PreIPO • Aug. 1, 2022

Investing in Unlisted Shares

Unlisted Shares

Unlisted, as the name suggests means something which hasn’t been listed on a formal exchange yet. India has 8 types of exchanges but only 2 prominent exchanges-

1.     Bombay Stock Exchange (BSE)

2.     National Stock Exchange (NSE)


Difference between Listed & Unlisted shares-

Basis

Listed

Unlisted

Traded

Traded on a formal stock exchange.

Traded Over The Counter (OTC) or at any place other than formal exchange. Planify is the biggest Marketplace for trading of unlisted shares.

Liquidity

High Liquidity

Low Liquidity

Regulated

Regulated by SEBI

Non-Regulated but governed by Companies Act

Disclosure & Risk

More Disclosure & Risk of Investing is comparatively low

Lower Disclosure & thus Risk of Investing is higher

Tax

Less tax

More Tax

GrowthListed Shares grow at a slower rate of 10-12%Unlisted Shares grow at a faster & sustainable rate of 17% comparatively


Sequence of a Company-

UNLISTED -> LISTED -> DE-LISTED -> RE-LISTED


Types of Unlisted Stocks-

1.    Subsidiaries of Listed Parent Companies like HDB Financial Services- HDFC & Reliance Retail- Reliance Industries Ltd.

2.    New Age Business like Chennai Super Kings

 

Investing Tip- Companies whose Parent Companies are listed are usually preferred due to them having a Brand recognition due to their parent company already being listed.

 

How are Unlisted Shares Valued?...

The Valuation of Unlisted Shares is done following the Fair Market Value (FMV) Method. Since they’re not listed on stock exchange, hence no accurate market value exists. FMV is calculated by Underwriters or Investment Bankers.


Advantages of Investing in Unlisted Shares-

1.     Invest at an early stage of the company to be a part of their growth journey

2.     Possibility of better returns (For e.g. CSK share price rose from Rs. 75 to Rs. 175 at present)

3.     Diversification of portfolio helps reduce risk & increases investor revenue chances.



Concerns related to investing in Unlisted Shares-

1.     Lack of Liquidity- At times it can happen that you might not get suitable buyer for the shares you want to sell due to them quoting a lower price.

 

2.     Higher Taxes on Unlisted Shares due to them being aligned with your income tax bracket

 

3.     Limited Company specific data since it’s not regulated & hence there’s less disclosure of information

 

4.     High Commission from whom you want to buy, they might charge a heavy commission for selling

 

5.     High Ticket Size- At times minimum ticket size can even reach Rs. 20 Lakhs

 

Exit Strategies after investing in unlisted shares-

1.     Initial Public Offer (IPO)-> Selling shares at a higher price after getting listed

2.     Buyback offer from the company

3.     Transfer shares privately to someone directly from your Demat A/C to their Demat Account, at times even at a premium.

4.     Company gets acquired by another listed company.

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