Picture two investors holding stakes in the same company. One can sell on the NSE before lunch. The other must find a buyer, settle on a price and wait for the transfer to clear, with no promise that any of it happens soon. Few people would value those two holdings equally, and that instinct sits behind the illiquidity discount unlisted shares are often assessed with. Understanding it is a sensible first step for anyone comparing an unlisted company with a listed peer.
In short, an illiquidity discount is a reduction in estimated value that reflects how hard, slow or uncertain it may be to sell a share. It is one input in pre-IPO valuation, not a fixed rule, and no single percentage applies to every company.
Liquidity is simply how easily an asset can be turned into cash without moving its price. A large listed company scores well here. Buyers and sellers are plentiful, prices refresh every second and settlement follows a standard cycle.
Unlisted shares sit at the other end. They do not trade on a recognised exchange, so the pool of buyers is small, trades are occasional and nobody can say how long a sale might take. The illiquidity discount is the valuation adjustment that tries to account for this. Valuers often call it a discount for lack of marketability, or DLOM.
It helps to keep this apart from a general company discount. A business may be valued below its listed peers because it is smaller, less profitable or more indebted, and those reasons have nothing to do with trading. Illiquidity concerns the shares, not the business. Even a strong company’s unlisted equity can be harder to sell than its listed counterpart. In real quotes the two effects blur together, so a gap to listed peers rarely tells you how much of it comes from illiquidity alone.
Several features of the unlisted market can push value down, though none applies equally everywhere.
Start with the buyers. Interest in an unlisted company may come from a handful of investors, so a seller can wait a long time for a counterparty. There is also no continuous price discovery. A listed stock reprices every few seconds, while an unlisted one may see a few trades a year, and the last known price ages quickly.
Timing matters too. A holder cannot assume an exit in six months, or ever. The longer and less certain the likely holding period, the more a buyer tends to ask for in return for locking money away. Add the difference between an indicative quote and a trade that actually settles, and the price on a screen may not be the price anyone pays.
Company-specific factors sit on top of all this. Financial strength, the quality of disclosures, governance standards and the rights attached to the shares all shape a buyer’s comfort, and unlisted companies generally face lighter ongoing disclosure than listed ones. Finally, a planned IPO is only a plan. Market conditions, regulatory processes or business priorities can delay or end it.
Because these factors differ from company to company, the illiquidity discount unlisted shares carry cannot be pinned to one number. Some may trade close to listed peers and others at a wide gap, and it would be wrong to assume that every unlisted share must sit below its comparables.
Analysts usually start with listed peers. They compare multiples such as price-to-earnings or EV/EBITDA, adjust for differences in size, growth and risk, and may then apply a marketability adjustment for limited tradability. The method has limits. Perfect peers are rare, listed multiples swing with market mood, and the illiquidity discount unlisted shares receive depends on professional judgement, so two reasonable analysts can arrive at different valuations. Whenever pre ipo shares are described as “priced at a discount”, some version of this adjustment, formal or informal, is usually at work.
Three things are often confused. An indicative quote is a price shown by a platform or intermediary, and it may not be backed by a trade. A negotiated price is what one buyer and one seller actually agree, shaped by their needs and timing. A formal valuation is prepared as at a stated date, with disclosed methods and assumptions, often for tax, accounting or regulatory purposes. The valuation date matters because conditions change, and so do the rights attached to the shares. Equity, preference and ESOP-linked shares can carry different voting, dividend, liquidation and transfer rights, which may justify different adjustments.
The figures below are purely illustrative. They are not a market benchmark, a recommended method or a view on any real company. Suppose a peer comparison suggests equity worth ₹1,000 crore, with 2 crore shares outstanding.
| Step | Illustration |
| Peer-based equity value | ₹1,000 crore |
| Value per share (₹1,000 crore ÷ 2 crore shares) | ₹500 |
| Assumed illiquidity discount | 20% |
| Discount per share (₹500 × 20%) | ₹100 |
| Adjusted value per share (₹500 − ₹100) | ₹400 |
| Adjusted equity value (₹400 × 2 crore shares) | ₹800 crore |
At an assumed 30% discount the per-share value would be ₹350, and at 10% it would be ₹450. The 20% was chosen only to keep the arithmetic simple. A real valuation would need company-specific reasoning for whatever figure it uses.
An unlisted share price is not automatically a reliable measure of fair value. What you see reflects the latest transaction, how many buyers and sellers happen to be active that week, what the company has disclosed and whether the shares can be transferred without friction. A pre ipo share price quoted today might rest on a few small trades, or on one large block that says little about normal activity. Transfer conditions in the articles of association, such as board approval or a right of first refusal, can narrow the set of eligible buyers further. Thin trading data makes a quote a rough signal rather than a settled fact, which is why the illiquidity discount unlisted shares may warrant depends on the available market evidence and transfer restrictions.
One point deserves emphasis. A lower observed price does not mean a share is undervalued or a better opportunity. It may reflect weak fundamentals, thin demand, governance worries or doubts about an exit. A wide discount can be a warning sign as easily as an opening, and on its own it says little about future returns.
