What Are Unlisted Shares? A Comprehensive Guide

 In the ever-evolving world of investments, traditional avenues like fixed deposits, mutual funds, and listed stocks are well-known to most investors. However, there’s a growing interest in an alternative investment class called unlisted shares. These shares are becoming popular among savvy investors who are seeking higher returns and early access to promising companies. But what exactly are unlisted shares, and how do they differ from listed ones?

Let’s break it down in simple terms.

Understanding Unlisted Shares

Unlisted shares refer to the equity shares of companies that are not listed on any stock exchange such as NSE (National Stock Exchange) or BSE (Bombay Stock Exchange). These shares are not traded publicly in the open market, which means they are not available for buying and selling on traditional stock exchange platforms.

These companies could be:

  • Startups and private limited companies

  • Subsidiaries of listed companies

  • Pre-IPO (initial public offering) companies that are planning to go public in the future

Key Characteristics of Unlisted Shares

  1. Not Traded on Stock Exchanges
     The most defining feature is that unlisted shares are traded privately, usually through over-the-counter (OTC) deals or via intermediaries like brokers or investment platforms specializing in unlisted securities.

  2. Limited Liquidity
     Since these shares are not traded on an open exchange, they tend to have lower liquidity. This means finding buyers or sellers can take time compared to listed shares.

  3. Valuation Can Be Tricky
     The price of unlisted shares is determined by negotiation or the company’s internal valuation. Unlike listed stocks, whose prices fluctuate based on market forces, unlisted share prices are less transparent.

Potential for High Returns
 If an unlisted company performs well or gets listed in the future, early investors can benefit significantly. However, the risk is also high as there’s no guarantee of success.

Feature

Listed Shares

Unlisted Shares

Availability

Traded on public stock exchanges

Traded privately (OTC or via intermediaries)

Liquidity

Highly liquid

Low liquidity

Price Transparency

Real-time pricing

No real-time price, depends on negotiation

Regulation

Strictly regulated by SEBI and exchanges

Less regulated, but still under SEBI laws

Risk

Moderate (based on market volatility)

High (due to lack of transparency and liquidity)


Why Do Companies Stay Unlisted?

There are several reasons why companies choose to remain unlisted:

  • Avoid regulatory scrutiny: Listing comes with compliance requirements that some companies prefer to avoid.

  • Cost-saving: Going public involves heavy costs related to IPO, listing, and ongoing compliance.

  • Long-term vision: Some startups want to grow without the pressure of short-term market expectations.

How Can You Invest in Unlisted Shares?

If you are interested in investing in unlisted shares, here are a few ways to do it:

  1. Through Intermediaries
     Several platforms and brokers specialize in unlisted shares. They collect and verify sellers and facilitate trades between investors.

  2. Employee Stock Option Plans (ESOPs)
     Many startups offer shares to their employees through ESOPs, which can later be sold to investors.

  3. Direct Purchase from Existing Shareholders
     Sometimes existing shareholders such as early investors or employees sell their shares privately to interested buyers.

  4. Through PMS and AIFs
     Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) may invest in unlisted securities on behalf of their clients.
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Risks Involved

Investing in unlisted shares comes with certain risks:

  • Lack of liquidity means you may not be able to exit easily.

  • Valuation risk due to the absence of market-based pricing.

  • Regulatory risk in case the company faces legal or operational issues.

  • IPO uncertainty — the company may never get listed or may underperform after listing.

Tax Implications

As per Indian tax laws, unlisted shares held for more than 24 months are considered long-term capital assets. Long-term capital gains (LTCG) are taxed at 20% with indexation benefit. For short-term gains (held for less than 24 months), the gains are taxed as per your income tax slab.

Final Thoughts

Unlisted shares can be a lucrative addition to your investment portfolio if approached with proper due diligence. They offer the unique opportunity to invest in companies before they become public giants. However, the risks associated with them make it essential to consult financial experts, verify the source, and understand the company’s fundamentals before investing.

Whether you're looking to diversify your investments or explore high-growth opportunities, understanding unlisted shares is a crucial step in navigating the modern financial landscape.
Location: Big Jo'S Tower, Netaji Subhash Place, Pitampura, Delhi, 110034, India

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