Unlisted shares are the securities of the companies that are not listed on any stock exchange. These shares are being traded privately without the exchange involvement. Unlike public listed companies, these unlisted stocks do not adhere to SEBI regulations.
Unlisted equity shares belong to the shares of a private company which are not traded on stock exchanges. These companies are privately held and willing to become a public limited company where their shares are not available for public trading.
These shares are generally bought and sold through private transactions or through over-the-counter (OTC) markets from one demat account to another.
Unlisted equity shares can be the shares of a startup or private company which has not yet gone public through an Initial Public Offering (IPO).
Companies such as OYO, or Zomato (before their IPO) were examples of companies whose shares were unlisted at one point.
Unlisted shares are appealing because they often offer substantial growth potential in their early stage. These companies can grow at a rapid rate at the rate of 100-150% annually, and in many cases, they have outperformed listed companies by multiple times, generating more returns.
Investors are drawn to these shares as they can expect higher returns over the period before the companies go public.
Investing in unlisted shares always comes with inherent risks. They are less liquid in the market, which becomes harder to trade and more volatile because of their limited access to information for the investors, as well as the absence of regulatory scrutiny. Still, their high potential in terms of returns makes them attractive to investors.
To invest in unlisted shares, there are “n number of platforms one must use brokerage platforms that specialize in these types of transactions for safer transactions.
Choosing the right platform is essential for reducing risks and ensuring smooth transactions to prevent frauds and delay of credit of the shared to demat. The platform should be a high reputation, trustworthy, have a solid track record, and offer transparency in their services.
Investing in unlisted equity shares comes with higher risk compared to listed shares. The risk factors which influence their price are,
However, for the right investor looking for the long-term high returns, unlisted shares can offer higher returns, especially if the company later gets listed or has significant growth.
Make research the platform’s credibility, reviews, and reputation in the market to ensure that it has been positively reviewed by investors and experts.
The platform with a long history will be more trustworthy but could have higher commission fees as well. It’s very important to balance between reliability and the cost.
Order flow refers to how your broker might transfer your trade to a third party at an increased value. Ensure that the broker transparently handles this process.
Indexation refers to adjusting the purchase price of an asset for inflation to calculate long-term capital gains. This is done using the Cost Inflation Index (CII). If you hold them for more than 36 months, it will be considered as long-term holding, you can avail of indexation benefits when calculating long-term capital gains (LTCG).
Indexation process allows you to reduce your taxable capital gains by accounting for inflation, potentially reducing the amount of tax payable.
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
Unlisted equity shares are reported in the Income Tax Return (ITR) in the same format as listed equity shares are shown:
Unlisted shares are traded in different ways, you can invest in unlisted equity shares through different routes such as
Despite the risks, there are several compelling benefits to investing in unlisted shares such as,
Investing in unlisted equity shares can be a rewarding opportunity for those willing to take on additional risks in exchange for potentially higher returns. While these shares may offer significant upside if the company goes public or experiences significant growth, they also come with challenges such as limited liquidity and valuation uncertainties.
Understanding the taxation, holding period, and benefits of unlisted shares is essential for making informed investment decisions. As with any investment, it is crucial to carefully assess the company's prospects and consider the associated risks before venturing into the world of unlisted equity shares.
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