Mint examines why this proposal by the Securities and Exchange Board of India (Sebi) matters and what it could change for ESOPs.
What did the Sebi chairperson say, and why now?
Sebi chairperson Tuhin Kanta Pandey recently suggested creating a regulated venue where shares of IPO-bound companies could trade among private investors before listing, under clear rules. The timing is significant: India’s IPO market raised nearly ₹4.3 trillion in FY25, with more listings ahead.
Outside formal exchanges, however, early investors and employees with stock options (ESOPs) struggle to cash out, relying on the grey market—an informal, legally uncertain channel. Sebi wants to replace these risky trades with a transparent, supervised system.
What problems exist today?
Unregulated trades typically occur through informal brokers or chat groups, leading to counterparty risk, price opacity, ownership disputes, failed settlements, and information gaps.
“Currently, unlisted trades face problems like information gaps, unclear ownership or transfer rights, and settlement risks, all of which regulation can address,” said Ashima Obhan, senior partner at Obhan & Associates. A formal system, she added, would enable smoother secondary sales and cleaner cap tables.
How would this help ESOP holders?
Employees often wait years for an IPO or acquisition to monetise vested stock, facing complex paperwork and uncertain pricing.
“For ESOP holders and early investors, it could finally unlock liquidity well before IPOs, creating new wealth opportunities and reshaping exit strategies,” said Narinder Wadhwa, MD & CEO, SKI Capital. He noted that a regulated route could also strengthen hiring and retention by making equity more tangible.
A pilot platform could provide interim, rules-based liquidity—partial exits, clear settlement timelines, and auditable trails—while curbing the risks of today’s grey market.
What about early investors?
Venture capital and other early backers often wait 7-10 years for exits. A regulated venue could let them recycle capital sooner and improve internal rates of return.
“A regulated platform would give flexibility to partially exit before IPOs, which can free up capital to reinvest/allocate into newer startups. Faster exits make IRR more attractive for LPs,” said Brijesh Damodaran, managing partner, Auxano Capital.
“The platform may also alter exit strategies for existing investors, as they can now sell their shares in a regulated environment,” added Saurabh Bansal, founder of Finatwork Investment Advisor, pointing out that current secondary deals often happen at 30-80% discounts to the last priced round.
How would it address grey-market issues?
The plan would replace opaque matchmaking with regulated brokerage under Sebi oversight, integrated with depositories and clearing systems.
“The buyers and sellers trading in unlisted shares face a lot of challenges at present due to inadequate availability of information,” said Jyoti Prakash Gadia, MD, Resurgent India, citing mis-selling and misinformation as common pitfalls.
Recent instances where grey-market prices diverged sharply from IPO pricing underline the need for better discovery.
For example, some investors acquired shares of Mobikwik in the grey market for as much as ₹850, only to face steep losses when the company’s IPO was priced at ₹279. Similarly, Swiggy investors paid up to ₹500 per share in the unlisted market, which was a sharp markdown from its IPO price of ₹390. These cases underscore the volatile nature and speculative valuations of grey market trades.
Wadhwa said the move could provide real price discovery, transparency, and secure settlement—the biggest risks in informal trades. Gadia added that a regulated mechanism matching orders at tentative prices, with proper disclosures and participation records, would reduce volatility born of rumours and artificial demand.
What safeguards are needed?
“Investor protection must come first,” said Obhan, calling for strict KYC/AML checks; issuer disclosure of cap tables and ESOP overhang; insider-trading controls; escrow-based settlement; clear risk labels; and auditable grievance redress.
Damodaran sought audited financials, escrow-backed guarantees, retail safeguards, and strong integration with depositories to ensure clean processes.
What are the critiques?
Some argue the move could legitimise speculation without solving core information gaps.
“Rather than building an entire platform, the more prudent safeguard would be to mandate stricter disclosure norms for companies actively considering an IPO and to limit participation to accredited investors only,” said Tarun Singh, founder & MD, Highbrow Securities.
Singh suggested a safe-harbour framework for existing intermediaries instead. “Compliance would naturally adapt to any new regulation, but it would add a layer of complexity for what is essentially a marginal event in a company’s lifecycle. The cost‑benefit of such dedicated infrastructure seems questionable.”
He also flagged low‑float manipulation risks, messy cap‑table T+1 settlement, and heavy depository integration for a brief window.
What’s next?
Pandey’s remarks suggest an in-principle direction. Next steps will likely involve consultations with exchanges, depositories, and the corporate affairs ministry.
“Since the proposition is to start it on a pilot basis, the issues of integration, pricing, and settlement should evolve with active participation of all stakeholders,” said Gadia.
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