How to Buy Unlisted Shares in India?

Unlisted shares are a type of asset class that are equity shares being issued by companies which are not listed on public stock exchanges. These unlisted shares are typically held privately by the promoters, institutions, VCs, and not trading on exchanges like NSE, BSE.

Investing in unlisted shares offers unique opportunities and challenges to the investors, making it essential to understand their characteristics, benefits, and the processes involved in buying and selling them.​

What Are Unlisted Shares?

Unlisted shares refer to the shares of a company that are trading without being listed on any stock exchange, which means they do not have a formal marketplace or exchange where buyers and sellers can easily exchange them.

These unlisted shares, which belong to the private companies that are not publicly listed, have been under the process of being listed. These shares are typically less liquid and less transparent compared to listed shares.

Types of Unlisted Financial Instruments

Unlisted Shares:

Unlisted shares are equity shares in a company that is not listed on any stock exchanges.

These unlisted shares are privately held by promoters and often available to institutional investors, private equity firms, or retailers through over-the-counter transactions between buyers and sellers.

GSEC:

Government securities are debt instruments offered by the government of India to raise funds for their working capital.

These government securities are coming with low risk as well as low interest rate since they are backed by the government's credit.

Examples: Treasury bills, government bonds.

Convertible Securities:

Convertible securities are a hybrid financial product that can be converted into common stocks of the company.

Example: Convertible bonds allow the holder to convert the bond into a predetermined number of shares of the issuing company's stock.

Preferential Shares:

Preferential shares are a different type of asset class of shares that give holders priority over common shareholders in terms of dividends and during liquidation. However, they do not carry voting rights.

ESOP:

An ESOP is a kind of stock that allows employees to become partial owners of the company where they work for by acquiring shares apart from salary.

These were used by the companies to motivate their employees and align their interests with the company's performance.

Swaps: 

Swaps are financial contracts where two parties agree to exchange cash flows or other financial instruments over a specified period.

Common swaps include interest rate swaps, (exchange of fixed interest payments for variable ones), and currency swaps (exchange of cash flows in different currencies).

Forwards:

Forward contracts are financial agreements between two parties to buy or sell an asset at a predetermined future date for a price agreed upon today.

These contracts are customized and traded over-the-counter (OTC), unlike futures contracts, which are standardized and traded on exchanges.

Debentures:

Debentures are unsecured debt instruments issued by companies starting from 10 Lakh, which are not listed on the exchange. These can be bought or sold in private placements or through direct negotiations via dealers.

Bonds:

Bonds are Similar to unlisted debentures; these bonds are issued by companies but do not trade on any public market.

They are often offered to institutional investors or high-net-worth individuals.

Preference Shares:

These are shares that give holders preferential treatment in terms of dividends and repayment during liquidation, but they are not listed on any exchange.

Convertible Securities:

Convertible bonds or debentures issued by companies with an option to convert into their company’s equity shares. If these are not listed, they are considered unlisted securities.

Differences Between Listed and Unlisted Shares

Why Investors Need to Consider Unlisted Shares

High Returns:

Unlisted companies can generate high revenues often in early growth stages, there is a high return potential if the company goes public or gets acquired at a higher valuation, where you can capture profits by investing in them at the early stage.

Diversification:

Diversification towards investing in unlisted shares allows investors to diversify their portfolio beyond the stocks listed on exchanges.

Access to Exclusive Opportunities:

Unlisted shares can give investors access to pre-IPO opportunities or shares in innovative private companies.

Growth Potential:

Many high-growth companies are privately held for a long time before going public. Investing in them at the right time can be highly lucrative.

Risk Mitigation:

While there is money, there will be risks, some investors may see private companies as lower risk if they have a proven business model and strong management.

How to Buy Unlisted Shares in India

Private Placements:

Companies offer private placements for a group of people, in which you can participate and buy unlisted shares directly with the company.

Direct Transactions:

In India, there are many unlisted shares which can be purchased from current shareholders, promoters or founders through direct dealers with over-the-counter (OTC) transactions. This should happen through a broker or intermediary.

Unlisted Brokers:

There are certain platforms, such as unlisted zone, shares kart, and unlisted equity, which help you to buy and sell unlisted shares in India.

Venture Capitalist’s:

You can invest in private equity funds or venture capital firms that specialize in private companies or start-ups.

Angel Investors:

Investors can join angel networks with their funds, where high-net-worth individuals pool funds to invest in unlisted companies.

How to Sell Unlisted Shares

Selling unlisted shares can be more complex compared to listed shares due to lower liquidity and fewer buyers.

Here are the general steps to follow to sell your unlisted shares:

Find Buyers:

You need to reach out to retail or institutional buyers, private equity firms interested in acquiring unlisted shares.

Intermediary:

You can approach the brokers or agents who specialize in facilitating sales of unlisted shares.

Direct Sale:

You can find buyers via networking and other social platforms, and make a deal to sell your share.

IPO:

Most of the investors hold unlisted shares with the hope that the company will go public at a high price, then they bought. Once the company gets listed, you can sell on the open market.

Benefits of Investing in Unlisted Shares

High Growth Potential:

• Unlisted companies are more often having high significant growth potential, especially those in early stages or pre-IPO.

Early Access to Investment:

• You can get early access to shares of companies that have high-potential before they go public, while they can lead to substantial profits if the company grows and lists on exchanges.

Diversification:

• By investing in unlisted shares, you can diversify your investment portfolio beyond the stock market.

Attractive Valuations:

• Unlisted shares may be offered at lower valuations compared to their potential future valuations once they are listed.

Control and Influence:

• In some cases, by investing in private companies, you will have high chances to get the opportunity to have more influence over the company's direction and decisions.

Conclusion

Unlisted shares can be a good investment opportunity but require due diligence, patience, and understanding of the risks involved. Investing in unlisted shares can be a strategic way to diversify your investment portfolio and potentially achieve higher returns.

However, it requires thorough due diligence, a clear understanding of the associated risks, and awareness of the regulatory environment. By carefully considering these factors and utilizing appropriate channels for buying and selling, investors can navigate the unlisted share market effectively.

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