For anyone weighing pre ipo investing, the practical effects of limited liquidity can matter as much as the headline price. Shares may need to be held far longer than planned, because listing dates slip and some never arrive. A holder who needs cash quickly may have to accept a lower price, or may not find a buyer at all. The business can perform well while one investor earns little, depending on entry price, exit timing and market conditions. And a cheap-looking entry means little if the exit is narrow, so valuation and liquidity are best read together.
A future IPO should be treated as a possibility, not a promise, and even a successful listing does not clear every valuation or liquidity risk, as the section below explains. The regulatory setting differs from listed markets too. SEBI has repeatedly cautioned investors against dealing in shares of unlisted public companies through electronic platforms that it has neither authorised nor recognised, and has said that only recognised stock exchanges are authorised to provide a platform for securities of listed and “to be listed” companies. Anyone considering a pre ipo investment in unlisted shares should keep this in mind, since platform, documentation and counterparty risk sit alongside the discount itself. Investors who hold pre ipo shares through such platforms may also lack access to the grievance mechanisms available in the recognised market.
This checklist is educational. It does not remove risk and is not a personal recommendation.
A listing changes how shares trade and how prices are found. Price discovery becomes continuous and more participants can take part. It does not guarantee immediate liquidity, a higher valuation or a positive return, and newly listed stocks can fall below their issue price or trade thinly.
Lock-ins matter as well. Under SEBI’s ICDR framework as amended in 2021, the minimum promoters’ contribution of 20% of post-issue capital is generally locked in for 18 months and excess promoter holding for six months, while pre-issue shareholding of persons other than promoters is generally locked in for six months from allotment in the IPO. Exceptions and different timelines exist, for example for certain employee-held shares, specified institutional investors and SME issues, so check the current ICDR provisions and the offer document for the category that applies. Market conditions and personal circumstances then decide whether a sale at an acceptable price is possible.
The main risks in pre ipo investing are valuation uncertainty, limited liquidity, information gaps, uneven company performance, weak governance, transfer restrictions, IPO delay or cancellation, market volatility and the possibility of losing capital. None of this is cause for alarm, but all of it is cause for care. An illiquidity discount is neither a guarantee of returns nor a dependable standalone measure of how attractive an investment is. Treat it as one lens among several.
The illiquidity discount unlisted shares attract helps explain why unlisted and listed prices diverge, and why an attractive-looking entry price can come with real trade-offs. It is not a fixed number. It depends on the company, the shares, the buyers available and the time to a possible exit. A sound view of any pre ipo investment weighs valuation alongside fundamentals, disclosures, transfer conditions, liquidity constraints and the uncertainty around listing plans. Supremus Angel publishes educational material on unlisted shares for readers who want to build that understanding before making their own decisions.
1. What is an illiquidity discount in unlisted shares?
It is a reduction in estimated value that reflects how hard, slow or uncertain it can be to sell the shares. It applies to the shares rather than to the underlying business, and its size varies from company to company.
2. Why do unlisted shares have an illiquidity discount?
Without an exchange there are fewer buyers, less frequent pricing and an uncertain exit timeline. Limited disclosures and transfer conditions can add to this. Some unlisted shares may not trade at a discount at all.
3. How is the illiquidity discount calculated?
There is no single formula. Valuers may use judgement, studies of restricted stock, option-pricing models or comparable transactions, adjusted for holding period and volatility. Results vary by company, valuation date and purpose, so always read the assumptions behind a figure.
4. Is there a standard illiquidity discount for companies yet to list?
No. We found no authoritative source that sets a universal percentage for all unlisted shares. The appropriate adjustment depends on the company’s finances, the rights attached to the shares, the expected holding period and market conditions.
5. How does an illiquidity discount affect the pre ipo share price?
A discount applied to a peer-based valuation lowers the estimated value per share. Observed quotes also reflect demand, supply and negotiation, so the effect is neither precise nor uniform. A quote is not proof of what a trade would achieve.
6. Is a lower price for an unlisted share always a better deal?
No. A lower price can reflect weaker fundamentals, thin demand, governance concerns or exit difficulty. Whether a price is attractive depends on the company’s value, your holding period and your ability to sell later.
7. Can an IPO eliminate the illiquidity discount?
A listing can improve tradability and price discovery, but it does not guarantee liquidity, a higher valuation or returns. Lock-ins, market conditions and trading volumes still matter, and some IPOs are delayed or withdrawn.
8. What risks should investors assess before buying unlisted shares?
Key risks include valuation uncertainty, limited liquidity, information gaps, governance, transfer restrictions, IPO delays, market volatility and loss of capital. Investors should also verify any platform or intermediary, given SEBI’s cautions about unauthorised unlisted-share platforms.
9. How can investors assess the fair value of unlisted shares?
Fair value is usually estimated with several approaches, such as peer multiples, discounted cash flows and recent transactions, adjusted for marketability and share rights. Check the valuation date and assumptions, and consider independent professional advice for large decisions.
10. Does an illiquidity discount guarantee higher returns?
No. A discount reflects perceived liquidity and risk, not a promise of gains. A share bought at a discount can still lose value or remain hard to sell. Returns depend on business performance, exit timing and the price eventually achieved.
