What is Unlisted Equity Shares: Meaning, Example, Taxation

By REPAKA PAVAN ADITYA

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Updated on: Mar 17th, 2025

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4 min read

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.

What is Unlisted Equity Shares?

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.

Example of Unlisted Equity Shares

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.

Things to Understand in Unlisted Shares

Growth Potential

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.

Risk

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.

Investment Platforms

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.

Is It Safe to Buy Unlisted Shares?

Investing in unlisted equity shares comes with higher risk compared to listed shares. The risk factors which influence their price are,

Liquidity risk

  • These unlisted shares cannot be easily bought or sold nor traded on exchanges, which makes low liquidity on OTC markets.

Valuation risk

  • Unlisted shares are often harder to get an accurate valuation for the company because there’s no market price for the reference.

Regulatory risk

  • Since these shares are not under the same regulatory oversight as listed companies, they might be subject to less scrutiny.

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.

Things to Consider on Platform for Unlisted Shares

Trustworthiness

Make research the platform’s credibility, reviews, and reputation in the market to ensure that it has been positively reviewed by investors and experts.

Track Record

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

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 for Unlisted Equity Shares

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.

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 the unlisted shares within 36 months from the date of purchase, the gains are classified as short-term 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 as a long-term capital gains and taxed at 20% with indexation benefits.

Dividend Taxation

  • Amount received from the dividends of unlisted shares are taxed at the applicable income tax rate for the investor based on their income tax slab.

Unlisted Equity Shares in ITR

Unlisted equity shares are reported in the Income Tax Return (ITR) in the same format as listed equity shares are shown:

  • STCG or LTCG is reported under the section of "Income from Capital Gains".
  • You need to provide details like purchase price, sale price, and holding period.
  • If there is a long-term gain, you can claim the benefit of indexation for reducing taxable gain.

How to Invest in Unlisted Shares

Unlisted shares are traded in different ways, you can invest in unlisted equity shares through different routes such as

Private Equity Funds

  • These private equity funds pool money from different kinds of 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 group of angel investors who 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, which offer unlisted shares, or any third-party small distributor companies who offer unlisted shares in small lot sizes.

Benefits 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 got listed the early investors can see a significant return (ROI) on their initial investment. 
  • This makes investors get attractive for those who are willing to take on some risk.

Early Access to Promising Companies

  • Investing in unlisted shares gives you access to high-growth companies before they’re publicly listed. 
  • By the time they go public, these companies may have already established a solid business model.

Lower Cost of Investment

  • IUnlisted shares are often sold at a discounted prices over the counter, meaning investors can purchase shares at a lower price than they would once the company goes public.

Early Involvement

  • Investing in unlisted companies provides valuable networking opportunities and the chance to build relationships with key people in the industry. 
  • This can be a stepping stone to further investment opportunities in the future.

Conclusion

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.

Related Articles:
1. What is CMP in Share Market?
2. What is Swing Trading?
3. What is Option Chain?

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Frequently Asked Questions

Is it illegal to buy unlisted shares in India?

No, it is not illegal to buy unlisted shares in India. Investors can buy unlisted shares through various channels such as private placements, pre-IPO offerings, and transactions in the grey market. However, they should ensure compliance with SEBI regulations and tax laws.

Is it worth buying unlisted shares?

Buying unlisted shares can be lucrative, as they offer the potential for high returns if the company goes public or grows significantly. However, they come with risks such as lower liquidity, regulatory uncertainty, and longer investment horizons. Proper due diligence is necessary before investing.

Can I sell my unlisted shares?

Yes, unlisted shares can be sold to other investors, private buyers, or through intermediaries in the grey market. If the company gets listed, shares can be sold on stock exchanges after fulfilling lock-in requirements, if any.

What is the minimum investment for unlisted shares?

There is no fixed minimum investment for unlisted shares. It varies depending on the company, seller, and transaction terms. Some platforms or brokers may set a minimum ticket size, often ranging from ₹50,000 to ₹5 lakh or more.

Which IPO is most profitable?

Profits depend on the company’s market debut; historical data shows tech IPOs often outperform.

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About the Author

I manifest my zeal in financial quantitative & quantitative research and have been instrumental in creating a robust process for the evaluation and monitoring of mutual funds. I’m responsible for Equity and Mutual Funds Research while creating instrumental mathematical models for portfolio construction after evaluating funds, and I play an integral role in analyzing changes in mutual funds, micro, and macro-economic indicators, and equity market events and trends. My views on asset classes which are integral in creating an investment strategy for any profile. Read more

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