Listed shares on the stock market come with a safety net through constant monitoring and regulations by the Securities and Exchange Board of India (SEBI). Unlisted shares come with massive opportunities for growth and exposure but they do come with the risk of lesser regulations as well. If such high-growing opportunities pique your interest, this will help you understand the benefits of investing in unlisted companies.
Definition Of Unlisted Shares
An unlisted share is any security or financial instrument that’s available for trade on over-the-counter markets and is also known as over-the-counter (OTC) securities.
Typically, unlisted companies do not trade on any formal stock exchange. This is because smaller or newer firms do not choose to or cannot comply with certain requirements such as listing fees, market capitalization, etc.
Types Of Unlisted Financial Instruments
The most common type of unlisted financial instrument is the common stock. Most of these unlisted stocks trade on the OTC markets. Other instruments include:
- Penny stocks
- Corporate bonds
- Government securities
- Derivative products like swaps, etc.
How Can You Trade In Unlisted Stocks?
You can invest in stocks of some of the top unlisted companies in India in several ways. The most popular methods include:
- Investing in start-ups and intermediaries
A pre-IPO company is currently unlisted but intends to get listed in the future. You can invest in pre-IPO companies, as the shares come directly into your Demat account even though the trade happens off-record, and there’s no involvement of the exchange. The only thing you need to watch out for in choosing a trusted intermediary, i.e., someone who can successfully help you close the transaction and avoid any counterparty risks.
Alternatively, you can also put your money into unlisted start-ups that have the potential for multi-fold growth in the future. Such companies may be off the radar presently, but they have the opportunity to bring profits and growth at a later stage. In most start-ups, the minimum investment amount is around Rs 50,000 to get the stocks transferred into your Demat account.
- Buying ESOPs directly from employees
Some brokers help you connect with employees of organizations who sell their shares at a set price after a predetermined period. This is one way of buying shares for top unlisted companies in India.
- Buying stocks directly from promoters
To invest a significant stake in a company, you can approach a trusted investment bank, wealth manager, or broker who can help you learn how to know the share price of an unlisted company. In addition, they will help you connect with the company’s promoters directly and introduce you to a list of unlisted companies in India in 2021 and 2020. Such transactions are called private placements.
- Invest in PMS and AIF schemes that pick up unlisted shares
PMS or Portfolio Management Systems are professionally managed investment portfolios. In this, the portfolio manager dynamically changes the weight and constitution of the portfolio based on the market trends to maximize the investors’ net returns. You can reap the benefits of investing in unlisted shares in India through PMS schemes that pick up unlisted shares as part of the investment strategy. This is much safer than direct purchase because:
- You can diversify the risk across the constituents of the portfolio.
- The portfolio manager dynamically removes and adds stocks based on their performance.
While investing in unlisted shares can be quite beneficial, such investments come with a great deal of risk as well. The associated risks are:
- Loss of capital
- May not pay dividends
- Risk of dilution
Therefore, make your investment decisions wisely and consult an experienced and trusted wealth manager before investing.
- An unlisted share is a security or financial instrument belonging to a company that does not trade publicly on the stock market.
- The types of unlisted stocks include common stocks, penny stocks, corporate bonds, government securities, and derivative products.
- You can invest in the top unlisted companies in India by investing in start-ups and intermediaries, buying ESOPs directly from employees or promoters, or investing in PMS and AIF schemes that pick up unlisted shares.
- The risks include illiquidity, capital loss, risk of no dividends, risk of dilution.
What kind of taxes are associated with investing in unlisted companies?
The taxable percentage for long-term capital gains from investing in unlisted companies is 20%. You are subject to an indexation benefit, where you can add the cost of inflation to ease out the taxation. The holding period generally is for a minimum of 2 years.
What type of companies would you usually find in the unlisted category?
Most pre-IPO companies are usually companies in the early stage of their evolution. The investor needs to ensure that the due diligence done for such companies is rigorous and thorough. There could often be a lack of transparency or insufficiency of information in such companies.
Why would you classify unlisted stocks as illiquid instruments?
- Unlisted companies can be high-risk instruments because you can only encash them when:
- Your broker has another buyer for the stock.
- The IPO takes place, and you can sell your stocks.
- If neither of the two happens, your investment will be stuck.
Where can I see my unlisted shares after I purchase them?
Any unlisted share or security that you purchase reflects in your Demat account once the transaction is successful.
Is it possible for NRIs to invest in unlisted shares?
Yes. Just like with domestic investors, NRIs can also purchase unlisted shares. The share purchased will be non-repatriable in nature. However, if, as an NRI, you wish to purchase repatriable shares, you will need to make your intentions clear to the RBI by reporting it to them.