Investing in listed shares is a safe option in the stock market as listed shares are constantly regulated and monitored by the SEBI (Securities and Exchange Board of India). Unlisted shares are risky as compared to the listed stocks due to lesser regulations, but they come with great growth opportunities.
If you want to get the benefits of investing from unlisted shares, this blog is the right platform for you. But before we learn how to invest in unlisted companies, it is essential to learn the meaning of Unlisted Shares.
What are Unlisted Shares?
An unlisted share is a financial instrument or security available for trading in OTC (over-the-counter) markets and is also called OTC or over-the-counter securities. These unlisted shares do not trade in any formal stock exchange. This is because new or small firms cannot comply with certain requirements like market capitalization, listing fees, etc.
Types of Unlisted Financial Instruments
Common Stock is one of the most common types of unlisted financial instruments in the market. Most of these stocks trade in the over-the-counter markets. The other examples are:
- Corporate Bonds
- Penny Stocks
- Government Securities
- Derivative Products like Swaps, etc.
How to Trade in Unlisted Stocks?
As an investor, you may be wondering how to invest in unlisted companies. In India, you can invest in top unlisted companies in many ways. The answer to the question – how to trade in unlisted stocks is given below:
- By Investing in Start-ups and Intermediaries
A pre-IPO firm is currently unlisted but has plans to get listed in the stock exchanges in the future. As an investor, you can invest in pre-IPO companies, as the shares will directly be transferred into your Demat account even though there is no involvement of the exchange and the trade happens off-record. The only important thing is to pick a trusted intermediary – a person who will help you carry out the transaction without any unwanted risks.
Also, you can invest in unlisted start-ups with good scope for growth in the future. These companies may not be in the limelight currently, but they have the potential to earn profits at a later stage. In most start-ups, the minimum investment amount is Rs 50,000 to get the shares in your Demat account.
- By Purchasing Stocks Directly from Promoters
If you are planning to invest in an unlisted company’s shares, you can contact a wealth manager, a good investment bank, or a trusted broker who can help you find out the share price of an unlisted company. Along with this, they will help you get a list of unlisted companies in India in 2020-21 and connect with the promoters of the company. These transactions are called private placements.
- By Purchasing ESOPs Directly from Employees
Employee Stock Ownership or Employee Share Ownership is where the employees of a company own shares in that company. Some brokers help you connect with the employees of a company who sell their shares at a decided price after a certain period. This is one way of purchasing shares of top unlisted organizations in India.
- By Investing in AIF and PMS Schemes that Pick Up Unlisted Shares
Portfolio Management Systems or PMS are investment portfolios that are professionally managed schemes. Here, the portfolio manager dynamically changes the constitution and weight of the portfolio based on market trends to maximize the net returns of investors.
With the help of PMS schemes, you can reap the benefits of investing in unlisted shares in India. These PMS schemes choose unlisted shares as a part of the investment strategy. This is a much safer option than the direct way of purchasing because:
- You get the opportunity to diversify the risk across the constituents of the portfolio.
- The portfolio manager dynamically adds and removes the stocks on the basis of their performance.
Now that you know how to invest in unlisted companies, you should also be aware of the risks that are associated with them. Even though unlisted shares come with huge potential, they also come with a great deal of risk. Some of the risks associated with unlisted shares are:
- Loss of Capital
- No guarantee of Dividends
- Dilution Risk
Thus, as a wise investor, you must make your investment decisions only after detailed and thorough research. You should avoid unwanted stocks and consult a trusted wealth manager before taking any investment-related decision.
Key Points to Remember
- An unlisted share is a financial instrument or security belonging to an organization that does not trade publicly on the share market.
- Some of the examples of unlisted stocks are penny stocks, common stocks, government securities, corporate bonds, and derivative products.
- As an investor, you can invest in the top unlisted companies of India by investing in intermediaries or start-ups, purchasing ESOPs from promoters or employees directly, or by investing in AIF and PMS schemes that pick up unlisted shares.
- Some of the risks associated with unlisted shares are capital loss, illiquidity, risk of dilution, and risk of dividends.
Frequently Asked Questions
- Once I purchase my unlisted shares, where can I see them?
- Any security or unlisted share that you buy can be seen in your Demat account after the transaction is successful.
- What types of taxes are associated with investing in unlisted companies?
- For unlisted companies, the taxable % for LTCG or long-term capital gains is 20%. You are subject to an indexation benefit, and you can add the inflation cost to ease out the taxation. The holding period is usually 2 years minimum.
- What kind of companies or firms are under the unlisted category?
- The pre-IPO companies that are in the initial years of their evolution come under the unlisted category. As an investor, you must ensure that thorough research is carried out to verify the authenticity of these companies.
- Why are unlisted stocks called illiquid instruments?
- Unlisted companies are also called high-risk instruments as they can only be encashed when:
- The IPO comes out, and you can sell your shares or stocks.
- The broker has another buyer interested in the stock.
If any of the above 2 scenarios are not available, your investment will be stuck.
- Can an NRI invest in unlisted shares?
- Yes, NRIs are allowed to invest in unlisted shares. But the bought stock will be non-repatriable in nature. However, if you are willing to buy repatriable shares, you will have to inform RBI about the same.