HNIs tank up on stocks sold by employees of unlisted companies

When Flipkart employees land a windfall after Walmart seals the buyout deal, they may find investors waiting to buy their Esop fortune. While shares of unlisted companies have always been on the radar high networth and ultra-high networth individuals (HNIs and UHNIs), they are now tanking up on stocks sold by employees of unlisted companies.

Usually this happens in companies where there is visibility of listing or companies that get very high valuation from venture capitalists and there is a likelihood of the valuation going up even more, said wealth managers who have done such transactions on behalf of their clients. In the recent past, employees of companies like Paytm and ICICI Lombard General have sold their vested employee stock option plans (Esops).  

According to Rajesh Saluja, CEO and MD, ASK Wealth Advisors, UHNIs  prefer companies that are still some time away from listing because they believe they can get good returns after the initial public offering.

“Such investments are made in companies where there is an assumption of listing or there is a visibility for funding at a much higher valuation, especially in technology companies that see several series of funding. For instance, in a company like Paytm, one would assume a certain valuation and that the next round could be higher. So even if the listing does not happen and the company keeps on raising valuation, the investor can sell the shares to someone else,’’ he said.

These are Esops that are vested, so for the investor, they are essentially shares of unlisted companies. The risk for the HNI investor is that the listing may not happen. That is why one has to understand the company and the business, what stage of life the company is at, etc.

HNIs have the risk appetite of being able to invest in start-ups, private equity, angels funds, etc. Buying Esops of unlisted companies is an extension of that, said Prateek Pant, head, product and solutions, Sanctum Wealth Management.

“What is happening is that there is a secondary market where some employees are selling their holdings. And these are the type of blocks that are available in the market. It could be either employees or initial investors who want to exit, sometimes because the IPO has been deferred,’’ he said.

There are brokers who specialise in this and investment banks who have the mandate to place blocks of these Esops with HNIs or family offices. Wealth management firms, then advise their clients to buy such shares from these brokers.

While the valuation is a function of demand and supply, the wealth manager would also look at the financial data that is available, such as earnings, multiple and what peers are quoting, said Pant. There are specialised funds that invest in pre-IPO shares. But these would not be interested in Esops since these blocks of shares are of small quantities.

“Typically, a fund would buy equity in a company directly rather than buying Esops and holding them. They run on an investment mandate where there may not be a space for such small allocation,’’ Saluja said.
For employees who sell their options, it is primarily for liquidity reasons or to derisk because they don’t know if they will get a good price in the IPO.

For instance, someone who had held onto their Esops of a company like Infosys could have retired with the gains made from it. But someone who had Esops of a company like Satyam could have seen the entire worth turn zero at some point of time.

After the vesting period is over, the Esops are normal unlisted shares and would be taxed accordingly.
The long-term capital gains tax is 20% with indexation and the short-term capital gains tax is as per your tax slab, said Amit Maheshwari, partner, Ashok Maheshwary & Associates.

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After these shares are sold they are transferred to the new investor the company is informed. It is then reflected in the company’s shareholding pattern.

Source: DNA Money