What Are Unlisted Shares

Unlisted shares refer to shares of a company that are not listed on a public stock exchange. Instead, these shares are typically traded through private transactions, either directly between individuals who have prior knowledge of each other or with the assistance of a broker who specializes in unlisted securities. Unlisted shares encompass several categories:

1. Pre-IPO Shares: These are shares offered by companies that are in the process of preparing for an Initial Public Offering (IPO). These shares are usually made available to private investors, institutional investors, or employees before the company goes public on a stock exchange.
2. Delisted Shares: Delisted shares are shares of a company that were once listed on a stock exchange but have been removed from trading on that exchange. This can occur due to various reasons, including non-compliance with exchange regulations or a company’s voluntary decision to go private. After delisting, these shares may still be traded in the over-the-counter (OTC) market.
3. Shares Issued in Private Placements: Private placements involve the sale of shares directly to a select group of investors, such as institutions or accredited individuals, rather than through a public offering. Companies often use private placements to raise capital without going through the complexities of a public offering.
4. ESOP Shares: Employee Stock Option Plan (ESOP) shares are offered to employees as a form of compensation or incentive. These shares are usually subject to vesting periods and conditions, and employees have the option to purchase them at a predetermined price. ESOP shares may become tradable after certain conditions are met.
5. Shares Held by Group Shareholders of Private Companies: In privately held companies, shares may be owned by a select group of individuals, such as founders, family members, or close associates. These shares are not publicly traded and can only be transferred with the agreement of the company and its existing shareholders.

Unlisted shares offer investors opportunities in companies that are not part of the public stock market. However, they come with certain risks, including limited liquidity and transparency. Investors interested in unlisted shares should conduct thorough due diligence and consider the potential risks associated with these investments.

Advantages of Unlisted Shares:

1. Opportunity to Invest Early: Investing in unlisted shares allows you to get in on the ground floor of a company before it goes public. This early-stage investment can offer the potential for significant gains if the company experiences substantial growth.
2. No Insecurity for Allotment: Unlike IPOs where there is often uncertainty about whether you will be allotted shares, with unlisted shares, you can directly purchase the shares you want without the need to worry about allocation.
3. Possibility of Better Returns: Unlisted shares can provide higher returns compared to investing in listed stocks, especially if the company performs well and eventually goes public or is acquired by a larger entity.
4. Diversification: Investing in unlisted shares can be a way to diversify your investment portfolio, reducing overall risk by spreading your investments across different asset classes, including private companies.
5. Dematerialized and Held in Demat Account: Unlisted shares are typically traded in dematerialized form, making them easy to manage and store in a demat account, similar to listed stocks.

Disadvantages of Unlisted Shares:

1. Higher Risk: Investing in unlisted shares is inherently riskier than investing in publicly traded stocks because they are not regulated by stock exchanges and may lack the transparency and reporting requirements of listed companies.
2. Longer Transaction Time: Buying and selling unlisted shares can involve a longer transaction process compared to trading on stock exchanges. Finding willing buyers or sellers and negotiating terms can take time.
3. Lack of Liquidity: Unlisted shares can be illiquid, meaning they may not be easily tradable or convertible to cash when needed. This lack of liquidity can pose challenges if you need to exit your investment quickly.
4. Higher Investment Amount: The minimum lot size required to purchase unlisted shares can be relatively high, which may limit accessibility for small investors.
5. Limited Dealers: There are typically fewer dealers or brokers who specialize in unlisted securities, which can make it more challenging to find suitable opportunities for buying or selling these shares.
6. Long-Term Investment: Unlisted shares often require a longer-term investment horizon because it may take time for the company to mature, go public, or provide an exit opportunity.

Exit Strategies for Unlisted Shares:

1. Selling Privately: You can exit your investment in unlisted shares by finding a willing buyer privately. This typically involves negotiating terms and agreeing on a price with the buyer. However, due to the limited liquidity of unlisted shares, it may take some time to find a suitable buyer.
2. Selling Through an Unlisted Dealer: Unlisted shares can be sold through specialized dealers or brokers who deal in unlisted securities. These professionals can help connect buyers and sellers and facilitate the transaction. They have networks and expertise in handling such trades.
3. Buyback by the Company: Some companies may offer buyback programs for their unlisted shares. This allows shareholders to sell their shares back to the company at a predetermined price and under specified conditions. Check if the company you’ve invested in has a buyback policy.
4. Acquisition by a Listed Company: If the unlisted company you’ve invested in is acquired by a publicly listed company, you may have the opportunity to sell your shares as part of the acquisition deal. The terms of the acquisition will determine the value and timing of your exit.

Unlisted Shares Lock-In Period:

• There is typically no lock-up period for most unlisted shares, meaning you can sell them at any time after purchasing them if you can find a willing buyer.
• However, there is a lock-in period of six months for Pre-IPO shares. Pre-IPO shares are shares of a company that has announced an Initial Public Offering (IPO) and is preparing to be listed on a stock exchange. During this six-month period from the date of listing, you are generally not allowed to sell these shares. This lock-in period is imposed to prevent early investors from immediately cashing out after the company goes public and to ensure stability in the stock’s price.

It’s important to be aware of any specific terms and conditions associated with your unlisted shares, as these may vary depending on the company and the type of shares you hold. Additionally, when considering an exit strategy, it’s advisable to consult with financial advisors or experts in unlisted securities to navigate the complexities of this market.

