In the world of investments, you may come across many opportunities to create wealth. Amid all the investment options available, one particular option has managed to captivate investors. This option allows you to earn unique returns and associate yourself with the company’s growth. Yes, it is the option to invest in unlisted shares!
As exciting and promising as it sounds, it is essential to understand what an unlisted share is, how it benefits you, and the risks involved with this type of investment. This blog will help you explore the world of unlisted equity shares and understand how to diversify your portfolio with this instrument.
Understanding Unlisted Shares
Behind the formal stock exchange runs the market of unlisted equity shares. Unlisted shares refer to shares not listed and traded on the stock exchange. These are equities or financial instruments traded over the counter and called over-the-counter (OTC) securities. The shares belong to start-ups or small companies that have not yet complied with the stock exchange listing norms.
These shares are held by a limited number of people or entities, like founders, promoters, strategic investors, or venture capitalists.
Difference Between Unlisted Shares and Listed Shares
Shares not listed differ from listed shares on various parameters. Let us look at the crucial differences between the two.
|Ownership||A few private investors, such as founders and promoters, own the shares.||The ownership of listed shares lies in the hands of the public, promoters, and other entities.|
|Liquidity||These shares have low liquidity in contrast to listed shares. They might not always have immediate buyers, which makes it challenging for investors to exit their investments.||Listed shares have the advantage of high liquidity. You can purchase or sell these shares easily during trading hours. So you can get access to funds whenever you need it.|
|Regulatory Requirement||Unlisted companies have less rigid regulatory requirements. This gives them a flexible operating environment. However, this raises concerns regarding their transparency and governance.||The Securities and Exchange Board of India (SEBI) regulates listed companies. This ensures the market’s integrity and protects investors.|
|Investment Process||The investment process is straightforward. However, unlike listed shares, unlisted equity shares settle immediately.||While the investment process in a listed company is simple, it typically takes around trading +2 (T+2) days for the shares to settle.|
|Tax Implication||After indexation, the applicable tax slab rates are – Short-Term Capital Gains (STCG) – max 30%. Long-Term Capital Gains (LTCG) – 20%||Long-Term Capital Gains (LTCG) – 10% (without indexation) when they exceed ₹1 lakh in the financial year. Short-Term Capital Gains (STCG) – 15%|
|Prediction on Returns||The return predictability on unlisted shares is relatively low.||The return predictability on listed shares is relatively high.|
|Market Volatility||Stock market price fluctuations do not impact these shares. Investors seeking long-term growth find these shares appealing due to their lower short-term volatility.||Price fluctuations in the stock market, economic conditions, geopolitical events, and company-specific news actively influence the stock prices of listed companies.|
|Transparency||In contrast to listed companies, unlisted companies offer very limited information. You may have to rely on private sources or conduct research to evaluate the company’s true potential.||Strict regulatory requirements govern listed companies. This transparency ensures you obtain all the information regarding the companies’ performance, financial health, and governance practices.|
After understanding the differences between listed and unlisted equity shares, the next step is looking at how investing in these shares can benefit you.
Benefits of Investing in Unlisted Shares
As an investor, you can benefit from investing in unlisted equity shares in the following ways:
- Potential high returns: Investing in unlisted equity shares of promising start-ups can give you higher returns in the future.
- Low valuations: You can purchase these shares early at lower valuations.
- Diversification: By including these shares in your portfolio, you can diversify your investments and minimize the risk.
- Access to companies with potential: Buying these shares allows you to invest in and benefit from some promising start-ups and businesses.
- Pre-IPO opportunities: You can participate in Initial Public Offerings (IPOs) by purchasing these shares. Companies planning to go public usually offer pre-IPO shares to certain investors. This includes investors who have bought unlisted shares. If the IPO succeeds, you might be able to exit at a potentially higher valuation.
Risks of Investing in Unlisted Shares
Unlisted equity shares, though attractive and appealing, come with a few risks. Before investing, knowing the benefits and risks associated with these shares is crucial.
Listed below are a few of the risks:
- No transparency: In an unlisted public company, you can access most of the information only at the end of the fiscal year. This limited information makes evaluating the company and the share price tough.
- Not regulated: SEBI does not govern unlisted companies. Lack of regulations could increase the chances of fraudulent activities. This leads to a faulty valuation of the company as well.
- Restricted liquidity: These shares cannot be easily sold; generally, they require completion of the holding period. The sale takes place when there are buyers or when there is an IPO.
Factors to Consider While Investing in Unlisted Stocks
When you purchase unlisted or pre-IPO shares, you can earn potentially higher returns than you can make from buying and selling listed shares. However, as discussed, this investment involves a considerable amount of risk in terms of transparency and regulations. There are a few factors that you must bear in mind when you decide to invest in such shares.
- Performance: Before investing in any company, you must research and analyze the company’s financial statements. This provides an accurate picture of the revenue stream, the revenue generated, the profits, and the cash inflows. Since most of these firms are start-ups, research the management’s track record of success. This helps you understand the company’s current situation and its potential for future growth.
- Valuation: You must research the company’s valuation. Valuation is the price you will pay for a particular company’s share. Conducting research helps you determine if you are dealing with an undervalued or overvalued company. Investing in an undervalued company is a fantastic opportunity because the share price may be lower than the company’s actual value.
- Investment timeframe: These shares lack liquidity, i.e., you cannot buy or sell these shares quickly. This means, as an investor, you have to hold these shares for a long duration. Before investing in the shares of an unlisted public company, analyze your financial situation and be sure that you do not need liquid funds immediately.
- Risk appetite: Investing in unlisted or pre-IPO shares involves risk. As an investor, assess your risk appetite and ensure you are ready to take the risk.
- Lock-in period: If you choose to invest in pre-IPO shares, remember they come with a lock-in period. You cannot sell these shares for a set period following the IPO. If you invest in these shares, ensure you do not need funds shortly, as the lock-in period prevents you from withdrawing your funds.
Different Ways to Invest in Unlisted Stocks
You can invest in unlisted or pre-IPO shares in either of the following ways:
- Purchase them directly from the promoters of the company
- Purchase them from the employees of the company
- Purchase them via trustworthy intermediaries
- Participate in angel investing
- Invest in venture capital funds that invest in unlisted or pre-IPO shares
Unlisted shares are an unchartered territory and a hidden gem in the world of investments. They not only give you access to some promising start-ups but allow you to earn potentially high returns on your investment. Though an attractive investment option that also helps in portfolio diversification, it is important to weigh the pros and cons before investing.
Additionally, you must assess your risk appetite and financial requirements before you take the leap of faith. So, whether you are an experienced investor or a beginner, remember that calculated risk and informed decision-making are essential to a profitable investment.
Is an unlisted share similar to a delisted share?
No, they are completely different. An unlisted share is not yet listed on the stock exchange. A delisted share has already been listed on the stock exchange but has been removed for various reasons.
Should you declare unlisted shares while filing income tax returns (ITR)?
Yes. If you hold the shares of companies registered under the Companies Act 2013, you must report the same in your ITRs. If you do not have income from any other business/profession, you can file ITR-2 or ITR-3. You must disclose the ITR details under the ‘Part A – General Information’ tab.
Is it legal to invest in unlisted shares?
Yes. You can purchase these shares in different ways. However, you must research the company’s financials and growth prospects before deciding.
*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.