Unlisted Shares are stocks that are not listed on public stock exchanges like NSE or BSE. Unlike listed shares, unlisted stocks are usually less liquid and are bought through private listings on platforms.
Unlisted stocks have grown in popularity because their high-growth phases earn substantial returns that catch the eyes of investors. These are valued considerably lower than their public counterparts, which makes them lucrative to many who hope for a higher profit margin and invest at the right window before prices go up.
Key Takeaways
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Unlisted Shares are shares of companies that are not yet listed on public stock exchanges.
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Investors can become shareholders at a lower price because these are not impacted by the market trends.
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These stocks are less liquid and higher risk.
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LTCG (> 24 months) is taxed at 12.5% without indexation (the ₹1.25 lakh annual exemption applies only to STT-paid listed shares).
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STCG (≤ 24 months) is taxed at your applicable income tax slab rate (Section 111A's 20% flat rate does not apply to unlisted shares).
What Are Unlisted Shares?
Unlisted shares usually mean stocks of companies that are not listed or traded on public stock exchanges like the National Stock Exchange or the Bombay Stock Exchange. These shares commonly belong to unlisted, delisted, private, pre-IPO or startup companies.
Unlisted stocks differ from their listed counterparts as follows:
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Unlisted Shares |
Listed Shares |
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Traded outside any recognised stock exchange through private listings. |
Traded through NSE, BSE or other recognised stock exchange |
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Prices are generally more stable, as they depend on the company valuation. |
Prices change based on demand and supply as they are publicly visible. |
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Being unlisted means these shares are less liquid as buyers are hard to find. |
Generally more liquid and easier to find buyers. |
How Do Unlisted Shares Work?
Often companies create or sell new shares to investors against capital. This is called issuance. When the company in question is an unlisted company, these new shares do not come from a public offering but from a mechanism termed as, private placement.
Companies raise capital by issuing new shares to investors through private placements. Once an investor acquires these shares, they receive legal equity ownership and become an official shareholder of the company.
When dealing with shares, it is essential to understand the mechanics of buying and selling, which becomes even bigger of a point when it comes to unlisted stocks. If a shareholder decides to sell a part or the entirety of the shares they own, then it is considered a private transaction. But a transaction is not simple; it entails legal procedures as explained in Section 56 of the Companies Act, 2013.
Note: Transfer mechanisms are bound by laws and are dependent on the parent company.
How to Buy Unlisted Shares in India?
There are multiple ways to buy unlisted shares –
Through Brokers
Brokers act as intermediaries between sellers and buyers of unlisted stocks. They facilitate negotiations and aid in the required paperwork for the transfers.
Through Existing Shareholders
You can buy unlisted stocks from shareholders who are looking to liquidate their shares.
Through Unlisted Share Platforms
You can find many unlisted share platforms with greater transparency into the procedure enabling the transfer digitally.
ESOP Liquidity Transactions
You can buy ESOPs (Employee Stock Ownership Plans) directly from employees who have vested their shares. For this to be successful, you should have a valid demat account with CDSL or NSDL.
Types of Unlisted Shares
Common types of unlisted shares:
Pre-IPO Shares
Shares that are expected to go public soon through initial public offerings (IPOs). You can buy these shares before public trading begins.
Delisted Shares
Shares of companies that were previously traded publicly but have since been removed voluntarily or due to regulatory non-compliance.
Startup Equity Shares
Shares of startups that are issued to founders and early employees in the early stage of setting up the business to secure venture capital.
Employee Stock Ownership Plan (ESOP) Shares
Often employees are granted rights to purchase company shares as compensation after a stipulated vesting period; these retain employees and ensure long-term company growth.
Who Can Invest in Unlisted Shares?
In India unlisted shares are not just limited to just wealthy investors or large companies. However, there are a few criteria for holding unlisted stocks.
For you to be an eligible investor, you can acquire unlisted stocks through permissible routes like:
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Secondary transactions with existing shareholders
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Intermediaries for unlisted shares
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ESOP liquidity transactions
Unlisted stocks are, however, regulated through various laws that dictate how they are issued and subsequently transferred.
Benefits of Investing in Unlisted Shares
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Investing in unlisted shares is lucrative because it gives you access to the company before the market recognises its future potential, thus helping you acquire it at a much lower value.
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The valuations of unlisted stocks are insulated from the regular volatile market, thus acquiring such stocks help diversify your portfolio.
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Early investments often have massive returns when IPO launches boost the stock prices upwards.
Risks of Investing in Unlisted Shares
No investment comes without its fair share of risks and unlisted shares are no different.
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Unlisted stocks are less liquid, unlike listed shares that can be traded easily; finding buyers for unlisted shares might require extended time periods.
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The lack of publicly available information makes it difficult to determine fair value. Prices are often manipulated by intermediaries.
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Unlisted companies are not bound by the same regulatory disclosure guidelines as the listed companies. This makes it difficult to judge the financial health of the company.
Also Read More: How to Trade in Unlisted Shares
How are Unlisted Shares Valued?
Investors estimate the worth of the shares through various methods.
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Book Value subtracts what the company owes from what it owns.
Book Value = Total Assets − Total Liabilities
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Earnings Multiples examine the profitability metrics like EBITDA and Net Income.
Company Value = Earnings × P/E or EV/EBITDA Multiple
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DCF or Discounted Cash Flow estimates the company’s future cash flow to discount back to its present value.
Company Value = Present Value of Expected Future Cash Flows + Present Value of Terminal Value
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Comparable Companies mean that unlisted business values are estimated by comparing them to publicly traded entities.
Taxation of Unlisted Shares
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Capital gains: Unlisted share profits are generally taxable as a capital gain depending on how long the shares were held before sale.
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Holding period: Unlisted stocks are generally considered long-term capital assets when held for more than 24 months. Lesser time spans are considered short-term capital assets.
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Applicable Tax Provisions: LTCG on unlisted shares held for over 24 months is taxed at 12.5% without indexation (the Rs.1.25 lakh annual exemption under Section 112A does not apply), while STCG held for 24 months or less are added to total income and taxed at the investor's applicable income tax slab rate.
Unlisted Shares vs Listed Shares
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Aspect |
Unlisted Shares |
Listed Shares |
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Liquidity |
Low |
High |
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Regulation |
Low |
High |
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Pricing |
Low |
High |
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Disclosures |
Limited |
Transparent |
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Taxation |
|
|
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Trading Platform |
Private Markets |
NSE/BSE |
Things to Consider before Investing in Unlisted Shares
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More due diligence is required for unlisted shares. Listed shares are easier to research, with higher available information through standardised disclosures.
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Company fundamentals are to be investigated through revenue growth, profitability and future prospects.
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You must examine the background of the promoter through investigating past transactions and track records.
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Before investing, understand the risks involved due to the liquidity risk, valuation uncertainty, etc.
Conclusion
Unlisted shares give you a chance to invest in promising companies before they go public. While this offers great growth potential, these shares are harder to sell and carry higher risks than regular stock market investments. Doing thorough research before investing is essential to protect your money.
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