Investing in Unlisted Shares
Aug 1, 2022
Unlisted Shares: Unlisted, as the name suggests means something which hasn’t been listed on a formal exchange yet. India has 8 types of exchanges but only 2 prominent exchanges-
1. Bombay Stock Exchange (BSE)
2. National Stock Exchange (NSE)
Difference between Listed & Unlisted shares:
Basis | Listed | Unlisted |
Traded | Traded on a formal stock exchange. | Traded Over The Counter (OTC) or at any place other than a formal exchange. Planify is the biggest Marketplace for the trading of unlisted shares. |
Liquidity | High Liquidity | Low Liquidity |
Regulated | Regulated by SEBI | Non-Regulated but governed by Companies Act |
Disclosure & Risk | More Disclosure & Risk of Investing is comparatively low | Lower Disclosure & thus Risk of Investing is higher |
Tax | Less tax | More Tax |
The sequence of a Company:
UNLISTED > LISTED > DE-LISTED > RE-LISTED
Types of Unlisted Stocks:
1. Subsidiaries of Listed Parent Companies like HDB Financial Services- HDFC & Reliance Retail- Reliance Industries Ltd.
2. New Age businesses like Chennai Super Kings
Investing Tip- Companies whose Parent Companies are listed are usually preferred due to them having Brand recognition due to their parent company already being listed.
How are Unlisted Shares Valued?...
The Valuation of Unlisted Shares is done following the Fair Market Value (FMV) Method. Since they’re not listed on the stock exchange, hence no accurate market value exists. FMV is calculated by Underwriters or Investment Bankers.
Advantages of Investing in Unlisted Shares:
1. Invest at an early stage of the company to be a part of their growth journey
2. Possibility of better returns (For e.g. CSK share price rose from Rs. 75 to Rs. 175 at present)
3. Diversification of portfolio helps reduce risk & increases investor revenue chances.
Concerns related to investing in Unlisted Shares:
1. Lack of Liquidity- At times it can happen that you might not get a suitable buyer for the shares you want to sell due to them quoting a lower price.
2. Higher Taxes on Unlisted Shares due to them being aligned with your income tax bracket
3. Limited Company specific data since it’s not regulated & hence there’s less disclosure of information
4. High Commission from whom you want to buy, they might charge a heavy commission for selling
5. High Ticket Size- At times minimum ticket size can even reach Rs. 20 Lakhs
Exit Strategies after investing in Unlisted shares:
1. Initial Public Offer (IPO)-> Selling shares at a higher price after getting listed
2. Buyback offer from the company
3. Transfer shares privately to someone directly from your Demat A/C to their Demat Account, at times even at a premium.
4. Company gets acquired by another listed company.