Trading Unlisted Securities
Unlisted shares are those that aren't found on stock exchanges. Typically, these shares are traded over-the-counter, often between individuals or through brokers who specialize in unlisted securities. This includes shares from companies anticipating an IPO, delisted shares, and those issued through private placements or employee stock options (ESOPs).
Here's a quick rundown of the types of unlisted shares:
- Pre-IPO Shares: Offered by companies planning to go public.
- Delisted Shares: Either voluntarily removed or delisted by exchanges.
- Private Placement Shares: Issued directly to select investors.
- ESOP Shares: Allotted under employee stock options.
- Group Shareholder Shares: Held by stakeholders in private firms.
Advantages of Unlisted Shares
- Early Investment Opportunity: Get in before the IPO.
- No Allotment Anxiety: Secure your stake pre-IPO.
- Potential for Higher Returns: Early investing can pay off.
- Diversification: Add variety to your portfolio.
- Demat Form: Held securely in a demat account.
Disadvantages of Unlisted Shares
- Higher Risk: No exchange backing means more risk.
- Lengthy Transactions: Deals can take longer.
- Liquidity Issues: Harder to sell quickly.
- Higher Investment Threshold: Bigger lot sizes mean more upfront capital.
- Limited Dealer Network: Fewer brokers handle these trades.
- Long-Term Commitment: Best suited for patient investors.
Investing in unlisted shares can be done through brokers, dealers, or direct sellers. You might find shares via employee stock options, from existing investors, or through intermediaries. Other ways include investing in startups, buying ESOPs directly, acquiring stocks from promoters, or using Portfolio Management Services (PMS) and Alternative Investment Fund (AIF) schemes.
Brokers for Unlisted Shares
In India, a few brokers deal with unlisted shares. Orders can be placed via phone, email, or online, and transactions occur in dematerialized form.
Exit Strategies for Unlisted Shares
Exiting unlisted shares requires finding a buyer, which can take time due to liquidity issues. Here are some ways to cash out:
- Private Sales: Sell directly to another individual.
- Dealer Transactions: Go through a dealer.
- Company Buybacks: Sell back to the issuing company.
- Acquisition: When the company is bought by a listed firm.
Lock-in Period for Unlisted Shares
Typically, there's no lock-in period for unlisted shares, except for pre-IPO shares. If a company you hold shares in goes public, a six-month lock-in applies from the listing date. These are known as pre-IPO shares.
Taxation of Unlisted Shares
The tax treatment of unlisted shares depends on how long you hold them.
- Selling within 24 months incurs short-term capital gains tax, aligned with your tax slab.
- Holding for over 24 months qualifies for long-term capital gains tax at 20%, with indexation benefits.
Unlisted Shares in SME IPOs
Before small and medium enterprises (SMEs) go public, their shares remain unlisted. These may be held by promoters, early investors, or employees through ESOPs. Only pre-IPO shares available through brokers or authorized intermediaries appear on unlisted platforms.
Investing in SME unlisted shares presents a chance to join at a lower valuation. Unlike mainboard shares, these are often smaller in scale, less liquid, and traded in specific lot sizes. When the company lists on the SME platform of BSE or NSE, these shares become tradable, offering exit opportunities and potential gains. Until the shares are listed, standard unlisted share tax rules apply. However, investors should be wary of higher risks and valuation fluctuations.
Comparing Unlisted and Listed Shares
| Unlisted Shares | Listed Shares |
|---|---|
| Traded over-the-counter | Traded on recognized stock exchanges |
| Illiquid market | Higher liquidity |
| Unregulated, but follow Companies Act | Regulated by SEBI |
| Riskier investment | Less risky |
| Harder to buy/sell | Easy to trade |
Glossary of Terms
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PMS (Portfolio Management Service): A service where financial institutions manage investments based on individual risk tolerance and goals. PMS diversifies investments across equities, mutual funds, and bonds, including access to unlisted shares.
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AIF (Alternative Investment Fund): Managed by professional fund managers, AIFs pool investor money into real estate, commodities, hedge funds, and unlisted shares, often beyond traditional equities and debt, involving higher risk-return strategies.