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Purchase A Company Before Listing
What are Unlisted Shares?
Unlisted shares are shares of companies that are not listed on a stock exchange and are therefore not publicly traded. Shareholders of unlisted companies don’t have the same privileges as shareholders of listed companies (BSE/ NSE/ MSEI).
How Does Unlisted Shares Work?
When a company goes public, it hires promoters or underwriters, usually investment and merchant banks. They buy unlisted shares from the company and offer them to investors. This is known as private placement, and shares are bought and sold privately.
However, these promoters have a higher minimum investment requirement than other intermediaries.
Benefits of Unlisted Shares
The unlisted stock market is illiquid, but this can be an advantage for investors. Because of illiquidity, the stock price is undervalued or overvalued for a long time. In the long-term, you can make huge profits.
Unlisted stocks are for long-term investment, not trading. You can research, buy the best unlisted stock, and wait. No need to bite your fingers at the market's open or close.
Diversifying reduces portfolio risk. Unlisted stocks are not or barely volatile. If you have volatile stocks in your portfolio, you can reduce their risk by adding unlisted stocks.
Close Market Investment
OTC trades unlisted stocks. You buy or sell shares directly from the broker. This boosts future investment confidence. The intermediary can advise you when to invest in unlisted shares or other instruments.
Comparison of Unlisted Shares with other products
|PARTICULARS||LISTED SHARES||UNLISTED SHARES|
|Meaning||Listed Shares are stocks listed on the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).||Unlisted shares are those that are not listed on the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).|
|Trading||Shares that are listed are traded on stock exchanges.||Shares are traded OTC. The shares can be bought and sold by brokers or directly.|
|Classification as Long Term and Short Term||Listed shares are long-term if held for over a year. Less than 12 months is short-term.||Unlisted shares are long-term if held for 24 months. Less than 24 months is short term.|
|Selling Price for Computation of Capital Gain||Stock exchange trading makes purchase and sale prices readily available.||First, the fair market value of the shares sold must be determined. The higher of fair market value and actual selling price is used to calculate capital gain. Merchant Banker or Chartered Accountant calculates FMV|
|Benefit of Indexation||No indexation is provided when computing capital gains.||Indexation helps compute Long-Term Capital Gains|
|Rate of Tax||Tax-free long-term gains up to Rs. 1 lakh. Gains over Rs. 1 lakh are taxed at 10%. Short-term gains are taxed 15%.||Long-term capital gains are taxed at 20% after indexation and 10% without indexation if held by a nonresident. Short term gains are taxed in slabs.|
|Set off and Carried Forward of Losses||Long-term capital losses can only be offset by long-term gains, but short-term losses can be offset by both. Losses carried forward for 8 years||Long-term capital losses can only be offset by long-term capital gains, but short-term losses can be offset by both types of gains. Losses can be carried over for 8 years.|
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Depends on factors. Unlisted shares can be sold freely. If the company issues an IPO and gets listed, all unlisted shares are locked for 6 months from the listing date. This is a year before August 2021 if a company filed for DRHP. Once the company’s Issue date and Listing are published, corporate action restricts stock sales.
Existing investors sell their shares because they have other investment options or personal financial needs. Shareholders include current and ex-employees, private equity investors, etc.
To get the best returns, invest in the company from its early stages until its IPO and keep growing until it reaches saturation. Nobody can predict this duration.
There is a 10,000 INR (Indian Rupees) minimum per order.
Ultimately, it is determined by the state of the market. So, when the market performs well, the potential reward is usually worth taking the risk.