Unlisted promoter shares can sometimes appear attractive because they are offered at a discount to the market price of a company’s listed shares. But a lower price does not automatically mean a better investment.

Unlike ordinary shares traded regularly on NEPSE, unlisted or promoter shares can involve additional questions about transferability, liquidity, valuation, regulatory restrictions and future exit options.

Before investing, investors should therefore look beyond the quoted price and conduct proper due diligence.

This guide explains the key things to check before buying unlisted promoter shares in Nepal.

What Are Unlisted Promoter Shares?

Promoter shares are shares held by the founding shareholders or promoters of a company. Depending on the company and applicable regulations, promoter shares may have restrictions that do not apply in the same way to freely traded ordinary shares.

An unlisted promoter share is particularly different from a normal NEPSE-traded share because there may be no readily available market where you can immediately sell it.

Therefore, the investment decision involves two separate questions:

1. Is the underlying company financially and operationally attractive?
2. Are these particular shares legally transferable and reasonably priced?

Both questions need to be answered before investing.

1. Verify Exactly What You Are Buying

Do not invest based solely on the seller saying that the shares are “promoter shares” of a particular company.

Obtain documentary evidence showing:

• Company name
• Company registration details
• Share class
• Number of shares
• Face value
• Current shareholder’s name
• Share certificate or applicable dematerialized holding evidence
• Shareholder/account details
• Whether the shares are pledged
• Whether there is any lien or other encumbrance
• Whether there are restrictions on transfer

The identity of the actual shareholder is particularly important.

The person offering you the shares should be able to demonstrate that they legally own the shares and have the right to transfer them.

2. Check Whether the Shares Can Actually Be Transferred

This is one of the most important checks before buying unlisted promoter shares.

Do not assume that owning a share certificate automatically means you can freely transfer the shares to another person.

Ask the company, its registrar or the relevant authorized institution about the transfer process.

Check for:

• Lock-in provisions
• Articles of Association restrictions
• Promoter-share restrictions
• Pre-emption or first-refusal provisions
• Board approval requirements
• Regulatory approval requirements
• Restrictions applicable to particular shareholders
• Pledge or lien
• Requirements for dematerialization
• Conditions for conversion of promoter shares into ordinary/public shares

The Securities Board of Nepal (SEBON) maintains regulations and information concerning securities issuance, listing and promoter-share conversion. Therefore, investors should verify the applicable rules for the particular company instead of relying on informal assurances.

A good investment opportunity that you cannot legally transfer or sell when required can still become a poor investment for your personal circumstances.

3. Do Not Assume Promoter Shares Will Automatically Become Public Shares

One of the common arguments used to sell promoter shares is:

“The company will soon convert these into ordinary shares.”

Treat this as a claim that needs verification—not as a guaranteed return.

Promoter-share conversion is subject to applicable laws, regulations and company-specific circumstances.

Before paying a premium based on an expected conversion, verify:

• Whether conversion is actually permitted
• Whether the company has initiated the process
• Whether the relevant approvals exist
• The applicable ratio or conditions
• Any lock-in or other restrictions
• The likely timeline
• Whether the conversion has actually been approved

A future conversion should not be treated as certain simply because a seller or intermediary says it is going to happen.

4. Understand the Difference Between Listed Price and Promoter-Share Value

Suppose a company’s listed ordinary share is trading at Rs. 600, while someone offers its promoter shares for Rs. 350.

It may initially appear that you are buying the same company at a 42% discount.

But this calculation can be misleading.

The two securities may have different:

• Liquidity
• Transfer restrictions
• Voting characteristics
• Marketability
• Conversion conditions
• Exit opportunities
• Holding periods

Therefore:

Rs. 600 listed share − Rs. 350 promoter share ≠ automatically Rs. 250 of guaranteed value.

The discount may partly compensate you for the additional risks associated with holding the unlisted shares.

5. Calculate Book Value Per Share

Book value is an important starting point when evaluating an unlisted share.

