What is Unlisted Equity Shares: Meaning, Example, Taxation

Unlisted shares are the securities of companies that are not listed on any stock exchange. These unlisted shares are being traded privately by individuals, without the stock exchange involved. The thing about these shares is that they do not comply with the rules of the Securities and Exchange Board of India that publicly listed companies must follow. 

Key Highlights:

• Unlisted equity shares are privately traded securities that are not listed on any recognised stock exchange.
• Investors can buy unlisted shares through private placements, OTC transactions, venture capital, private equity funds, or trusted intermediaries.
• Gains are taxed as STCG if sold within 36 months and as LTCG after 36 months, with indexation benefits available for eligible long-term gains.

What are Unlisted Equity Shares?

Unlisted equity shares are shares of a private company that are not traded on stock exchanges. These companies are privately held and are willing to become public limited companies, in which their shares are not available for public trading.

These shares are generally bought and sold through private transactions or over the counter (OTC) markets from one person to another.

Example: Suppose ABC Pvt. Ltd. has not listed its shares on the NSE or BSE. If an investor purchases its shares directly from an existing shareholder through a private transaction, those shares are known as unlisted equity shares. 

Things to Understand About Unlisted Shares

Investing in unlisted shares can offer attractive growth opportunities, but it also comes with risks distinct from investing in stocks listed on the stock exchange. Understanding these points before investing can help you make more informed decisions.

• They are not easy to sell: Unlike listed shares, unlisted shares cannot be sold instantly on a stock exchange. Finding a buyer may take time, so they are generally less liquid.
• The market does not fix prices: Since these shares are traded privately, their price is determined through negotiations and factors such as the company's financial performance, growth potential, and investor demand.
• Limited information is available: Unlisted companies are not required to disclose as much information as listed companies. This means you'll need to do more research before investing.
• Be prepared to invest for the long term: Most investors hold unlisted shares for several years, hoping the company grows or eventually lists on a stock exchange. They are generally not suitable for short-term trading.
• Understand the tax implications: You need to know about the taxes when you sell shares. When you sell these shares and make a profit, you have to pay capital gains tax. The amount of tax you pay depends on how you have held the shares and on the tax rules at that time.
• Research the company carefully: find out as much as you can before you invest. Look at the company's records, how it makes money, who the leaders are, and what it plans to do in the future. If you do some research, you can avoid making mistakes.
• Buy through trusted sources: When you buy shares, make sure you buy them from someone you can trust. Always buy from a company registered with SEBI or from a well-known platform. This way, you can be sure the sale is valid, and the shares are credited to your Demat account correctly.

Risk Involved in Unlisted Shares

Investing in unlisted equity shares carries higher risk than investing in listed shares. The risk factors that influence their price are,

• Liquidity risk: These unlisted shares cannot be easily bought or sold, nor traded on exchanges, which results in low liquidity on OTC markets.
• Valuation risk: Unlisted shares are often harder to value accurately because there’s no market price to reference.
• Regulatory risk: Since these shares are not subject to the same regulatory oversight as those of listed companies, they may receive less scrutiny.

However, for the right investor seeking long-term high returns, unlisted shares can offer higher returns, especially if the company later gets listed or experiences significant growth.

Things to Consider on Platform for Unlisted Shares

The platform you choose plays a crucial role in ensuring the safety of your investments. Before buying unlisted shares, keep these factors in mind:

• SEBI Compliance: Choose a platform that follows SEBI regulations and works with registered intermediaries. This adds credibility and reduces the risk of fraudulent transactions.
• Company Verification: A good platform should verify the authenticity of the companies whose shares are available for trading and provide basic company information to investors.
• Transparent Pricing: Look for platforms that clearly display the share price, transaction charges, taxes, and any additional fees. Hidden costs can affect your overall returns.
• Secure Share Transfer: Ensures the platform transfers the shares directly to your Demat account within the promised timeline and provides proper transaction records.
• Research and Insights: Platforms that provide company financials, valuation details, business updates, and industry insights can help you make better investment decisions.
• Reputation and Reviews: Check the platform's track record, customer reviews, and market reputation before investing. A trusted platform is more likely to offer a smooth and secure investing experience.

