For investors looking beyond exchange-traded stocks, unlisted shares provide an alternative way to access private market opportunities. They allow you to trade in companies that have not yet been listed on any stock exchange. However, there is a different way to go about trading unlisted stocks compared to listed ones, which is explored in the article below.
Key Takeaways
-
Unlisted shares are not available for trading on any recognised stock exchange. Hence, you require a proper medium for buying and transferring them.
-
For the purchase of unlisted shares, you require a demat account, KYC completion, and proper transaction documents.
-
Before making the investment, you should verify the company, stock availability, cost, valuation, and other factors.
-
Multiple risks can be associated with buying unlisted shares, including but not restricted to capital gains tax.
What are Unlisted Shares?
When a corporation or company does not list its shares or trade them on a registered stock market, those shares are called unlisted shares. Unlike listed shares, you cannot buy or sell them through the normal exchange trading mechanism. Unlisted securities can, however, be held in dematerialised form.
Who Can Invest in Unlisted Shares?
Retail investors can invest in unlisted shares, subject to the applicable company, securities and transaction rules. However, the route you use matters. Private placement offers, for instance, are subject to conditions under the Companies Act, 2013, and cannot simply be marketed to the general public as an open investment offer.
So, before you commit any funds, you should also check the involvement and legitimacy of any middlemen and the nature of the transaction.
How to Invest in Unlisted Shares?
-
Open a demat account to hold the stocks or shares that you buy. The unlisted securities can be held in dematerialised form through the depository system.
-
Ensure that all your KYC requirements and other details of the intermediary conducting the transaction are met.
-
Conduct your due diligence on the company to understand the business, finances, promoters, valuation and prospects of the company.
-
Use a SEBI-registered depository participant (like, banks, custodial brokers, or depository agencies associated with CDSL/NSDL) and ensure that the intermediary is a duly registered one as applicable in some cases.
-
Determine the number of shares available, the price quoted and the terms of the transfer.
-
After you have made the necessary verifications, make the payment through the authorised banking channel. Ensure that all the confirmations in this regard are received.
-
Once the transfer has taken place and necessary verifications are made, the shares can be credited to your demat account. Verify the same from your transaction statements.
Where Can You Buy Unlisted Shares?
Unlisted shares can be obtained via various ways. This may include unlisted shares being sold by current shareholders, ESOP holders who qualify for the purchase, private placement deals, as well as intermediaries operating unlisted shares.
Documents Required to Invest in Unlisted Shares
You generally need the following information and documents to complete the investment process:
-
KYC details
-
PAN
-
Aadhaar or another valid identity document
-
Bank account details
-
Demat account details
-
Transaction or transfer documents, wherever applicable
Also Read More: Unlisted Shares
Benefits of Trading Unlisted Shares
Investing in unlisted shares allows retail investors to gain early access to private businesses during their growth and pre-IPO stages. The value of your investment will rise if the business does well and has a successful listing or other liquidity event. They can also add another category of equity exposure to your portfolio. You may gain access to businesses that are not yet available through the regular stock-market route.
Risks of Investing in Unlisted Shares
Unlisted shares carry risks that you should assess before investing. Some of the major concerns are as follows:
-
When you wish to sell, you might not find a buyer right away.
-
It can be challenging to determine whether the quoted price is reasonable in the absence of regular exchange-based price discovery.
-
You may have less publicly available information than you would for a listed company.
-
Selling depends on finding an eligible buyer and completing the applicable transfer process.
Things to Check Before Investing in Unlisted Shares
As a rule, gains from the disposal of these shares are dealt with under the capital gains provisions. For tax reasons, shares that are maintained for over 24 months prior to transfer are classified as long time capital assets.
The applicable tax will be determined by the kind and time of holding and the provisions applicable for the relevant assessment year. Additionally, the Income Tax Department mandates the use of the appropriate income-tax return form and not ITR-1 for people who have held unlisted equity shares the year before.
Taxation of Unlisted Shares
Gains from the transfer of unlisted shares are generally considered under the capital gains framework. For tax purposes, unlisted shares are treated as long time capital assets when held for over 2 years before transfer.
The applicable tax treatment depends on the nature and period of the holding and the provisions in force for the relevant assessment year. You should also note that the Income Tax Department requires individuals who have held unlisted equity shares during the relevant previous year to use the applicable income-tax return form rather than ITR-1.
Unlisted Shares vs Listed Shares
|
Feature |
Unlisted Shares |
Listed Shares |
|
Trading |
Not traded on recognised stock exchanges |
Traded on recognised exchanges |
|
Liquidity |
Generally lower |
Generally higher |
|
Regulation |
Subject to applicable company and securities laws |
Subject to listed-market regulatory framework |
|
Valuation |
Requires independent assessment |
Market price is continuously available during trading |
|
Transparency |
Public information may be more limited |
Regular listed-company disclosures |
|
Taxation |
Capital gains rules apply; holding period is 24 months for long term classification |
Tax treatment depends on listed-security rules and holding period |
Conclusion
To sum it up, in order to purchase shares that have not been listed yet, you will need KYC, your demat account, a proper channel for transactions, and thorough research on the stock. It is crucial to do your analysis before investing.
Looking to invest? Open a Demat Account with Angel One and start trading seamlessly.