A simplified calculation is:

Book Value Per Share = Net Worth ÷ Number of Outstanding Shares

For example, suppose:

• Company’s net worth = Rs. 10 billion
• Outstanding shares = 100 million

Then:

Book value per share = Rs. 100

If you are being asked to pay Rs. 300 per share, you are paying approximately 3 times book value.

That may or may not be reasonable depending on the company’s profitability, growth prospects, asset quality, industry and other factors.

Do not use book value alone. It is only one component of valuation.

6. Look at Earnings and P/E

Profitability is another important consideration.

Calculate:

EPS = Net Profit ÷ Weighted Average Number of Shares

Then:

P/E Ratio = Price Per Share ÷ EPS

For example, if the proposed purchase price is Rs. 300 and EPS is Rs. 30:

P/E = 10 times

Compare this valuation with:

• The company’s historical valuation
• Comparable companies
• Industry characteristics
• Growth rate
• Dividend history
• Return on equity

The listed market price can provide a reference point, but it should not be treated as the only measure of fair value.

7. Examine the Company’s Cash Flow

A company can report accounting profit without generating strong cash flow.

Therefore, don’t stop after looking at EPS.

Review at least:

• Operating cash flow
• Investing cash flow
• Financing cash flow
• Free cash flow where meaningful
• Receivables
• Inventory
• Borrowings
• Interest payments

If profits are increasing but operating cash flow consistently remains weak, investigate why.

The Securities Board of Nepal advises investors to study a company’s periodic and annual reports, financial condition, management and returns before making investment decisions.

8. Study at Least 3–5 Years of Financial Statements

Before committing significant money, obtain several years of audited financial statements.

Look for trends in:

One year’s strong profit should not automatically determine your valuation.

9. Investigate the Promoters and Management

With promoter shares, the promoter group deserves particular attention.

Investigate:

• Promoters’ business history
• Track record
• Other companies controlled by the group
• Related-party transactions
• Loans to related parties
• Cross-holdings
• Major litigation
• Regulatory action
• Auditor changes
• Board resignations
• Corporate-governance concerns

A financially attractive company can still present significant risks if there are unresolved governance or related-party issues.

SEBON’s investor education material similarly encourages investors to examine management and company performance rather than making decisions based on publicity or market rumors.

10. Find Out How You Will Exit

This question should be answered before you buy.

Ask yourself:

“If I need my money back in two years, who will buy these shares from me?”

Possible exit routes may include:

• Sale to another eligible investor
• Sale to an existing shareholder
• Company-approved transfer
• Conversion into another share class, where permitted
• Listing or other regulatory route, if actually approved

But do not base your investment solely on the assumption that a future IPO or conversion will happen.

An investment that looks attractive at purchase can become difficult if there is no active secondary market.

This is why liquidity risk should be included in the valuation.

11. Apply a Liquidity Discount

Suppose two investments represent interests in fundamentally similar businesses:

• Listed share: easily traded
• Unlisted promoter share: difficult to sell

They do not necessarily deserve the same valuation.

For an unlisted share, an investor may need compensation for:

Illiquidity + transfer restrictions + uncertainty about exit + regulatory restrictions

The appropriate discount is not a universal percentage. It depends on the company, share class, restrictions, financial quality and available exit mechanisms.

The important point is:

Do not pay the same price merely because both shares belong to the same company.

12. Be Careful With “Pre-IPO” Offers

Another common pitch is:

“This is a pre-IPO opportunity. Buy now and you will make a large gain when the company lists.”

This requires particular caution.

SEBON has published a specific notice concerning the sale of shares to the general public under the name “Pre-IPO.”

An investor should distinguish between:

A. A genuine transfer of existing shares from an existing shareholder

and

B. An informal offer based on a promise of future shares, conversion or listing.

These are not the same transaction.

Never assume that an expected IPO automatically means that the current unlisted share will become freely tradable at a particular price.

13. Check the Seller Before Making Payment

The seller is just as important as the company.

