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The Ultimate Guide to Unlisted Shares!

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Unlisted stocks have recently been on a high trend.  As the name suggests, unlisted shares are not listed on any stock exchange. They can be high-growth companies like Ola and Oyo or simply subsidiaries of other successful conglomerates like HDB Financial Services, an HDFC Bank subsidiary. These Securities are usually companies that are still working at a private stage. but have the plan to go public soon at some point in time.

These securities often represent companies operating in a private stage with plans to go public in the future, providing an avenue for investment advice to consider diversified portfolios with growth potential. Investors need to conduct thorough research and consult with financial experts to make informed decisions in this dynamic market.

Why should one invest in Unlisted security?

If done with fundamentally sound research, unlisted securities are considered hidden treasures. Not all of these companies are valued at the market level. With a sound business approach, money growth can be taken to the next level. Portfolio allocations should not exceed 5%-10%. Unlisted shares can also be dangerous if we don’t understand the following.

  • Investments with a high return potential 
  • Diversification of risks
  • The price range with less volatility 
  • Investing in high-growth companies 

There is a lock-in period for this security that is mentioned below: 

  • As long as the security is not listed, it can be sold over OTC (Over the Counter) on a stock exchange, or else if some buyer or seller agrees to trade then it can also be traded.
  • These securities cannot be sold within six months of listing if they are listed.  It can be traded in this security after 6 months of listing. 

How to invest in unlisted companies?

Several ways exist for you to invest in stocks of some of the top unlisted companies in India. Among the most popular methods are:

  • Investing in start-ups and intermediaries

An unlisted pre-IPO company intends to go public in the future. It is possible to invest in pre-IPO companies since the shares are delivered directly to your Demat account, even though the trade is off-record and the exchange isn’t involved. Select a trusted intermediary to help you close the deal and avoid counterparty risks.

Additionally, you can invest in unlisted start-ups that may grow multi-fold. At the moment, such companies may be off the radar, but they can bring profits and growth in the future. A minimum investment amount of Rs 50,000 is required in most start-ups for stocks to be transferred to your Demat account.

  • Buying ESOPs directly from employees

You can connect with brokers who help you find employees who sell their shares at a fixed price after a set period. In India, this is one way to purchase shares of top unlisted companies.

  • Buying stocks directly from promoters

To learn the share price of an unlisted company if you intend to invest a significant amount in it, you can approach a trusted investment bank, wealth manager, or broker. Additionally, they will introduce you to a list of unlisted companies in India for 2021 and 2020 and help you connect with the company’s promoters directly. Private placements are transactions of this type.

  • Invest in PMS and AIF schemes that pick up unlisted shares

Portfolio Management Systems (PMS) are systems for managing investment portfolios professionally. To maximize the investors’ net returns, the portfolio manager adjusts the weight and composition of the portfolio dynamically based on market trends. Through PMS schemes that include unlisted shares as part of their investment strategy, you can benefit from investing in unlisted shares in India. 

Factors to consider before investing in Unlisted Shares!

Assess the company’s performance

  • Discover the company’s future goals from the management
  • Analyze the company’s revenue sources, revenue mix, and risk to cash flow

Discover the company’s value proposition

  • Analyze the company’s competitive edge in its industry
  • Learn what makes the company’s products and services unique

Analyze the company’s valuation

  • Take a look at the gray market price of the company’s unlisted shares
  • Check to see if it has a higher or lower relative valuation than its peers 

Analyze the company’s future potential

  • Find out how the company plans to expand and how it plans to fund it
  • Examine the company’s prospects and growth plans, as well as its execution strategy 

Taxation on Unlisted Equity: 

This kind of investment has different taxation. Unlike listed equity, this investment does not have the same tax as 15% of short-term capital gain and 10% of long-term capital gain. 

  • Short-term capital gain:– if security is held for up to 24 months, which means 2 years from the date of purchase, the gain is taxable at a slab rate.
  • Long-term capital gain:- If a security hold for more than 24 months means more than 2 years, then the tax will be 20% as per indexation value.