Want to own a piece of an unlisted company? Know the pros and cons before investing

Stock Market Radar

The equity market has witnessed significant interest in unlisted shares of late, driven by the availability of shares from companies like NSE, Swiggy, Chennai Super Kings and Tata Capital in the market.

Unlisted shares as the name suggests are company stocks that are not listed or traded on any regular stock exchange. The supply is limited, as these shares are typically held by a small group of entities such as founders and venture capitalists.

The different ways to purchase unlisted shares include:

From employees: You can approach employees of companies who have received shares in the company they work for through ESOPs (employee stock ownership plans).

From startups: It is possible to buy shares directly from promoters of startups, though there is usually a minimum investment required.

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Through intermediaries: Several intermediaries facilitate the purchase of shares of companies that may be headed for but have not yet opened their initial public offerings.

Once you've identified a reliable intermediary, you will need to provide the following documents:

• Aadhaar
• Bank details
• PAN
• Client Master Report (CML) document

It's important to note that, unlike in the listed space, unlisted shares can take anywhere from 2 and 45 days to be credited to your demat account.

The benefits of investing in unlisted shares

Diversification: Unlisted shares are less volatile compared to listed stocks because they are not subject to public market sentiment and are usually thinly traded. You also get to invest in some categories that are not available in the listed segment. A good example is Chennai Super Kings (CSK)—the unlisted shares of the Twenty20 cricket team franchise do not have a peer in the listed space.

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Potential undervaluation: Due to illiquidity, unlisted shares often have fewer investors willing to hold them for long periods. As a result, these shares may be undervalued due to lower competition.

High growth potential: Investors can earn substantial returns if they are willing to stay invested over a longer horizon. For example, one could have purchased CSK shares at Rs 40 in 2020, which are now trading at Rs 225—a growth of 500 percent over four years.

Significant profit potential upon listing: When listed on an exchange, these shares can lead to significant gains. For instance, PolicyBazaar shares were available at Rs 600 each before listing and debuted at Rs 1,150. Similarly, shares of e-sports firm Nazara Technologies were available at Rs 750 and listed at Rs 1,900 per share.

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Taxation: The tax treatment for listed and unlisted securities is now aligned for long-term capital gains. Both are subject  to 12.5 percent tax on long-term capital gains. This removes the previous disadvantage for unlisted shares. However, the holding period to qualify for LTCG benefit for unlisted shares is 24 months vis-à-vis 12 months for listed shares.

Beware of the downsides

Lack of liquidity: Since unlisted shares cannot be traded on exchanges, they are more difficult to sell and are, hence, less liquid.

Limited disclosures: Unlisted companies have less stringent disclosure requirements compared to listed companies. Investors must perform thorough due diligence before investing.

No dividends: Most unlisted companies reinvest profits into their business and do not declare dividends.

Risk of capital loss: There is a high risk of losing your capital due to the limited availability of information on unlisted companies. The chances of investing in the wrong company are significant. It is advisable to seek professional help when investing in unlisted shares to avoid losing your money.

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While unlisted shares offer potential for diversification and high returns, they come with significant risks, including illiquidity and limited disclosure. It's crucial to thoroughly research any company before investing and ensure you understand its financial standing and growth potential. Partnering with a trusted intermediary is equally important to ensure a secure and smooth transaction. Careful research and choosing the right intermediary can help you create wealth in the unlisted space.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

The author is Founder, True North Finance, a Financial and Investment Planning Firm based in Pune.