Taxation of Unlisted Shares:

1. Short-Term Capital Gains: When unlisted shares are sold within 24 months of their acquisition, any profit realized from the sale is considered a short-term capital gain. Short-term capital gains on unlisted shares are subject to taxation at the individual’s applicable income tax slab rate. This means that the gain is added to the individual’s total taxable income, and they are taxed according to their respective tax brackets.
2. Long-Term Capital Gains: If unlisted shares are held for more than 24 months (2 years) prior to their sale, any gains from the sale are classified as long-term capital gains. Long-term capital gains on unlisted shares are taxed at a flat rate of 20%. Additionally, individuals have the option to apply indexation to the cost of acquisition, which adjusts the purchase price for inflation. This can potentially lower the taxable long-term capital gains amount.

It’s essential for individuals who hold unlisted shares to be aware of the holding period and the associated tax implications. The choice between holding unlisted shares for the short term or long term can significantly affect the amount of capital gains tax they will be required to pay. Additionally, tax laws and rates may vary by jurisdiction, so it’s advisable to consult with a qualified tax advisor or accountant to ensure compliance with local tax regulations and to make informed decisions regarding the sale of unlisted shares.

Is It Safe To Buy Unlisted Shares?

Unlisted shares are generally considered riskier than listed shares for several reasons:

1. Limited Regulation: Unlisted shares are not subject to the same level of regulatory oversight as listed shares. They are not monitored by stock exchanges or regulatory authorities like SEBI (Securities and Exchange Board of India), making them more susceptible to fraud and manipulation.
2. Lack of Transparency: Unlisted companies may not provide the same level of financial disclosure and transparency as listed companies. Investors may have limited access to information about the company’s financial health and operations.
3. Limited Liquidity: Unlisted shares often have limited liquidity, meaning they may not be easily traded, and finding buyers or sellers can be challenging. This lack of liquidity can make it difficult to exit investments quickly.
4. Higher Risk: The risk associated with unlisted shares is generally higher due to the factors mentioned above. Investors in unlisted shares may face higher uncertainty and may need to conduct thorough due diligence.

Despite these risks, some investors are attracted to unlisted shares because of their potential for higher returns. Unlisted shares can provide opportunities for early-stage investments in companies with growth potential. However, it’s crucial for investors to carefully assess their risk tolerance and conduct thorough research before investing in unlisted shares.

How Is The Fair Value Of Unlisted Shares Calculated?

Unlisted shares do not have a readily available market price like listed shares. Therefore, determining their fair value can be more challenging. Several methods are commonly used to estimate the fair value of unlisted shares:

1. Book Value Method: This method considers the company’s tangible assets and liabilities. The fair value is calculated as follows:Fair Value = Sum of all tangible assets – Sum of all tangible liabilities
2. Last Transaction Price Method: This method looks at the last price at which the unlisted share was traded. However, it may not always be a reliable indicator, especially if there have been few recent transactions.
3. Discounted Cash Flow (DCF) Method: DCF is a commonly used method for valuing unlisted shares, especially for companies with stable operations. It involves estimating future cash flows and discounting them back to their present value using an appropriate discount rate. The discount rate is often derived from the same sector or industry, based on listed companies’ data.
4. Net Asset Value (NAV) Method: NAV can be calculated using two approaches:
   • Tangible Assets Only: NAV = Sum of all tangible assets with current market value – Sum of all tangible liabilities with current market value.
   • Including Both Tangible and Intangible Assets: NAV = Sum of all tangible and intangible assets with current market value – Sum of all tangible and intangible liabilities with current market value.

Each of these valuation methods has its strengths and weaknesses, and the choice of method may depend on the specific circumstances and financial information available for the unlisted company. It’s advisable to seek professional assistance from a qualified valuator or financial expert when determining the fair value of unlisted shares to ensure accuracy and compliance with accounting standards.

Unlisted vs listed shares

Aspect	Unlisted Shares	Listed Shares
Stock Exchange Listing	Not listed on public stock exchanges	Listed and traded on stock exchanges
Liquidity	Limited liquidity, may take time to find buyers/sellers	High liquidity, easily traded on exchanges
Price Discovery	Limited price transparency, negotiated privately	Transparent prices determined by market supply and demand
Regulation	Less regulatory oversight and reporting requirements	Subject to stock exchange regulations and reporting standards
Investor Base	Typically limited to private investors and insiders	Accessible to a wide range of retail and institutional investors
Trading Hours	No fixed trading hours, subject to private agreements	Traded during stock exchange trading hours
Information Availability	Limited public information, less transparency	Extensive public information and financial disclosures
Capital Gains Tax	Tax rate based on holding period, up to 20% with indexation for long-term gains	Taxed at income tax slab rates for short-term gains and 20% with indexation for long-term gains
Exit Strategies	May involve private sales, dealers, company buybacks, or acquisitions	Easily sold through stock exchanges, multiple trading options
Risk	Higher risk due to limited liquidity, less transparency, and regulatory oversight	Lower risk due to higher liquidity, transparency, and regulation
Listing Requirements	Typically no stringent listing requirements	Must meet specific criteria to list on exchanges
Investment Horizon	Often suited for longer-term investments	Suited for both short-term and long-term investments