In recent years companies are delaying their IPOs and are choosing to remain private for a longer time, with the result that the private market has significant growth opportunities. A company can choose to remain unlisted for a number of reasons like the company is not large enough to meet the listing requirements of a stock exchange, the company is not seeking public investors. These unlisted companies especially the new age companies in the e-commerce and financial services sector have unique and innovative concepts. They present new business ideas and promise huge returns giving a chance to the investors to participate in the upside. The unlisted stock market is attractive to individuals who are excited to back start-ups that focus on innovation and technology. Also high networth individuals buy these shares in order to be able to own a small percentage of the companies they like.

 Why Invest in Unlisted Shares

Many of the unlisted companies present some of the best investment opportunities.  Although the scalability or profitability of these companies whose shares are unlisted is yet to be established, investors are ready to pay huge premiums to buy these shares compared to what they are valued during funding. Consider this. Shares of Swiggy are valued at Rs. 2.3-2.5 lakh per share, Paytm, the digital payments company, can be bought at Rs.16,000 per share. The prices of many of these shares have risen manifold in the last few years. Very few listed shares can boast of such an achievement.

Another advantage is that the prices of the unlisted shares are not affected much by the volatility of the stock markets. So when the stock markets are falling these shares can offer some stability. Investors can consider these shares as part of diversification.

As we all know a listed security is a stock of a company that meets the listing requirements of a stock exchange and is therefore accepted to trade on an authorized stock exchange. When a company goes public it gets listed on a stock exchange, its shares are openly tradable and its shares are listed securities.

As a corollary, an unlisted security is a stock of a company that has not met the listing requirements of a stock exchange and hasn’t gone through the initial public offering (IPO) process. Hence these shares are not listed on any stock exchange and therefore are not publicly traded.  Although the company is not listed it can have infinite number of shareholders.

There are 2 types of unlisted companies.

  1. Subsidiaries of well-known multi-national companies (MNCs): Many of the MNCs which have operated in India for years and have created substantial wealth for the shareholders are now increasingly launching new products through their unlisted subsidiaries. For instance P&G’s popular brands like Ariel, Tide, Pampers have been launched through its unlisted subsidiary. Other examples of unlisted subsidiaries of MNCs are Reliance Retail, Reliance Jio.
  2. The new-gen unlisted companies in the areas of technology, e-commerce, financial services, gaming. Examples of such companies include OLA, OYO, Paytm, etc.Let’s delve into the comparison between the listed and unlisted Shares:

Comparison of Listed and Unlisted Shares

Listed shares Unlisted Shares
Definition A listed share is a share of a public limited company that Is listed on a stock exchange and is publicly traded Unlisted share is a share of a company that is not listed and it is traded via the over the counter market (private transactions).
Ownership Listed shares are owned by public investors. The decisions in the company are made by the board of directors elected by the investors or shareholders. Unlisted shares are held by private investors.  The decisions in the company are taken by these private investors.
Nature of the company After meeting the listing requirements of the stock exchange the company comes out with an IPO and gets listed. There is greater transparency with regards to the financials of the company and other information. The company is usually well-established and has a steady revenue and growth. Not much financial information and reports are available about these companies. Many of these companies are new-gen ones with new business ideas with limited operating history.
Valuation Valuation is market-driven, the prices are quoted on the exchanges allowing the investors to keep track of the prices. Hence no negotiation is required while buying or selling these securities. Valuation is more difficult to calculate and may be misleading. Since the prices of the shares are not openly displayed and may be historical in many cases and there is no information on trading of unlisted shares investors have to rely on information from brokers with the risk of price manipulation.
Liquidity Better Liquidity as there is a formal market to buy and sell the securities. There is little or no liquidity in unlisted shares, i.e., it is very difficult to sell them as there is no formal market. There is also no guarantee that the market will develop for many of the unlisted securities.
Trading Frequency More and Regular Trading frequency is less and irregular and depends on private transactions.
Regulatory Framework Listed companies have to meet the requirements of the stock exchanges. They also have to comply with the regulations of SEBI, the market regulator. Unlisted companies need not follow the stringent requirements of the exchanges or SEBI. Disclosure requirements are also less stringent in this case.
Risks Less risky to invest in listed securities since there is transparency with regard to the company’s operations, its financials etc Liquidity, pricing risk, business risk are the most prominent risks. Investment in these securities is highly risky and investors may sometimes lose their entire investment.  Hence investors must independently do a due diligence regarding the investment.
Profits Since there is a formal market and it is not controlled by the brokers, investors can make profits by selling securities at the right price. Since the unlisted shares are not traded much and the difference between the bid and ask price is large it is difficult to realize profits in case of these investments.
Taxation If the holding period of the listed shares is more than a year, the long term capital gains is taxed at 10% If the holding period is more than 20%, long-term capital gains is taxed at 20%.

How to Invest in Unlisted Companies

Although the unlisted shares are not publicly traded, an investor can buy and sell them at private auctions and on private exchanges. One can invest in the unlisted companies in the following ways

  1. Startups: The startup community in India has been growing at a rapid pace since the 1990s thanks to the technology boom. These companies offer stocsk in demat form with a minimum investment of Rs. 50,000. Investors get equity or preferred stock in exchange for their investment.

Also investors can participate in the startup at various stages. The seed or the early-stage investors are the early-stage investors who put money when the company just has a business plan or a prototype. If the revenue model is proven and the company has a decent customer base, venture capitalists invest. Private equity firms invest in more stable startups having stable cash flows, profits.

  1. Buy from Existing Employees with ESOPs: This is another emerging market where investors can purchase the shares owned by the employees of the private companies. Employee stock ownership or employee share ownership is where a company’s employees own shares in that company. By buying ESOPs, Investors can get exposure to a privately held company.
  2. Buy from Promoters: One can directly buy from the promoters in a private placement deal. The promoter may be in need of funds or may want to diversify his investment. So the promoter will sell a percentage of his stake. In such cases one can buy unlisted shares directly from the promoters.
  3. Invest in PMS or AIFs which buy unlisted shares. Financial Institutions usually invest in unlisted shares through their Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs). Both these are investment vehicles which collect funds and invest on behalf of the investors.Key Takeaway: 
    Investing in Unlisted shares require forethought and a lot of hindsight. You must be able to predict the market ahead and be ready to take some amount of risks for huge windfall gains. But how much risk is for a gain you might ask? Well, consult experts at FinComienzo for expert level advice.
Contact Us
close slider