Before transferring money, verify:

• Seller’s identity
• Ownership of shares
• Share certificate or demat evidence
• Number of shares
• Shareholder details
• Whether shares are pledged
• Whether there are outstanding obligations
• Whether the seller has authority to transfer them

Avoid large informal cash transactions or payments based solely on screenshots and photocopies.

For a significant transaction, use proper banking channels and maintain complete documentation.

14. Use a Proper Share Purchase Agreement

For a substantial investment, a written agreement should clearly identify:

• Buyer
• Seller
• Company
• Number of shares
• Share class
• Purchase price
• Total consideration
• Payment terms
• Transfer procedure
• Taxes and transaction costs
• Responsibility if the transfer is rejected
• Seller’s declaration of ownership
• Confirmation that the shares are free from undisclosed encumbrances
• Refund/indemnity provisions where appropriate

For a large transaction, professional legal review can be worthwhile.

15. Consider Concentration Risk

Unlisted promoter shares can be particularly difficult to sell quickly.

Therefore, avoid putting an excessive portion of your investable money into a single unlisted company simply because the price appears attractive.

Ask:

• How much of my total portfolio would this represent?
• How much emergency cash would remain?
• Can I tolerate holding the shares for several years?
• What happens if the company performs poorly?
• What happens if I cannot find a buyer?

SEBON’s investor guidance emphasizes that investment risk is borne by the investor and advises investors not to make decisions solely because of rumors, publicity or persuasion.

A Practical Due-Diligence Checklist

Before buying unlisted promoter shares, try to answer yes to the following:

Ownership

☐ Have I verified that the seller actually owns the shares?

☐ Have I verified the number and class of shares?

☐ Have I checked the share certificate/demat evidence?

Transferability

☐ Can the shares legally be transferred to me?

☐ Have I checked lock-in and other restrictions?

☐ Have I confirmed the transfer procedure with the relevant company/registrar?

Company

☐ Have I reviewed 3–5 years of financial statements?

☐ Have I checked profitability and EPS?

☐ Have I calculated book value per share?

☐ Have I examined debt and cash flow?

☐ Have I reviewed dividend history?

☐ Have I investigated promoters and management?

Valuation

☐ Have I calculated P/E?

☐ Have I compared the price with book value?

☐ Have I considered the difference between listed and unlisted shares?

☐ Does the price adequately compensate me for illiquidity?

Exit

☐ Do I know how I can legally sell the shares?

☐ Do I know who the likely future buyers are?

☐ Am I financially prepared to hold the shares for an extended period?

Documentation

☐ Is there a written agreement?

☐ Are payments properly documented?

☐ Have I checked applicable taxes and transaction costs?

☐ Have I obtained professional advice where the transaction is substantial?

Final Thoughts

Buying unlisted promoter shares is not simply a matter of finding a company whose ordinary shares are trading at Rs. 500 and buying its promoter shares at Rs. 300.

The real investment question is:

What am I actually receiving for Rs. 300, what restrictions come with it, and how will I eventually realize its value?

A financially strong company can still be an unsuitable investment if the shares cannot be transferred easily, the purchase price is excessive, or the investor has no realistic exit strategy.

Before investing, examine ownership, transferability, restrictions, financial performance, valuation, promoter quality, liquidity, regulatory requirements and exit options.

Most importantly, do your own due diligence rather than relying on claims such as “guaranteed IPO,” “sure-shot profit,” “promoter shares are always cheaper,” or “this company will definitely list soon.”

Investment decisions should be based on verified information and the investor’s own risk tolerance and financial circumstances. SEBON’s investor education guidance likewise advises investors to study company reports, financial condition, management and returns and to make investment decisions based on their own judgment rather than rumors or persuasion.

Disclaimer: This article is for general educational and informational purposes only and should not be considered investment, legal or tax advice. Rules governing securities, promoter shares, transfers and taxation may change. Investors should verify the current requirements with the relevant company, registrar, SEBON, licensed securities professionals and appropriate legal/tax advisers before entering into a transaction.