Taxation of Unlisted Equity Shares

In India, the taxation of unlisted equity shares follows the same rules as listed shares, with a few key changes in terms of holding period, such as:

• Short-Term Capital Gains (STCG): If you sell unlisted shares within 36 months of purchase, the gains are classified as short-term capital gains and taxed at 15% plus applicable surcharge and cess.
• Long-Term Capital Gains (LTCG): If the shares were held for more than 36 months, the gains are considered long-term capital gains and taxed at 20% with indexation benefits.
• Dividend Taxation: Dividends from unlisted shares are taxed at the applicable income tax rate for the investor, based on their income tax slab.

Unlisted Equity Shares in ITR

If you buy or sell unlisted equity shares during a financial year, you must report the transaction while filing your Income Tax Return (ITR). These transactions should be disclosed under the Income from Capital Gains section, just like listed equity shares.

When reporting unlisted equity shares, you need to provide details such as:

• Purchase price of the shares
• Sale price or transfer value
• Date of purchase and sale to determine the holding period.

How to Invest in Unlisted Shares

You can invest in unlisted shares by buying them through authorised dealers, existing shareholders, or private placements. Once the transaction is complete, the shares are transferred to your Demat account through an off-market transfer. You can invest in unlisted equity shares through different routes, such as:

• Private Equity Funds: These funds pool capital from various investors to buy equity stakes in unlisted companies.
• Angel Investing: Angel investing is a way of direct investment in startups or early-stage companies. The high-net-worth individuals or accredited investors usually do this.
• Secondary Market: Sometimes, shares of private companies are available for trade in the secondary market, where existing shareholders sell their shares via OTC.
• Venture Capital: Venture capital is a form of financing in which angel investors invest in startups through venture capital firms, which often deal with unlisted companies.
• Retail Investor: As a retail investor, you can approach full-time or traditional broking platforms that offer unlisted shares, or third-party small-distributor companies that offer unlisted shares in small lot sizes.
• Over the Counter (OTC) Transactions: Unlisted shares are traded through private, off-market deals between buyers and sellers. These transactions take place outside recognised stock exchanges. 
• Employee Stock Ownership Plans (ESOPs): Employees of private companies may receive unlisted shares of their own company (ESOPs) as part of their compensation. These shares can later be sold through eligible off-market transactions, subject to company policies. 

Advantages of Investing in Unlisted Shares

Despite the risks, there are several compelling benefits to investing in unlisted shares, such as,

• Higher Potential Returns: If the company does well after its IPO is listed, the early investors can see a significant return (ROI) on their initial investment.
• Early Access to Promising Companies: Investing in unlisted shares gives you access to high-growth companies before they’re publicly listed. 
• Lower Cost of Investment: Unlisted shares are often sold over-the-counter at a discount, allowing investors to purchase them at a lower price than if the company were to go public.
• Early Involvement: Investing in unlisted companies offers valuable networking opportunities and the chance to build relationships with key industry figures.

Disadvantages of Investing in Unlisted Shares

Investing in unlisted shares offers high growth potential, but it comes with risks investors should consider beforehand.

• Low liquidity: It is difficult to sell unlisted shares because there are few buyers.
• Limited information: Private firms can share fewer financial data than listed companies.
• Valuation problems: Finding the right value for unlisted shares can be tricky.
• High risk: Unlisted companies may have more uncertainties regarding their business and finances.
• Longer holding period: Users may wait years until they start receiving money back, especially if the company does not get listed or sold.
• Fewer exit options: Unlike listed shares, there is no immediate opportunity to sell them on the market.

Conclusion

Investing in unlisted equity shares can be an excellent choice for individuals with a long-term perspective and a greater tolerance for risk. It gives the investor access to promising companies earlier than when they are public nevertheless, careful diligence is needed because of its liquidity challenges and lower public transparency.

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