Thinking About Investing in an Unlisted Company? Understand the Benefits and Risks First!
Delhi News
Recently, there has been growing interest in unlisted shares, particularly from companies like NSE, Swiggy, Chennai Super Kings, and Tata Capital. Unlisted shares are stocks of companies unavailable on regular stock exchanges. Because these shares are usually held by a small number of people, such as company founders and venture capitalists, their supply is limited.
You can purchase unlisted shares through various methods, including:
From employees: You can reach out to employees of companies who have received shares through Employee Stock Ownership Plans (ESOPs).
From startups: You can buy shares directly from the promoters of startups, but a minimum investment amount is often required.
Through intermediaries: Several intermediaries can help you purchase shares of companies planning to go public but have yet to open their initial public offerings (IPOs). Once you find a trustworthy intermediary, you’ll need to provide the following documents:
- Aadhaar
- Bank details
- PAN
- Client Master Report (CML) document
After completing the Know Your Customer (KYC) process and submitting the required documents, the intermediary will start the transaction for the number of shares you want to buy. It’s important to note that, unlike listed shares, unlisted shares can take anywhere from 2 to 45 days to be credited to your demat account.
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Advantages of Investing in Unlisted Shares
Diversification: Unlisted shares tend to be less volatile than listed stocks because they are not influenced by public market sentiment and are typically traded less frequently. Investing in unlisted shares also gives you access to opportunities unavailable in the listed market. For example, Chennai Super Kings (CSK), a Twenty20 cricket team franchise, has unlisted shares that do not have a comparable counterpart in the listed market.
Potential undervaluation: Unlisted shares are often less liquid, so fewer investors are willing to hold them for extended periods. This lack of demand can lead to reduced competition, which can undervalue these shares.
High growth potential: Investors can achieve significant returns by holding their investments longer. For instance, if someone bought CSK shares for ₹40 in 2020, those shares are now trading at ₹225, representing a remarkable growth of 500% over four years.
Significant profit potential upon listing: When unlisted shares are eventually listed on an exchange, they can result in substantial gains. For example, PolicyBazaar shares were priced at ₹600 before their listing but debuted at ₹1,150. Similarly, Nazara Technologies shares were available at ₹750 and listed at ₹1,900 each.
Taxation: The treatment for long-term capital gains (LTCG) for listed and unlisted securities is now the same. Both types of shares are subject to a 12.5% tax on LTCG, eliminating the previous disadvantage for unlisted shares. However, to qualify for LTCG benefits, unlisted shares require a holding period of 24 months, compared to 12 months for listed shares.
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Be Aware of the Risks
Lack of liquidity: Unlisted shares cannot be traded on exchanges, making them harder to sell and lower liquidity.
Limited disclosures: Unlisted companies have fewer disclosure requirements than listed companies, so investors need to conduct thorough due diligence before investing.
No dividends: Most unlisted companies reinvest their profits back into the business and do not pay out dividends.
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Risk of capital loss: Due to limited information availability, there is a high risk of losing your capital when investing in unlisted companies. The likelihood of investing in the wrong company is significant, so it’s advisable to seek professional guidance to protect your investment.
While unlisted shares can provide opportunities for diversification and high returns, they also carry considerable risks, such as illiquidity and limited disclosure. It’s essential to conduct thorough research on any company before investing, ensuring you understand its financial health and growth potential. Partnering with a trusted intermediary is crucial for a secure and smooth transaction. By carefully researching and selecting the right intermediary, you can increase your chances of building wealth in the unlisted market.