Comprehending unlisted shares
Unlisted shares are shares in firms that are not listed on noted stock exchanges like the NSE or BSE. They are usually bought by way of private placements, employee stock option plans (ESOPs), or off-market acquisitions. Though they hold out the potential to deliver high returns if the firm subsequently gets listed or expands rapidly, retail investors should realize that such a purchase involves higher risk and lesser protection compared to listed securities.
The problem of liquidity
One of the most significant drawbacks of unlisted shares is that they cannot be liquidated. Since they are not listed on open exchanges, it is normally hard to sell them and find a buyer, so investors have to sell at a loss to withdraw. This does not make them very ideal for investors who may need quick access to their money. However, listed shares can be sold nearly instantly as the market is open, providing greater flexibility and market-based pricing.
Valuation and transparency issues
Listed companies are required to make their financial statements, quarterly accounts, and other compliance reports public. These form the basis of decisions made by investors. Unlisted firms do not have to. Therefore, investors generally make decisions based on whatever minimal information they get from the intermediaries, which can actually not reflect the financials of the company properly. This lack of transparency raises the probability of overpaying in the shares or investing in financially unsound companies.
Regulatory and exit risks
Whereas the Securities and Exchange Board of India (SEBI) regulates the securities market, unlisted share transactions typically occur in private arrangements with minimal regulation. This subjects investors to functional and legal risks. Even when the firm issues an IPO at a later stage, there are no guarantees that the IPO will succeed or even that the price of the share will appreciate. In fact, some IPOs issue at a discount, incurring losses for pioneer investors.
Who should consider unlisted shares
Unlisted shares may be more suitable for high net worth individuals (HNIs) or astute investors who are willing and capable to take more risk, make deep due diligence, and wait for the long term. Retail investors with limited funds and lower risk appetite may opt for safer wagers in listed stocks, mutual funds, or fixed income. If at all one has to invest in unlisted shares, it must be a small slice of the pie and only after conducting thorough research on the company fundamentals.
FAQs
Q1. Are profits on unlisted shares taxable?
Yes. Profits on unlisted shares held for more than 24 months are long-term capital gains and taxed at 20% indexed. Short-term gains are taxed at your highest income tax slab rate.
Q2. How do retail investors buy unlisted shares?
They can be purchased in private transactions, intermediaries, or unlisted security specialising platforms. But previous due diligence is essential during dealings.
Q3. Can unlisted shares be pledged for a loan?
Some financial institutions accept unlisted shares as collateral but with more strict conditions and lower valuation compared to listed shares.
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