 (2) of the Companies Act, which permits the transferability of shares to justify broad public solicitation. Such transactions are deliberately structured as secondary sales to avoid regulatory scrutiny and illegally grant retail access to high-risk investments without protection, the PIL added.
Petitioner Prakash Narayan Shukla explained to Moneycontrol the rationale behind the petition and said, “The PIL was filed to expose the misuse of the principle of free transferability under Section 58 of the Companies Act, which is being wrongfully extended to allow open marketability of unlisted shares”. He added, “Once any share whether listed or unlisted – acquires marketability, it must be governed under Sebi’s regulatory framework, just as listed shares are. However, Sebi has limited itself to non-binding advisories, failing to exercise its statutory powers to regulate, investigate, or prohibit such unregulated trading.”
The PIL was withdrawn after Bombay HC observed that issues are related to regulatory vacuum. However, petitioner Advocate Shukla said, “During the hearing, the Hon’ble Chief Justice observed that the issues raised involve a regulatory vacuum or legislative gap concerning Sebi’s enforcement, and such structural or policy-level directives -especially when they relate to empowered regulators – fall within the exclusive jurisdiction of the Hon’ble Supreme Court under Article 142 of the Constitution. Hence, appropriate relief may be more effectively pursued before Sebi or by invoking the Supreme Court’s extraordinary powers in suitable circumstances.” Shukla said the PIL was withdrawn with liberty to approach Sebi, as recorded by the HC.
The concern of insider trading too has been raised, as the moment a company files a Draft Red Herring Prospectus (DRHP), unlisted shares often experience speculative price surges driven by asymmetrical information and insider access, contravening the spirit of Sebi’s regulations – including the Sebi (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. The price surge is not based on any fundamentals or well-regulated disclosures but many a times based on rumours or hearsay.
The petition had demanded that trading in unlisted shares should be paused once the company declares its intent to go public. As the absence of such a mechanism erodes IPO integrity and opens avenues for market manipulation. The petition also sought prohibition on unregistered platforms from publishing indicative prices or engaging in public marketing of unlisted shares.
The PIL sought all intermediaries dealing in unlisted securities to register mandatorily with Sebi and comply with disclosure norms. Companies with actively-traded unlisted shares should be asked for periodic financial and event-based disclosures.
The petition said Section 11 and its sub-sections empower Sebi to prohibit the publication of unlisted share prices to the general public, solicitation of retail investors for trading in unlisted shares and trading of unlisted shares post-IPO announcement.
JN Gupta, former Sebi Executive Director said, “ There is no protection if something goes wrong. There are hardly any disclosures and if at all , there are any such disclosures, news could be manipulated. Such platforms do not reflect the real price of the underlying. It helps creating favourable atmosphere for sellers who may have inside information.” He added that such platforms may lure investors of regulated market because once IPO is announced even if at a lower price than grey market, “Then they get attracted, though the pricing still may not be realistic,” he said.
Arun Kejriwal, Director of Kejriwal Research and Investment Services and a market veteran, says, “Investors have faced the music of pricing at unlisted platforms in the case of HDB Financial, where the price band was more than 40 percent below the unlisted market. But thanks to merchant bankers who did not bow down under pricing pressure based on such platforms.” Kejriwal further suggests, “The government should regulate these platforms and allow price discovery based on a periodic schedule—say weekly or bi-weekly—at main board exchanges.” Though Kejriwal appreciated that these platforms have made it easier for people to find shares beyond the listed space, he also noted that such trades happen through regulated payment methods and that shares are credited to demat accounts.
With the emergence of fintech, dozens of such platforms have emerged providing easy and convenient way to trade and create liquidity for unlisted shares, which used to be the domain of traditional brokers. These web or app-based platforms have provided an easy access for value investors to find suitable companies and invest outside the listed zone.
Anil Choudhary, Partner, Finsec Law Advisors said, “The fundamental challenge with unlisted securities lies in their lack of transparency and underdeveloped market dynamics. Unlike listed entities that are required to make detailed public filings and whose share price is driven by market forces, unlisted securities lack vetted information and exhibit shallow market depth. In markets where credible information is scarce and price discovery is flawed, investors risk being misled or duped. The recent trend of IPO prices falling short of grey market expectations further illustrates this inherent disconnect”.
Sebi had been regularly issuing caution to investors to trade with only Sebi-registered entities but in the case of unlisted shares, many brokers or their associated entities provide services of transacting in such unlisted shares. Previously, Sebi had brought unregulated online bond trading platforms under regulatory ambit after multiple such avenues emerged.
<h3>📬 Subscribe to our newsletter</h3>
<p>Get notified whenever we publish a new blog post.</p>