Start-ups secure funding for their establishment and expansion. When a company lists on exchanges like the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) with its equity share capital, it becomes a publicly-traded entity. This allows the company to freely trade its equity shares with both retail and institutional investors. Listed shares belong to companies available for trading on a stock exchange. On the other hand, unlisted equity shares, which are part of a firm’s equity share capital, are not traded on any stock exchange. To buy these unlisted shares, investors can seek guidance from top unlisted share brokers in India.

Pre-IPO shares or unlisted shares are not publicly traded on a stock exchange. They become available for trading before the company becomes publicly listed. Purchasing unlisted shares requires unconventional methods. Before delving into how to buy unlisted shares in India, it’s crucial to highlight essential considerations when acquiring unlisted equity shares.

Unlisted Shares

Unlisted shares offer an avenue for investors to own stakes in companies that haven’t listed their stocks on formal exchanges. These shares present a unique investment opportunity, usually linked to smaller or growing firms that might avoid public listing due to regulatory requirements or other reasons.

Understanding Unlisted Shares

Unlisted shares are ownership stakes in companies that aren’t publicly traded on established stock exchanges. Instead, they’re traded through less regulated methods like over-the-counter (OTC) trading or private platforms. Simply put, unlisted shares allow investments in companies opting for more flexible and less public trading, often due to non-compliance with listing criteria.

Types of unlisted financial instruments

• Common Stock: Common stock, also known as capital stock, represents your ownership in a company. Having one share translates to holding a portion of the company. For example, if a company has a total of 100 shares, owning one share signifies a 1% ownership stake in the company.
• Penny Stocks: Penny stocks are shares that trade at very low prices, typically on smaller exchanges. They often possess low market capitalization and trading volume. Investing in penny stocks is seen as speculative and risky due to their limited liquidity, small shareholder base, and often limited available information.
• Corporate Bonds: Corporate bonds serve as financial tools that companies issue to generate funds. By investing in a corporate bond, you earn regular interest payments. These payments persist until the bond matures, returning your initial investment. Corporate bonds often tie to the company’s financial performance and might be secured by company assets in certain instances.
• Government Securities: Government securities, such as Treasury bonds, bills, and notes, are financial instruments issued by the government. These investments are recognized for their low-risk nature as they are backed by the government, guaranteeing full repayment of your invested funds upon the security’s maturity. Additionally, certain government securities offer regular interest payments, adding to their reputation as conservative investment options.

Crucial Factors to Consider Before Investing in Unlisted Equity Shares

Given the distinction between listed and unlisted shares, having crucial details about unlisted shares is imperative for informed investment choices.

• The process of investing – Trading unlisted shares is primarily an offline process conducted over the counter, often involving a wealth of information. Acquiring unlisted shares can be intricate and time-consuming, often not instantly available. Nevertheless, Stockify streamlines unlisted share trading, providing efficiency and speed. Serving as an online platform, Stockify facilitates online trading of unlisted stocks, except for the offline transfer process. Shares are transferred to a client’s Demat account within one business day.
• Shareholder – Investing in unlisted shares carries risks due to limited public information about the company. Seek expert advice and conduct thorough research before making any investments.
• Risk factors at play – Investing in unlisted shares carries risks due to limited public information about the company. Seeking expert advice and thorough research is crucial before investment.
• Challenges regarding liquidity – It’s challenging to find buyers for unlisted shares since pre-IPO stocks aren’t publicly accessible. Consequently, unlisted equity shares lack liquidity and might not be readily convertible to cash. Yet, Stockify offers a buyback guarantee to its clients.
• Valuation – Understanding that Unlisted shares aren’t traded on NSE or BSE, they lack a market value. These shares are owned by investors and company promoters, who assess the firm’s worth based on the concept of fair value.

How to purchase unlisted shares in India?

Here are several methods to acquire unlisted shares effectively:

• Invest in Pre-IPO Companies – Consider investing in pre-IPO companies, firms aiming for future public listing. These ventures often offer significant growth potential, and early investment can yield substantial rewards. Shares acquired through these investments are usually directly deposited into your Demat account, bypassing conventional stock exchanges. However, partnering with a trustworthy intermediary is essential for a successful investment.
• Explore Startup Opportunities – India’s burgeoning startup landscape is renowned for its energy and potential growth. Investing in startups showing promising prospects is feasible. Typically, these startups seek a minimum investment, often around Rs 50,000, with shares directly deposited into your Demat account.
• Acquire Employee Stock Options (ESOPs) – Employee Stock Option Plans (ESOPs) entail shares provided to employees at a discounted rate. Certain brokers facilitate connections with employees seeking to sell their ESOPs, providing a chance to invest in unlisted firms.
• Direct Purchases from Promoters – Should you desire a substantial ownership stake in an unlisted company, you can enlist the services of investment banks, wealth managers, or reliable brokers. They can aid you in acquiring shares directly from the company’s promoters via private placement.

Tax ramifications for investments in unlisted entities

If you hold unlisted equity shares for less than two years, the resulting profits are categorized as short-term capital gains, taxed according to investors’ marginal tax rates. Long-term gains arise when these shares are held for more than two years before being sold, attracting a long-term capital gains tax of 20%, featuring indexation benefits for adjusting the asset cost to offset inflation.

Calculating returns on unlisted equity shares differs from listed ones. Capital gains from unlisted shares hinge on comparing the fair market value with the actual sale price, termed as the “sale consideration.” These gains are computed by deducting the transfer and acquisition costs from this value. For shares held beyond 24 months, indexed acquisition costs are calculated instead of the actual purchase cost.

Conclusion

Understanding the process of purchasing unlisted shares broadens the scope of investment possibilities, ranging from burgeoning startups to pre-IPO ventures. These avenues offer diverse opportunities, whether you’re pursuing considerable growth potential or direct engagement with unlisted entities. Navigating this terrain involves diligent research, engaging reputable intermediaries, and assessing the inherent risks and rewards to make informed decisions before delving into unlisted shares.