Unlisted shares are emerging as the new trend in the minds of smart investors desiring the highest growth opportunities. But then, what are really unlisted shares, and should they be invested in?
This blog is going to cover everything that you should know about unlisted shares-from their benefits to how to buy them, as well as some key advantages and disadvantages.
What Are Unlisted Shares?
Unlisted shares of a company are those which are traded neither on the recognized stock exchanges of India, namely, the NSE and BSE. Generally, these are shares of private companies, startups, or companies that will be going public in the near future.
Unlike shares that are listed, unlisted shares are bought and sold over-the-counter (OTC) or in private transactions.
Benefits of Investing in Unlisted Shares
1. Early-Stage Investment Opportunities
Investment in unlisted shares gives you access to potential startups or companies before they make an IPO. This warrants a higher potential return in case the company does well or makes an IPO.
2. Diversification
Unlisted shares diversify your portfolio beyond conventional equities and mutual funds, thus lowering overall risk.
3. Pre-IPO Gains
If the company lists on the stock exchange, the value of unlisted shares may rise quickly, giving rise to attractive returns for early investors.
4. Access to High-Growth Sectors
Investing in highly promising industry sectors or companies that are otherwise not listed on stock exchanges is possible. Examples include tech startups, fintechs, even unicorns.
How to Buy Unlisted Shares in India
1. Through Trusted Brokers/Dealers
There are registered dealers and brokers who specialize in unlisted shares. Ensure that they are SEBI registered to avoid malpractices.
2. Employee Stock Ownership Plans (ESOPs)
Private company employees sometimes sell their ESOPs in the secondary market, which can be purchased through dealers.
3. Online Platforms
Digital platforms and fintech apps are available for investors to buy unlisted shares along with proper documents.
4. From Promoters/Shareholders
In case of proper networking and legal support, the shareholders of the company can be approached directly for the deal.
Note:
Check every possible factor before buying: company financials, valuation, and legal status.
Advantages of Unlisted Shares
- High Return Potential: If the company scales up or has a listing, you may make hefty capital gains.
- Long-term Growth: Most unlisted firms are startups that have an extremely high degree of scalability.
- Access to Unique Sectors: Think sports franchises, space tech, or even fintech.
- Less Market Volatility: Since these shares are not traded on a daily basis, they are less susceptible to daily market noise.
Disadvantages of Unlisted Shares
- Low Liquidity: You cannot find a buyer quickly if you want to sell your shares.
- Higher Risk: Startups and private companies have higher business risk.
- Lack of Transparency: Very little financial information and no periodic disclosure.
- Tax Implication: Short-term capital gains (less than 24 months) will be taxed at slab rate; and long-term capital gains (greater than ₹1 lakh) will be taxed at 20% plus indexation.
Final Thoughts
Unlisted shares are an exciting investment avenue for anyone looking to diversify their portfolio whilst reaping the high potential returns at the onset of growth. They also come with their own sets of risks such as low liquidity and less information.
Frequently Asked Questions (FAQs)
1. Is it legal to buy unlisted shares in India?
Yes, it is completely legal as long as you transact through proper channels and follow SEBI guidelines.
2. Can unlisted shares be transferred?
Yes, they can be transferred via Demat accounts just like listed shares.
3. Do unlisted shares pay dividends?
Some profitable companies may pay dividends, but it’s not common.
4. What is the lock-in period post IPO?
If you buy unlisted shares before IPO, you may face a lock-in period of 6 months after listing.