Unlisted Shares in the Indian Financial Market

Tue, 5 Nov 2024

4 mins

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• What Are Unlisted Shares?

  In the dynamic landscape of investing, where traditional avenues like stocks and bonds dominate, unlisted shares present an intriguing opportunity for those seeking alternative investments. These shares, as the name suggests, belong to companies that are not listed on any stock exchange.
  
  Instead of being traded openly, transactions involving unlisted shares occur through private negotiations and agreements. This niche segment of the market includes startups, smaller firms, and companies in the early stages of growth that have not yet opted for a public listing.

• Unlisted shares v/s Listed shares

  Valuation:
  Unlike listed shares, which have readily available market prices, valuing unlisted shares requires more intricate methodologies. Common approaches include Discounted Cash Flow (DCF) analysis and comparisons with similar transactions in the market. This process often involves a deep dive into the company's financials and projections, reflecting the speculative nature of these investments.
  
  Ownership and Liquidity:
  Listed companies distribute ownership widely among the public through shares traded on exchanges. In contrast, unlisted companies typically have concentrated ownership among founders, early investors, and sometimes employees through ESOPs (Employee Stock Ownership Plans). This concentration can influence decision-making and governance dynamics within the company.
  
  Liquidity:
  Liquidity, a critical aspect for investors, varies significantly between listed and unlisted shares. While listed shares benefit from active trading platforms that ensure quick transactions, unlisted shares lack this liquidity thus increasing liquidity risk. Selling unlisted shares can be more challenging and time-consuming due to the limited number of buyers and sellers in the private market.
  
  Regulatory Framework:
  Listed companies in India operate under stringent regulations enforced by stock exchanges and regulatory bodies like the Securities and Exchange Board of India (SEBI). These regulations ensure transparency, fair practices, and investor protection. In contrast, unlisted companies face fewer regulatory requirements but must still adhere to company law and other applicable regulations. This flexibility can appeal to smaller enterprises seeking to minimize administrative burdens.

• Tax on Unlisted shares:

  Investors in unlisted equity shares in India encounter specific tax considerations:
  
  - Long-Term Capital Gains (LTCG): Profits from selling unlisted shares held for more than 24 months are subject to LTCG tax at 12.5%.
  
  - Short-Term Capital Gains (STCG): If held for 24 months or less, gains are treated as STCG and taxed at 20%.
  
  Notably, unlisted shares do not attract Securities Transaction Tax (STT), which is typically levied on transactions of listed securities. To know more about the recent changes in taxation on unlisted shares, check out our blog

• How to buy Unlisted Shares?

  Investing in unlisted shares requires navigating different avenues:
  
  1. Startups and Early-Stage Companies: Direct investment in startups offers exposure to innovative ideas and potential high growth before these companies consider going public.
  
  2. ESOPs (Employee Stock Ownership Plans): Purchasing shares from employees who hold ESOPs provides an opportunity to acquire stakes in companies where employees have a vested interest in the organization's success.
  
  3. Private Placements: Engaging with promoters and investment intermediaries allows investors to participate in private placements, where shares are offered directly by the company to private investors.
  
  4. Pre-IPO Opportunities: Investing in companies preparing for an Initial Public Offering (IPO) enables investors to secure shares before they become available to the general public.
  
  Each method involves assessing the company's potential, conducting due diligence, and often relying on trusted intermediaries to facilitate transactions and mitigate risks.

• Benefits of Investing in Unlisted Shares

  1. Early Access to Growth: Investing in unlisted shares provides an opportunity to enter potentially high-growth companies before they reach the broader market through an IPO.
  
  2. Negotiable Prices: Limited market exposure allows for negotiable pricing, potentially securing shares at a lower valuation compared to what may be offered post-IPO.
  
  3. Potential for High Returns: Successful investments in unlisted shares can yield substantial profits if the company performs well upon listing or during subsequent rounds of funding.
  
  To check unlisted shares list: click here

• Risks Associated with Unlisted Shares

  1.Liquidity Challenges: Unlisted shares are less liquid compared to their listed counterparts, requiring patience and a longer investment horizon.
  
  2.Limited Information: Smaller companies may not disclose as much financial information as publicly traded firms, necessitating thorough research and reliance on trusted sources.
  
  3. Risk Management: The lack of regulatory oversight comparable to listed markets poses inherent risks, including potential capital loss and limited exit strategies.
  
  

• To conclude:

  In conclusion, unlisted equity shares present an alternative investment avenue for individuals and institutions looking to diversify their portfolios and capitalize on early-stage opportunities.
  
  While offering potential for high returns, these investments require careful consideration of risks, thorough due diligence, and strategic planning.
  
  By understanding the nuances of the market and leveraging available resources, investors can explore and potentially benefit from this dynamic segment of the Indian financial landscape.