It is common knowledge that publicly listed shares come with specific safety measures through constant oversight and regulations by the Securities and Exchange Board of India (SEBI). On the other hand, unlisted shares bring explosive opportunities for growth and exposure, and they have lesser restrictions too.
What are Unlisted Shares?
Unlisted shares are securities that are not listed in the stock market and that can be traded only in over-the-counter (OTC) markets, also known as OTC Securities.
Typically unlisted shares are not traded on any stock exchanges. This happens because these smaller or new companies choose not to meet or cannot comply with specific requirements such as listing fees and market capitalization.
Types of Unlisted Financial Instruments
There are a few unlisted financial instruments, the most common being common stock. Other instruments include the following :
- Penny Stocks
- Corporate Bonds
- Government Securities
- Derivatives such as Swaps etc.
How to invest in or buy Unlisted Securities
There are multiple ways to buy shares or invest in unlisted companies. Few of the popular methods are:
- Investing in Startups via a trusted Intermediary :
Pre-IPO companies are the ones who are presently unlisted, but they do intend to get listed in the future. You can easily invest in Pre-IPO companies, as the shares will come directly into the Demat account, despite trade happening off the record, without the involvement of any exchange. The only thing that requires attention here is a trusted intermediary, i.e. who can close your transactions wholly and successfully eliminate any counterparty risks.
- Buy ESOPs from Employees
Brokers can often connect you with employees of certain companies who are willing to sell their shares after a certain vesting period. This works as one of the ways to buy shares of Major Unlisted companies in India.
- Take up PMS and AIF schemes that invest in Unlisted shares.
PMS or Portfolio Management Systems are professionally managed investment portfolios. The portfolio manager dynamically changes the portfolio’s composition depending upon the market trend to maximize investment returns. You can easily benefit from investing in unlisted shares in India through PMS schemes that pick unlisted shares as part of the investment strategy. This is better than direct purchase because:
- It can help you diversify your portfolio, thus reducing the risk.
- The manager will dynamically add or remove stocks based on their performance.
While there is immense growth potential, there might be a few risks associated, such as :
- Capital Loss
- Dilution Risk
- Dividends may not be paid.
Unlisted Vs Delisted Shares
People often confuse between Unlisted and Delisted Shares, which shouldn’t happen as both are entirely different. Unlisted shares are the ones which are not listed yet, but Delisted ones are which were once listed but dropped out from the list because of specific reasons.
You can trade unlisted shares on any OTC Market, but you will not be able to trade any delisted ones. Delisted shares are still unavailable on any of the platforms, be it a stock exchange or over the counter.
Unlisted companies may or may not have plans for listing, or they do not meet the requirements of SEBI to be listed. On the other hand, companies get delisted when they fail to adhere to the disclosure guidelines provided by SEBI and the respective stock exchanges or when the board of the company wants to get delisted themselves.
Valuation of Unlisted Shares
Unlisted shares are valued using the Fair Market Value (FMV) method. Since they are not listed on any of the stock exchanges, they do not have an actual market price. The Underwriters or the Investment Bankers generally do the FMV calculation.
To calculate FMV, you simply deduct the book value of liabilities (L) from the book value of all the assets (A). Then you multiply the result by the Paid-up value (PV) of the equity shares, and then the total amount is divided by the total amount of the paid-up share equity capital (PE).
FMV = (A-L) * PV/PE
The details are calculated as per the balance sheet.
You can also calculate the value of unlisted shares using the Discounted Cash Flow Statement. In this method, all future cash flows are forecasted and discounted at a rate to get their present value. This method becomes a little tedious as it works under the anticipation of cash and the occurrence of no black swan event, which may disrupt the cash flows. Even though it may or may not be adjusted to challenging scenarios, it is quite popular among investors who want to invest in unlisted shares.
Since unlisted shares differ from those listed, they also have slightly different tax implications. If you sell an unlisted share within 24 months of buying, then you welcome a short-term capital gain tax, but if your holding period exceeds 24 months, you are liable for a long term capital gain tax of 20%; you also get the benefits of indexation. However, the profits will be calculated as per the FMV. Once they get listed, they will be treated as listed equity shares and the tax will be levied accordingly. The long-term capital gains tax would be 10% on profits greater than INR 1 Lakh without the indexation benefit
Unlisted shares hold immense potential for positive returns that is if you pick the right one. The returns can be exponential. The concern as mentioned stays in picking up the unlisted stock after careful consideration of the companies’ financials and a trusted intermediary. Rurash has been providing a wide range of unlisted shares of HDFC Securities, Studds Accessories, Suryoday SFB, Hero Fincorp, HDB Financial Services, Fino Paytech, Chennai Super Kings, One97 Communications (Paytm), and many more. Since trust and deep market expertise are critical in Unlisted Shares trading, you need a reliable intermediary for that. With Rurash, you can discover high growth opportunities with ease and stay updated with essential and relevant market intelligence. We help you make informed investment decisions. Transparency and compliance are the core principles of our execution.
RURASH is one of India’s leading investment management firms, providing financial solutions to augment the client’s wealth and facilitating in building a purposeful legacy.