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Unlisted Shares

The conventional way of investing in equities is buying shares of listed companies trading in stock exchanges. You can buy shares of listed companies in the primary market (IPO) or secondary market (post listing). Do you know that you can buy shares of company even before its Initial Public Offering (IPO)? In this article, we will discuss about unlisted shares.

Differences between listed and unlisted shares

As the name suggests, unlisted shares are shares of companies that have not yet been listed on a stock exchange. Listed shares trade on stock exchanges.

The ownership base of unlisted shares is very restricted i.e. promoters, angel investors, venture capital etc. The ownership base of listed shares is much bigger because the general public can invest in these shares.

It is much easier to get information on listed shares because these companies trade on stock exchanges. You can price and other data from the stock exchange. It is much more difficult to get information on unlisted shares.

Listed companies are bound by SEBI regulations to report their financial results. Listed companies are supposed to submit their quarterly financial results within 45 - 60 days from the end of each quarter. You can also get information on the financial performance of unlisted companies. Unlisted companies disclose their financial information with the Ministry of Corporate Affairs (MCA), which can be accessed by paying a nominal fee.

Listed shares are much more liquid than unlisted shares because you can sell the shares of listed companies on the stock exchanges. The liquidity of unlisted shares is much less, since they do not trade on stock exchanges. You may wait for the company to get listed or get in touch with a broker who deals in unlisted shares.

Why invest in unlisted shares?

Firstly, you can invest in unlisted shares at much more attractive valuations compared to listed companies. Some of investors in unlisted companies like private equity, venture capital funds etc, seek to exit their investment in unlisted companies through IPOs. Hence the IPO price range is set in such a way that the existing investors in the unlisted entity can exit with good profits / returns. If you are an investor in an unlisted company, you may want to wait till you get the listing gains or even longer, to get higher profits / returns. Secondly, if you subscribe to an IPO, your share allotment will depend on the subscription status i.e. how many times the IPO is over-subscribed; you may not get the number of shares you want. On the other hand, if you invest in Pre-IPO shares (unlisted shares), you may be able to buy the number of shares you want.

How to invest in unlisted shares?

Pre IPO shares : These are shares of unlisted companies who have the intention of listing the company in the near future. You can invest in Pre IPO shares through full service stockbrokers. Pre IPO shares are credited to your demat account.

PMS / AIFs : Some PMS or AIFs invest in unlisted shares. If you are unsure when an unlisted company will list, then PMS / AIFs with exposure to unlisted shares may be a good option. These are professionally managed funds, which would have done adequate due diligence and research.

Buying ESOPs from employees : Many companies offer employee stock options (ESOPs) to their employees as a part of their performance reward. Some stockbrokers can help you connect with employees who want to sell their ESOPs.

Points to consider when investing in unlisted shares

Unlisted shares are definitely more risky than listed shares but they have the potential of giving significantly higher returns (multi-bagger returns). You need to have very high risk appetite for investing in unlisted shares. You also need to have a longer investment horizon for unlisted horizon.

Adequate due diligence must be done when you are investing in unlisted shares. The due diligence should include the business model, financial results, growth potential, quality of management team etc. You should consult a stockbroker or financial advisor, who has expertise in unlisted companies

Pre IPO companies i.e. companies who have the intention of list in near future are usually the most sought after unlisted shares because you have higher visibility on liquidity horizon and potential returns. However, you must invest in these through a reputed and trusted stockbroker, who can get you the best price.

Taxation of unlisted shares is different from that of listed shares. Capital gains arising out of sale of unlisted shares within 2 years from the investment date will be added to your income and taxed as per your income slab. Capital gains arising out of sale of unlisted shares after 2 years from the investment date will be taxed at 20%, after allowing for indexation benefits.