Unlisted shares in India offer an alternative investment opportunity for those seeking to diversify their portfolios. These shares are not traded on formal stock exchanges and are instead bought and sold through less regulated methods, often referred to as over-the-counter (OTC) trading. Investing in unlisted shares can be appealing due to their potential for high growth and exposure, but it also comes with increased risk as they are subject to fewer regulations. In this article, we will explore the unique characteristics of unlisted shares, the different types available, and provide a step-by-step guide on how individuals can invest in these opportunities in India.
Characteristics | Values |
---|---|
Definition | Any security or financial instrument that's available for trade on over-the-counter markets |
Regulation | Not regulated by SEBI, the Securities and Exchange Board of India |
Risk | High risk due to lesser regulations |
Types | Common stock, penny stocks, corporate bonds, government securities, derivative products |
Investment methods | Investing in start-ups and intermediaries, buying ESOPs directly from employees or promoters, investing in PMS and AIF schemes |
Risks | Illiquidity, capital loss, no dividends, dilution |
Taxes | 20% for long-term capital gains, taxed as per slab rates if sold before 24 months |
Companies | Pre-IPO companies, start-ups, Tata Technologies, CSK, boAt, OYO, HDB Financial Services, Reliance Retail Limited, Pharmeasy, B9 beverages |
Advantages | High return potential, diversification of risks, less volatile share value, undervalued prices |
Sellers | Existing shareholders including CEOs, ex-employees, current employees, promoters, private investors |
Buyers | Connect with the unlisted company, its promoters, employees, or a trusted intermediary |
Minimum investment | Rs 50,000 for start-ups |
Where to see purchased shares | Demat account |
NRI investment | Possible, but shares are non-repatriable unless intentions are reported to RBI |
What You'll Learn
Pre-IPO companies
Pre-IPO shares are always available at a lower cost compared to listed companies. Therefore, investing early in these companies can be rewarding, as you can multiply your returns once the company is officially listed. Buying unlisted shares in pre-IPO companies is one of the most strategic ways to build wealth in the long term.
There are several platforms that can help you buy pre-IPO shares, such as Stockify, Planify, and SBNRI. These platforms can connect you with sellers, including existing stakeholders, promoters, employees, and early investors who wish to liquidate their investments.
When investing in pre-IPO companies, it is important to conduct thorough research and due diligence. There are risks associated with investing in these companies, including liquidity risk and growth uncertainty. The success of any startup depends on its management, and delays in going public can impact your ability to liquidate your investment.
Additionally, it is crucial to understand the tax implications of investing in pre-IPO companies. In India, long-term capital gains are taxed at 20%, while short-term capital gains are taxed according to the income slab.
Before investing, ensure you have a Demat account, as shares from such investments are typically credited directly to this account.
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Startups
Investing in unlisted shares of Indian startups can be a great opportunity for investors to get in on the ground floor of promising young companies. The process of investing in unlisted shares is different from investing in publicly traded companies, and there are a few things to keep in mind.
In India, unlisted shares are those that are not traded on a recognized stock exchange. These shares are typically held by the promoters or founders of the company and are not easily transferable. Investing in unlisted shares can offer several benefits, such as the potential for high returns and the opportunity to invest in companies with strong growth prospects.
To invest in unlisted shares of Indian startups, one of the most common ways is through a private investment. This involves identifying a startup that is looking to raise capital and then negotiating the terms of the investment directly with the company's founders or management. It is important to conduct thorough due diligence when considering a private investment, including reviewing the company's business plan, financial projections, and the track record of the management team.
Another way to invest in unlisted shares is through a venture capital fund. These funds pool money from multiple investors and then invest in a portfolio of startups. This can be a good option for investors who want to diversify their risk across multiple companies. Venture capital funds are typically managed by experienced professionals who have expertise in identifying and mentoring promising startups.
Online platforms that specialize in facilitating investments in unlisted shares have emerged as an alternative avenue for investors. These platforms serve as a marketplace where startups seeking capital can connect with investors looking for investment opportunities. They provide a level of convenience and accessibility, offering a range of investment options and streamlining the investment process through digital interfaces.
When investing in unlisted shares of Indian startups, it is important to be aware of the risks involved. These shares are typically more illiquid than publicly traded shares, meaning it can be difficult to sell them if you need to exit your investment quickly. The value of unlisted shares can also be more volatile, as they are often subject to the performance and prospects of the individual company.
To mitigate these risks, it is important to diversify your investments across multiple startups and consider investing only a small portion of your overall portfolio in unlisted shares. It is also crucial to have a long-term investment horizon when investing in startups, as it may take several years for the company to mature and generate returns.
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Employee stock options (ESOPs)
In India, ESOPs are regulated by the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014. The issuance of ESOPs involves a process that includes board and general meetings, with disclosures to be made regarding the number of options granted, vesting periods, exercise prices, and other relevant information.
ESOPs can serve as a motivational tool for employees, giving them a sense of ownership and responsibility for the company's performance. They are also beneficial for companies, particularly startups, as they can help maintain liquidity and reward employee loyalty.
There are different types of stock option schemes available, such as the Employee Stock Option Scheme (ESOS) and the Employee Stock Purchase Plan (ESPP). The vesting and exercising of ESOPs are important considerations, with a minimum of one year between the grant of the option and the vesting date.
Overall, ESOPs provide an opportunity for employees to acquire company shares at a discounted price, fostering a sense of ownership and encouraging higher performance.
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Direct purchases from promoters
If you're interested in acquiring a significant stake in an unlisted company, you can engage the services of investment banks, wealth managers, or trusted brokers. These intermediaries can assist you in purchasing shares directly from the company's promoters through a process known as private placement.
Private placements are a means of raising capital by selling securities, such as stocks or bonds, directly to investors. In the context of unlisted shares, private placements allow you to acquire a substantial ownership interest in a company that is not publicly traded on formal stock exchanges.
- Engaging Intermediaries: It is essential to work with reputable and trusted intermediaries, such as investment banks, wealth managers, or brokers. These professionals can facilitate the connection between you and the company's promoters, ensuring a smoother transaction process.
- Due Diligence: Conducting thorough due diligence is crucial when investing in unlisted companies. Since these companies are not subject to the same regulatory requirements as publicly listed firms, it is important to carefully analyse the company's fundamentals, financial health, and growth prospects.
- Risk Assessment: Unlisted shares carry higher risks than listed stocks due to their lower liquidity and less transparent valuations. It is important to be aware of these risks and assess the company's credit risk, as government entities do not regulate trades in the unlisted market.
- Transaction Process: When engaging in direct purchases from promoters, the intermediaries will handle the transaction process. This typically involves connecting the buyer and seller, performing the necessary due diligence, and ensuring compliance with applicable regulations.
- Minimum Investment: It is important to note that unlisted shares typically require a higher minimum investment amount. For example, the minimum investment amount for start-up investments is often around Rs 50,000, while some sources mention a minimum of Rs 25 Lakhs for unlisted shares.
- Tax Implications: Unlisted shares have different tax implications compared to listed shares. Short-term capital gains tax (at a marginal rate) applies if the shares are sold within 24 months of purchase. Long-term capital gains tax (20%) with indexation is applicable if the shares are sold after 24 months.
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PMS and AIF schemes
PMS, or Portfolio Management Systems, are professionally managed investment portfolios. The portfolio manager dynamically adjusts the weight and constitution of the portfolio based on market trends to maximise investor net returns. PMS schemes that include unlisted shares as part of their investment strategy allow investors to benefit from the potential of unlisted shares while diversifying risk across the portfolio's constituents. This is a safer option than direct purchase, as portfolio managers actively monitor and adjust the portfolio composition.
AIF, or Alternative Investment Fund, is a fund managed by professional fund managers. They pool money from investors and invest in real estate, commodities, hedge funds, unlisted shares, etc. AIFs deploy funds in investment categories beyond equities and debt, involving high-risk, high-return strategies.
AIFs are regulated by the Securities and Exchange Board of India (SEBI) and must comply with the SEBI (Alternative Investment Funds) Regulations of 2012. They are established as corporations, limited liability partnerships (LLP), trusts, or other forms. The minimum ticket size for investing in an AIF in India is ₹1 crore.
AIFs offer a wide range of investment strategies beyond traditional asset classes, including equity, debt, real estate, infrastructure, private equity, hedge funds, venture capital, and other alternative investments. This flexibility allows AIFs to cater to various investor preferences and risk appetites.
AIFs are suitable for investors seeking dynamic investment approaches that can generate positive returns even in volatile or declining markets. They are tailored for high-net-worth individuals, institutional investors, or qualified institutional buyers (QIBs).
Both PMS and AIF schemes provide opportunities to invest in unlisted shares, with PMS offering a more dynamic and actively managed approach, and AIFs providing access to a wider range of alternative investments.
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